What documents do you need to protect you and your gay family?


Given the patchwork of state laws and the federal Defense of Marriage Act (DOMA), same-sex couples do not have access to the same protections as heterosexual couples. It is imperative that couples take measures to protect themselves and their loved ones. This is true even if you have a legal marriage or registered domestic partnership.

The tool below helps same sex couples navigate the myriad financial, legal and tax implications of their relationships. It provides a clear list of documents to obtain, and financial considerations to ask advisors about.

Remember, bad things happen to good people who don't plan. Don't be one of them!

Consider opening a joint account if:
You plan to buy property together. This will help to streamline the record keeping for the purchase and subsequent mortgage and maintenance expenses.

Why does this matter?
Assuming you title your property using "Joint Tenancy With Right of Survivorship", the property will pass to the surviving spouse upon the death of one partner. The joint account can help with the bookkeeping which is required for the calculation of estate taxes. If you don't show that you contributed to the purchase and upkeep, the full value of the property will be included in the estate tax calculation, leading to a hefty bill!

Concerns
Some couples may use joint accounts as a way to ease transfer of assets upon death. However, you should be careful of running into the gift tax law. Due to DOMA, assets transferred between two unrelated parties could be treated as gifts. The current annual allowance is $13,000 per year.
Having the right title
To protect your shared interests in a property, titling is crucial. If only one partner is on the title, when he passes away, the property will be:

a) Subject to probate

b) Passed as designated in the will (if there is one) or as provided by state law.

This leaves the surviving spouse open to having the property contested by other family members during the probate process.

One way to deal with these complications is by titling the property "Joint Tenants with Rights of Survivorship "(JTWROS). This titling arrangement means that if one partner dies, the other automatically receives ownership of the house regardless of the will, state inheritance law or any claims by outside parties. You are thus avoiding the probate process.

Managing tax liability
However, you're not out of the woods yet. JTWROS has several potentially negative tax implications.

a) First, the entire house's value will be considered in the federal estate tax calculation. The burden will be on the surviving partner to prove contribution to the asset up to 50% of the fair market value of the house. If the survivor cannot prove having made such a contribution, the entire value will be included in the estate tax calculation, which could trigger estate taxes. Hence the importance of good record keeping!

b) Second, if the house was not originally titled JTWROS and a partner with sole title re-titles it to JTWROS, the other partner may have to provide proof of contribution to the asset or the IRS might look upon the re-titling as a "gift" of half the value of the house, which could trigger gift tax liability.

c) If the property titled in one partner's name is then re-titled with her or his spouse/partner. This constitutes a taxable gift in the moment when a partner is added to the original title.

Capital gains exposure
There also may be capital gains exposure for the surviving spouse if he chooses to sell after the death of his spouse, as there is no step-up in basis upon transfer. E.g. The house appreciated from $200K to $1M over the course of the relationship. At sale, the capital gains tax is paid on the difference with $200K, not the value at the time of the transfer.
Overview
In almost all cases regarding retirement income and assets, which usually are governed in key respects by federal law, same-sex spouses and all domestic partners are considered "non-spouse" beneficiaries. This means you shouldn't assume that you are entitled to spousal benefits and should consider taking protective steps to ensure retirement income. This is an area where it makes sense to seek a financial advisor for help with structuring retirement accounts and subsequent distributions.

Designating beneficiaries
Retirement plans allow you to choose beneficiaries for the assets after death. If you do not designate a beneficiary, the assets become part of your estate, and they will be distributed as decided through the probate process. If you also did not have a valid will at time of death, then state law determines who gets the assets, and there is no guarantee that it will go to your spouse. Make sure you keep your beneficiaries up to date!

Social Security benefits
Due to DOMA, same-sex spouses and all domestic partners do not qualify as "spouses" for federal purposes and thus are not eligible for spousal continuation of social security benefits upon the death of one's partner.

401k plans
Beginning January 1, 2010, non-spousal beneficiaries of 401(k) plans (including domestic partners and same-sex spouses) are able to roll a lump-sum distribution into their own "inherited" IRA account. Previously, only federally-recognized spouses were permitted to roll-over in this way absent a specific non-spousal roll-over provision in the employer's 401(k) plan. Non-spousal beneficiaries still will have to start taking distributions immediately (unlike federally-recognized spouses), but will no longer be subject to the high tax burden of taking the funds in a mandatory, immediate lump sum distribution.

