Estate planning can be confusing and difficult for anyone. For same-sex couples, the hurdles can sometimes be insurmountable. Every state has its own laws regarding marriage and domestic partnerships and most still do not legally recognize same-sex relationships. This becomes a challenge when couples want to ensure that their assets go to their partner upon death.
TUTORIAL: Estate Planning
As of 2011, if the estate is worth more than $5 million, there can also be hefty estate tax issues even if the assets transfer to the partner seamlessly. This can change in 2013. Many of the tax laws, both federal and state, that allow assets to transfer to a spouse without tax consequences don't apply to same-sex couples.
Working with an estate lawyer experienced in this practice area in your state is the best way to ensure that your wishes are carried out. Here are four major areas to consider when planning ahead. (Tax-Efficient Wealth Transfer can help higher net worth individuals reduce their estate taxes.)
Some states allow unmarried residents to hold real estate jointly with right of survivorship - meaning that the property automatically passes to your partner on your death, regardless of your legal marital status. For those in states that do not have this provision, and for handling all other major assets, having a will is a critical first step in estate planning.
Naming your partner as beneficiary in the will can be problematic. The first issue is that a will is a public document and some same-sex couples prefer that their relationship be private. Wills can also be contested by the family and other potential heirs of the decedent. In states that do not recognize same-sex couples, the family can often have the will overturned and leave the partner with nothing. One way around this problem is to set up a living trust and transfer all assets that you want your partner to have into the trust. Upon death, the partner becomes the trustee of the trust if designated. Although this does not get around estate tax issues, a trust is a private arrangement and overturning a trust designation is much more difficult than overturning a will.
The rules for inheriting an IRA or 401(k) plan are different for spouses and non-spouse beneficiaries. Because the IRS does not recognize same-sex partnerships, non-spouse inheritance rules must be followed. When an IRA is transferred to your partner, he or she will be required to begin withdrawing required minimum distributions from the plan beginning the year after death. Until the beginning of 2010, non-spouse beneficiaries of 401(k) plans had to declare it all as income when inherited and pay what could amount to a massive tax bill. Beginning January 1, 2010, non-spouse beneficiaries can roll the plan into an inherited IRA. They will still be required to take minimum distributions, but are no longer subject to the upfront tax hit. (For further reading, see Moving Plan Assets: How To Avoid Mistakes and Moving Your Plan Assets?)
In most states, same-sex couples cannot share legal custody of their children, whether natural or adopted. One spouse often has legal custody which leaves the other spouse vulnerable if the legal parent dies. In your will, you can specify who you want to be the guardian of your minor children. However, family members can try to have it thrown out and your children may end up somewhere other than where you intended. Naming your spouse as the children's guardian is the first step, but if you also name your spouse as the trustee of the children's trust, you can specify how often the trustee "meets" with the children. This at least ensures visitation.
Many states allow only immediate family and legal spouses to claim a body and attend to funeral arrangements for the deceased. Unmarried or same-sex partners have no legal rights in these situations. You may designate whomever you wish to plan your funeral. However, if there's dissension between your partner and your family, the wishes of your family will often override your partner's. There is no easy way around this in most states. Making your wishes clear to your family can go a long way towards the inclusion of your spouse in the arrangements. (Decrease the value of your taxable estate and prevent the tax man from getting you one last time, read How To Avoid Taxation On Life Insurance Proceeds.)
The Bottom Line
Estate planning for same-sex couples requires extra effort and legal assistance to ensure that your wishes are carried out when you die. When there are minor children involved, guardianship legalities can take away your spouse's parental rights. Planning ahead and working with an expert estate lawyer are the keys to making your estate transfer as effective as it can be.