Estate Planning for Gay Couples

As reported by Dana Dratch, on

For gay couples, estate planning can be incredibly frustrating.

“Domestic partners have a lot of planning to do, and have to fight discrimination at every turn,” says Todd G. Sears, vice president at Merrill Lynch, and founder of the company’s lesbian, gay, bisexual and transgender financial services team.

In many cases, the law doesn’t recognize domestic partnerships.  And if the estate is worth more than $2 million, a surviving partner can face a hefty federal estate tax bill.  In some states, the threshold for state estate tax is lower.

Even if you’re well under the $2 million mark, if there is anyone who depends on your income, you really need to sit down with an attorney and do some planning.

Avoiding Courts

One concern for same-sex couples “is avoiding courts on death,” says Janet Dobrovolny, found of the California-based Law Offices of Dobrovolny & Moon and estate planning consultant of “Suze Orman’s Will & Trust Kit.”

First, everything in a will becomes public during probate.  Second, going through probate means notifying all potential heirs and giving them a chance to contest the will, she says.  For that reason, Dobrovolny favors trusts for many assets.

“In most states, they can be 100% private,” she says.  Plus, challenging trusts is much more difficult than challenging wills, requiring more effort, time and money.

Another issue: While some states recognize gay unions and will allow you to hold joint property without estate tax issues, others don’t.  And the federal government doesn’t either.  So your estate planning strategies may differ depending on where you live.

Partners also need to get “detailed advice” on passing everyday shared assets, such as bank accounts and the home, says David Buckel, senior counsel for Lambda Legal, a nonprofit civil rights group serving the gay community.

Best bet: Find an attorney who is experienced in both estate planning and the local and federal laws concerning same-sex couples.  Your attorney should be able to offer you a variety of options depending on the size of your estate, your family situation and what you want to do with your money.

Here are some items you can discus:

A will: If you want any control over who gets your assets, you need a will.  “That’s basic,” says Joan Burda, attorney and author of “Estate Planning for Same-Sex Couples.”  Unfortunately, “a lot of people think if they have join accounts and property held jointly, they don’t need a will.”

If you have kids and you’re the legal parent, you can name a guardian you would like to raise them if you’re not around.  Many states don’t allow gay couples to have joint custody, so the death of the legal parent can ignite a custody battle.

If you suspect your family will contest your guardianship choice, you might also want to name your partner as the trustee for any trust you set up for the kids – and stipulate how often you want the trustee to see the kids, says Burda, who refers to this as the “Aunt Mame” clause.  That way if a family succeeds in overturning your selection for guardian, the children will still have contact with your partner.

A shared custody agreement: Some states will allow the legal parent to draft a contract for shared custody with a domestic partner.  This could  be very helpful in keeping the family together if the legal parent dies.  The downside is that if you and your partner break up, you will be sharing custody.

A bridge guardian: If your state doesn’t allow unmarried couples to be co-parents, the kids could end up in a temporary state custody after the legal parent dies and before the courts decide permanent custody.  Often you can avoid this by naming a temporary or “bridge” guardian, who will look after the children in the interim.

Funeral arrangement documents: “You have to designate who’s taking care of funeral arrangements,” says Buckel.  “There are many cases where the partner is shut out of the process and not allowed to participate.”

A living trust: You set this up and, while you’re alive, transfer into it any assets you want to leave.  While you’re around, the trust “owns”  the assets, but you control the trust.  When you die, the person you’ve named as trustee passes them on to whoever you’ve named as the beneficiaries (and in most places you can name your partner as both trustee and beneficiary.)  You do have to remember to transfer assets into it, which involves some paperwork.  And it won’t lighten the load when it comes to estate taxes.

A testamentary trust: Testamentary trusts are much like living trusts, except they only come into being after you die.  So while you’re alive, you “own” your assets.  When you die, a list of specific assets you’ve designated go into the trust.

Lifetime gifting: you can give away $1 million tax-free during your lifetime.

Annual gifting: You can give anyone up to $12,000 per year per person, tax-free.  It doesn’t count against your $2 million estate tax exclusion.

An insurance trust: You can create a trust precisely for the purposes of conveying an insurance policy.  It can be one way to make sure that a beneficiary gets an instant cash infusion for expenses without having to wait for probate.  Tax tip: Keep the insurance in the trust, pay the premiums from the trust or from your annual gift to the trust; that way, the insurance won’t count toward your $2 million federal estate tax exclusion, says Burda.

A bypass trust: When using a bypass trust, your partner, or whoever you name as first beneficiary, has full control of the assets in the trust during his or her lifetime.  But when the partner dies, any remaining assets go to a party you’ve selected.

Joint tenants with right of survivorship: This is a way to title property that is used by unmarried couples, partners or siblings to allow the survivor to keep a piece of property, such as a home.  When one dies, ownership passes to the survivor.  But the IRS can assume that the entire property belonged to the first partner and tax accordingly.  If that’s not the case, keep good records.  Some states won’t let unmarried couples use join tenancy, says Burda.

Retirement accounts: Thanks to a change in the law last year, you may be able to leave your 401(k) account to a domestic partner, who can roll the money into an inherited IRA to grow tax-deferred.  But only if your employer-sponsored plan allows it, says Sears.

Keep it Current

Estate plans are like technology – it pays to stay current.

Your life changes and so do the state and federal tax rules.  To be effective, your estate plans must keep pace.  If you have a major life event, that’s often a good time to review your plans.  Different states treat domestic partners and their arrangements differently, so moving also means revisiting your plans, says Sears.  Otherwise, update things at least every three years, he says.

Same-sex couples “don’t have the support, in many cases, of the law or the family,” Dobrovolny says.  “You can’t rely on the good will of the law of family.  You have to rely on legal documents.”

If you (or someone you know) have questions or concerns about estate planning, please contact the Law Offices of Mitchell S. Ostwald at 916.388.5100 or email us at