The Legal Environment
In states where lesbian and gay couples cannot legally marry, the relationships of same-sex partners are governed generally by contract law. Because of the confusing patchwork of rights afforded to same-sex couples across state lines, having a comprehensive plan in place covering all aspects of planning is vital.
Estate planning is the process of compiling a list of assets and obligations and making decisions in a will about how the estate will be distributed after death. If an individual does not have a will, living trust, or any other legal designation for transferring property, his or her property will be distributed under the state’s intestacy laws, generally requiring that property pass to certain specified family members, such a spouse, children, or parents.
In order to protect each other, couples should plan ahead. If the relationship is not recognized by the law, the partners are not related to each other and intestacy rules will not apply. Lack of proper planning could result in an individual’s partner being evicted from their home, denied access to shared possessions, or having to wage legal battle against relatives.
Estate and Gift Tax
Under federal law, a married person can transfer unlimited assets to his or her spouse by gift during his or her lifetime or by bequest at death with no federal gift or estate tax consequences. The same deductions are not available to same-sex couples. With the passage of the same sex marriage bill, the State of Maryland could soon offer the same protections from Maryland estate taxes for same-sex married couples. Until that law is enacted, it is important to plan for the potential imposition of estate or inheritance tax.
Assets Requiring Special Planning
The distributions of retirement plan assets are generally controlled by the beneficiary designations made by the plan participant.
There are strategies available to stretch out the distributions and resulting income taxes, but not all are available to unmarried partners. A surviving spouse may roll over a deceased spouse’s retirement plan into his or her own plan, but this option is not available to unmarried partners. This may result in the distributions (and resulting taxes) beginning sooner than would have been required by a surviving spouse.
Life insurance may be a useful tool for unmarried individuals. Life insurance trusts are useful for a variety of estate planning needs. Properly employed, the proceeds of a life insurance policy can avoid both income and estate taxes. The proceeds of life insurance are paid to the named beneficiary(ies).
The proceeds can be used to pay estate taxes for someone who did not want to make gifts during life. Also, naming a domestic partner as the beneficiary in a life insurance policy or life insurance policy owned by a trust may protect their right to inherit if there is a possibility that a will might be contested.
Powers of Attorney
A financial power of attorney requires that the person choose an agent to make decisions regarding financial matters and property. This is essential to protect your assets in the event you become physically or mentally unable to handle financial matters. By naming a partner as your agent for making financial decisions, he or she can act on your behalf to pay expenses, collect benefits, watch over your investments and file taxes should you be unable. Without this, family members, rather than your partner, may gain controlling interest in your affairs.
It is important for unmarried partners to have legal documents such as wills and powers of attorney in place, and review all beneficiary designations. Without these documents, partners may not be able to take care of one another in the event of illness and the survivor may be left with nothing at the first partner’s death. Estate planning is often an uncomfortable topic to discuss with loved ones. However, properly preparing for such contingencies will bring peace of mind to you and your family.