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!
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!
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.
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.
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.
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.
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.
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.
This is different from the Medical Power of Attorney, which is specifically related to the power to make healthcare decisions on your behalf. States’ Advance Directive/Living Will laws generally cover the ability to make healthcare decisions on behalf of another person.
What powers am I awarding? You can limit the powers of your agent to a specific time frame, or to specific functions, using a limited power of attorney for finances. executing a general or limited power of attorney for finances can save the expense and difficulty of a conservatorship or guardianship proceeding. It can also prevent relatives from intervening in your financial affairs if you are incapacitated.
When does it go into effect? There are two types of power of attorney:
Springing – your agent is able to act for you upon your becoming incapacitated Durable – your agent is able to act for you now and when you become incapacitated. If you choose a springing power of attorney, you should define exactly what circumstances will activate it. If you don?t, court proceedings may be necessary to determine whether you are actually incapacitated.
The designation of power of attorney should not be taken lightly. By designating your partner to be your agent, you are giving away very broad rights to handle your finances, including the ability to empty your bank account without your knowledge.Some people choose a springing power of attorney because they're worried their partner might abuse the agent role, so they want to make sure it only goes into effect in a worst-case scenario. However, given the seriousness of designation of power of attorney, you should only give it to a person you trust wholeheartedly.
Why does it matter? If you become incapacitated and you have not already legally authorized your partner or someone else you trust to act on your behalf, it is possible for a friend or family member to initiate a guardianship proceedings by filing a petition in the county court. If the court decreed medical examination finds you unable to meet the requirements for your health and safety, it will appoint a guardian to make personal decisions on your behalf. The court is likely to choose a biological relative, like an adult child or a parent. Some people are comfortable with their adult child or a parent controlling their assets. But if you are not, it is important to make the choice yourself in advance.
Additional considerations Banks and other financial institutions may require their own versions be signed. You should check with your bank to ensure that you have the proper documentation on file with them.
HIPAA release form: This authorizes your medical service providers to disclose health-related information to your designated agent.
Why is it important? Despite President Obama's 2010 directive to the Department of Health and Human Services to "respect the rights of patients to designate visitors", this is the last thing you want to be arguing with hospital staff about when you or your spouse is ill.
Without the HIPAA release, healthcare providers are not authorized to share details of your loved one's medical condition with you.
What do I do with it?
1. Ask your local healthcare provider (doctor, clinic, hospital) for their HIPAA release form. Make sure one copy is on file at the institution, and carry a copy with you.
2. Consider filing a healthcare visitation authorization with your local hospital, carry a copy with you, an upload a copy to a cloud service for constant availability. One easy way to do this is to scan the documents and email them to yourself.
3. Consider an online document repository which gives you 24/7 access to your documents
Why does it matter? Without this document naming your partner as your agent, hospitals will look for your closest legal relative to make medical decisions for you. If you are married and in a state that recognizes your marriage, your spouse will have first priority. But having a medical power of attorney will always be clearer than not. If you are travelling in a state that does not recognize same sex marriage, and you don't have a medical power of attorney, your partner will have no legal rights to make healthcare decisions for you.
When does it go into effect? The medical power of attorney is activated depending on what you specify in the document. Generally these are drafted to only become effective when your doctor declares you incapacitated. The document becomes ineffective upon your death, so make sure you also have a will!
Because each state regulates the requirements for a valid health care proxy in different ways, it is important to know the requirements in your state and draft your documents accordingly!
This is another document that you will want to carry with you at all times, especially when traveling out-of-state.
Why does it matter? In hospitals, there can be a preference to do everything possible to preserve life. You may have your own preferences about whether you want "extraordinary measures" to be taken on your behalf, whether you would want to be sustained if you were to be in a persistent vegetative state, or continual resuscitation even when close to death. The living will helps to preserve your wishes in writing, and in conjunction with the Medical Power of Attorney will enable your spouse to carry out your wishes even if your relationship is challenged.
Other considerations Life and death situations often cause medical providers to be cautious if other family members object to the directions in your living will. For additional protection, have discussions with your loved ones early, before you are ill, to help them understand your logic.
Why is it important? Guardianship is a legal process, and states have established hierarchies as to who is most likely to be appointed. By selecting your spouse in a pre-need designation of guardianship, you give your spouse standing to seek guardianship in court. The designation doesn't guarantee they will be awarded guardianship, but it will help establish intent. State regulations specify the order of preference, generally spouse (does not automatically apply to same-sex marriages), then nearest next of kin.
Some states allow pre-need guardianship designations by statute, meaning that your designation gives your partner standing in court to demonstrate why he or she is the right person to be your guardian. Without your written designation, your partner may have a less favorable position from which to demonstrate his or her candidacy.
If I have a Durable POA, why do I need this? Pre-need guardianships award much more than power of attorney. Power of attorney assignations relate to financial and legal issues. Guardianship is a much broader concept and also gives control over the person.
Probate assets vs. non-probate assets Wills only cover assets governed by the probate process (varies from state to state), but generally includes real property held solely in the decedent's name.
Non-probate assets include assets or real property owned as joint tenants with right of survivorship (JTWROS), real property owned as tenants by the entirety (TBE), assets held in a revocable trust, and assets held in designated beneficiary accounts such as "in trust for accounts", "Transfer on Death" (TOD) accounts, life insurance policies, Totten trust accounts, Individual Retirement Accounts (IRAs), 401(k)s, annuities, and health savings accounts (HSAs).
Why does it matter? For same-sex surviving partners, probate assets are often the cause of dismay, as they may be vulnerable to challenge in probate court by necessary parties to the probate action. Depending on state law and the legal contracts you execute, your partner may have less standing in court than your legal relatives. If you are married and in a state that recognizes your marriage, your spouse should have first priority. There is also a geographical wrinkle specific to probate law for real property (e.g. houses). Court probate to pass real property to heirs must be filed in the county of the state where the property is located. As you know by now, state laws vary widely. If you want to ensure that your partner will be comfortable even after you pass away, it is important to review your assets with an estate lawyer, and ensure that your assets will actually be distributed as you intend.
Why does it matter? Unless you leave written instructions, nearly every state gives your legal relatives the right to control the disposition of your body when you die, including funeral arrangements and the decision of whether to authorize an autopsy. A surviving same-sex partner does not automatically have this right.
This document is particularly important for transgender people so that you can specify and designate someone who will ensure that you are buried or cremated with dress and grooming matching your gender.
Homophobic funeral directors may look for a reason to prevent the surviving partner from getting access to the deceased partner’s remains. Having an affidavits of burial or cremation provide you the legal documentation to get around personal prejudices.
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.
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.
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.