In 2015, in the Obergefell v. Hodges decision, the U.S. Supreme Court upheld the right of same-sex couples to marry in all 50 states, bringing marriage equality to lesbian, gay, bisexual, and transgender (LGBT) couples no matter where they live. As a result, same-sex married couples now have access to all the estate planning tools that heterosexual spouses have been taking advantage of for years. They no longer have to go to creative lengths—and pay estate planning experts well versed in work-around strategies—to achieve similar results that heterosexual families enjoy.
Despite this, estate planning is still something that few families spend enough time thinking about, much less enacting. And same-sex couples often have special situations that require extra planning.
Here are five steps that same-sex couples can take to get started with estate planning:
Go beyond a will
While an estate plan that includes a will is a no-brainer for most couples, nearly two thirds of Americans die without one. A will allows you, instead of the state, determine where your assets should go upon your death.
But same-sex couples shouldn’t stop there. Often, setting up a trust can be a good idea, especially if there are concerns about battles over your assets when you die. While certainly not always the case, the families of a same-sex couple may be more apt to contest the will than a heterosexual couple because more LGBTQ people tend to be estranged from their biological families.
A trust can be a better way to go, since it can be established and funded during your lifetime. If properly set up, it is less likely to be come public upon death and, therefore, there is less of an opportunity to contest it.
Think about medical needs
Same-sex spouses tend to be challenged more than heterosexual spouses when they need to make medical decisions for partners who are incapacitated or unable to communicate. Therefore, same-sex couples especially need to document their wishes.
There are several options for documenting your medical wishes:
- A medical power of attorney, which allows someone you choose to make medical decisions for you if a doctor determines you are unable to make those decisions for yourself.
- A HIPAA release form, which authorizes doctors to share your medical information with specific people.
- A living will, a do-not-resuscitate or other kind of health directive, which documents your preferences about medical treatment when you can’t communicate.
Plan for kids
Typically, when parents die, their assets pass to their children. But to ensure everything ends up with the kids, some same-sex parents may need to make adoption part of their estate planning if they haven’t already. This is because it’s more common for only one of the parents to be biologically related to the child. This is often referred to a second-parent adoption.
In Texas, a second-parent adoption is a type of adoption that allows a second person to adopt a child without interfering with the rights of the child’s other parent. This is similar to a stepparent adoption. A second-parent adoption is also often referred to as a same-sex parent adoption or co-parent adoption.
For same-sex couples, a second-parent adoption allows for the spouse of the child’s adoptive or biological parent to also have child custody. In other words, a second-parent adoption allows for a child to have two legal parents, even if only biologically born to one of those parents, or adopted by one of the parents.
The goal is to ensure that the couple’s assets flow to the children rather than to aunts, uncles or other family members. However, if there’s been no legal determination of the child, and the spouses don’t have an estate plan, the child may not receive anything.
Additionally, if only one spouse or partner is legally recognized as the parent, adding a trust with certain provisions can at least ensure the non-legal parent remains in contact with the child if someone else becomes the guardian.
Take Advantage of the Unlimited Marital Deduction and Portability
Two years before the Obergefell decision, the Supreme Court gave married same-sex couples the ability to pass assets from a deceased spouse to a surviving spouse without incurring federal estate taxes, when the Court invalidated Section 3 of the Defense of Marriage Act in the case of United States v. Windsor.
That’s a big cost savings for high-net-worth couples, since the estate federal tax rate is currently 40%. When one spouse dies (provided both spouses are U.S. citizens), his or her assets pass to the surviving spouse tax free due to the unlimited marital deduction. Only when the second spouse dies will estate tax be owed on any amounts over the federal exclusion amount passing to non-charitable beneficiaries, which in 2018 with the tax law changes is set at $11.2 million per person and $22.4 million per couple (the exclusion goes up each year to reflect annual inflation adjustments).
Same-sex couples also benefit from the annual gift tax exclusion. In 2018, every taxpayer is allowed to gift $15,000 a year to any individual. Any amounts over the $15,000 exclusion amount must be reported to the Internal Revenue Service (IRS) on a Gift Tax Return. These excess amounts go toward the lifetime total that can be gifted without facing gift taxes. In 2018, the lifetime limit is $11.2 million, the same as the estate tax exclusion amount.
But married spouses can gift each other an unlimited amount of assets or property without ever incurring the federal estate and gift tax. This only applies to U.S. citizens.
Married spouses are also allowed “portability.” If one spouse dies, whatever portion of his or her $11.2 million exclusion that was not used may pass to the surviving spouse, increasing the portion of the estate that isn’t subject to federal estate tax. This wasn’t an option in the past, but now married same-sex couples in all 50 states get to roll over the unused portion of their spouse’s lifetime federal exclusion amount.
For example, say one spouse dies, having used $2 million of her exclusion. The surviving spouse can roll over the remainder, in this case $9.2 million, and pass $20.4 million on to her heirs tax free.
Don’t wing it
Same-sex couples should generally avoid do-it-yourself estate planning services online. Unfortunately, many of the DIY forms don’t account for the needs of same-sex couples. LGBT couples often have unique situations that require careful estate planning. To make the most of your estate plan, speak with an experienced estate planning attorney who is well versed with the estate planning challenges of the LGBT community.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. Nielsen Law is intentionally inclusive and lesbian, gay, bisexual and transgender friendly. For more information and to learn about our firm, please contact us.