IRA Distributions
A non-spousal beneficiary such as a partner or same-sex spouse may roll-over inherited IRA assets into his or her own "Inherited IRA," thereby entitling the beneficiary to receive payments over his or her lifetime rather than having to take a lump-sum distribution as was required prior to 2007.
Health insurance

Employer provided Some employers offer health care benefits to domestic partners. These benefits, however, are viewed as taxable income for the purposes of your Federal tax return.

State health benefits States with marriage recognition (their own, or those of other states) offer healthcare coverage to their employees. These will be taxed at the Federal level.

Federal health benefits State marriage laws have no impact on Federal Health benefits. This means that benefits that are mandated by Federal law will not be available to same-sex couples.

COBRA - right to continued self-funded healthcare coverage after termination
Under COBRA , “"qualified beneficiaries"” are limited to covered employees, spouses of covered employees and dependent children of covered employees. Due to DOMA definition of spouse, same sex domestic partners are excluded from Federal COBRA coverage regardless of state marriage laws. Do note that many states have their own COBRA-like continuation coverage laws, so if you live in a state that recognizes marriages between same-sex couples, registered domestic partnerships, or civil unions, your partner may qualify under these laws. Finally, employers may privately agree to provide this coverage, so check your plan documents carefully before assuming that your spouse or partner can't receive continuing coverage

FSA - FSAs allow you to use pre-Federal-tax dollars to pay for dependent care, as well as medical and dental services for you, your spouse or qualifying dependents. Medical expenses of a non-dependent domestic partner are not eligible for tax-free reimbursement from an FSA, even if the employer offers partner health insurance benefits.

HSA - Similarly, medical expenses incurred by or on behalf of domestic partners (and their children) that are not qualifying dependents under Internal Revenue Code Section 152 are not eligible for tax-free reimbursement from an HSA.

Life Insurance

Cross-owning life insurance on the other partner is something that same sex couples should think about. E.g. Mary owns life insurance on Nancy and vice versa. When one of the them passes, the surviving spouse collects the payout.

This ensures:
a) sufficient income after the death of one spouse;
b) minimization of estate tax liability since the policy is owned by the surviving spouse, not the decedent.

Why is this so complicated? The Federal Defense of Marriage Act ("DOMA") restricts the term "marriage" for federal purposes to the legal union of a heterosexual couple. The Federal government doesn't recognize your same-sex marriage/domestic partnership for the purposes of filing your Federal tax return.

As a consequence, the Federal government does not respect the actual legal status of married same-sex couples and individuals who have been married to a same-sex spouse for any purpose, including federal income taxation and estate and gift tax considerations, regardless of whether their home states honor their unions. Same-sex married couples thus are required to file separate individual federal income tax returns, each with a filing status of "single," even when they must file their state returns with a "married" status (whether filing jointly or separately).

What does this mean for my tax filing? Because you and your spouse are treated as strangers, this has an impact on a) Your Federal taxable income b) Gift tax consideration ($13,000 annual cap, vs. unlimited between heterosexual spouses) c) Estate tax considerations

You are legally liable of you knowingly file a tax return that is false - unfortunately the Federal tax return currently does not allow you to accurately identify your legal status. Some tax accountants propose a solution which involves you disclosing your married status in a separate document which you attach to the tax return.
State tax treatment of same-sex couples who are married or who have entered into a civil union or registered with the state as domestic partners varies by state. Some states allow you file jointly.

Because of the mismatch between state and federal laws, and the fact that the state return is based on the federal, it is important for same sex couples with state recognition to consult with a local tax practitioner to evaluate their options under state law.
Overview Many of the issues surrounding estate tax planning for same sex couples are addressed in the legal documents section. The main issue is that due to Federal non-recognition of same sex marriage via the Defense of Marriage Act (DOMA), same-sex couples are treated as unrelated strangers. This means they are not eligible for the spousal exemption, and any bequests to the surviving spouse would still be part of the Federal estate tax calculation.

Things to think about Structure - This can materially affect which portions of your estate are federally taxable. State estate taxes may also play a role if you live in a state that doesn't recognize your marriage.

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