Estate Planning for Same-Sex Marriages

On June 24, 2011, New York State passed the Marriage Equality Act (the “Act”) which provides that all individuals, regardless of whether they are same-sex or different sex couples, have the right to marry under the laws of New York State. Almost two years to the day of the passage of the NY Act, the United States Supreme Court struck down the key provision of the Defense of Marriage Act (“DOMA”) on June 26, 2013.

As a result of these two events (hereinafter referred to as the “Repeal”), same-sex couples now enjoy the same range of Federal and State benefits and can now utilize the same estate planning techniques previously only available to heterosexual married couples, in particular, the unlimited marital deduction.

The following is an introduction to some of the many estate planning options now available to same-sex married couples:

(A) Rights of Inheritance
One of the principal benefits now afforded to same-sex married couples is the right of inheritance. Prior to passage of the NY Act, if a person died without a Will, his/her assets would not pass to his/her surviving partner. The reason for this is that under the New York intestacy statute, first priority for inheritance is given to the spouse, and prior to the passage of the Act, a spouse only included a heterosexual spouse. If there was no “spouse,” the assets then typically passed to the individual’s parents and/or siblings and then so forth down the family line.

With the passage of the NY Act, the surviving spouse of a same-sex marriage will now be treated the same as the spouse of a heterosexual marriage and will be entitled to inherit the deceased spouse’s estate where there is no Will. Accordingly, while it is still important that spouses in a same-sex marriage execute Wills (for the reasons discussed below), they at least now have the same right of inheritance as heterosexual married couples.

In addition to the inheritance benefit, same-sex married couples will also receive the benefit of the unlimited “marital deduction” for purposes of calculating the Federal and New York State estate tax due on their estate. The “marital deduction” provides that any assets which pass from one spouse to another, regardless of the value of the assets, are not subject to Federal or New York State estate tax upon the first spouse’s death. This enables the first spouse to pass his/her entire estate to the surviving spouse without any estate tax. The estate tax will now not be imposed until the second spouse’s death. Before the passage of the Repeal, this “marital deduction” was only available to heterosexual couples, and resulted in a substantial estate tax penalty for estates of same-sex couples.

It is important to remember, there is no protection under the intestacy statute and no marital deduction benefit for same-sex couples that do not marry. Therefore it is crucial that they execute Wills naming their partners as the beneficiaries of their estates, even though no marital deduction benefits will apply.

(B) Still Need a Will
Even with the new protection under the intestacy statute, it is still crucial for couples in a same-sex marriage to execute Wills, especially if they have children.

First, by executing a Will, the couple is able to name a Guardian of the person of their minor children in the event of their deaths.

Second, by implementing an effective estate plan through properly drafted Wills, the couple can substantially reduce the amount of Federal and New York State estate tax that will be due upon the death of the survivor, and thereby potentially save hundreds of thousands of dollars for their children or other heirs.

As mentioned previously, under Federal and New York State law, no estate tax is due when assets pass from one spouse to the other spouse. In addition to the unlimited marital deduction, each person has an exemption from Federal estate tax of $5,250,000, and from New York State estate tax of $1 million.

If a couple executes “simple Wills,” each leaving his or her entire estate to the surviving spouse outright, this can result in estate tax being paid by their heirs upon the second spouse’s death. By simply leaving all of the assets to the surviving spouse outright, the couple fails to take advantage of both of their New York State estate tax exemptions.

For example, assume a couple has assets valued at $2 million and they executed “simple Wills” leaving their entire estates to each other. In this case, there will be no New York State estate tax due upon the first spouse’s death since all of the assets will pass to the surviving spouse and will be eligible for the marital deduction. However, when the second spouse dies and the assets pass to the children or other heirs, there will be a taxable estate of $2 million. Utilizing the second spouse’s $1 million exemption will result in a taxable estate of $1 million and a New York State tax liability of almost $100,000.

Instead of executing “simple Wills,” a couple can execute Wills that provide, on the death of the first spouse to die, for assets having a value equal to the New York State estate tax exemption to pass to a trust for the benefit of the surviving spouse (as opposed to that spouse outright). Those assets held in the trust will be sheltered from estate tax in the first spouse’s estate by virtue of using the first spouse’s exemption. The assets in the trust (plus any future appreciation) will not be subject to estate tax in the surviving spouse’s estate, thereby bypassing his/her estate. This trust is sometimes referred to as a “bypass trust.”

Since the assets in the “bypass trust” are not part of the surviving spouse’s taxable estate, the second spouse’s estate is valued for estate tax purposes at only $1 million, which is then offset by his/her own exemption. Accordingly, the full $2 million can pass to the children without any New York State estate tax.

The same planning opportunity is available at the Federal level for those with larger estates and the savings are even larger.

(C) Other Estate Tax Savings Techniques
In addition to executing Wills designed to fully utilize both spouses’ estate tax exemptions, there are other techniques which can be used to shield assets (including life insurance) from both the New York estate tax and, if applicable, the Federal estate tax, irrespective of same-sex married couple protection. For example, creating an Irrevocable Life Insurance Trust (“ILIT”) and making the ILIT the owner and beneficiary of life insurance policies prevents the death benefit from being subject to estate tax in either spouse’s estate. Similarly, by transferring title to one’s home to a Qualified Personal Residence Trust (“QPRT”), a couple retains the right to live in their home but is able to remove the value of their home and any subsequent appreciation from their taxable estate on a very favorable basis.

Finally, for those who have successful closely held businesses or large stock or real estate holdings, there are various trusts (such as Grantor Retained Annuity Trusts (“GRATS”) and Intentionally Defective Grantor Trusts (“IDGT”)) which allow individuals to freeze the value of their estates and thereby pass all appreciation to their children or heirs without any estate tax.

(D) Still Need a Health Care Proxy, and Power of Attorney
Despite the passage of the NY Act, under New York State law a spouse is not automatically deemed to be the other spouse’s health care proxy or agent under a durable Power of Attorney. A Health Care Proxy enables you to appoint someone (your proxy) to make health care decisions for you in the event you are unable to do so. A Durable Power of Attorney allows you to appoint someone as your agent to make financial decisions (as opposed to health care decisions) for you in the event you become incapacitated. Therefore, it is crucial that all married couples (whether same-sex or heterosexual) execute such documents specifically naming their spouses (or other persons) as their Health Care Proxies and agents.

(E) Need to Consider Prenuptial Agreements and Medicaid Planning
While the passage of the Act was hailed as a breakthrough for the rights of same-sex couples, it also imposes various responsibilities on them.

With the advent of same-sex marriages comes the unfortunate inevitability that there will be divorces. Accordingly, in order to protect one’s property, same-sex couples, like heterosexual couples, should strongly consider entering into prenuptial agreements which address issues relating to the division of property, and the amount of maintenance between the parties, in the event of a divorce.

Couples also need to consider Medicaid planning. This is particularly important in situations where one partner may need home care or nursing home care. Generally, under New York State law, a married person is responsible for the support of his/her spouse. This means the “well spouse” is responsible for contributing to the cost of home care or nursing home care for his/her spouse. There are several planning techniques (which are beyond the scope of this article) which can safeguard the couple’s assets. Couples facing this situation are advised to seek advice from an Elder Law attorney before the need for a nursing home arises to ensure proper planning.

The above techniques are only a few of the many options now available to married same-sex couples as a result of the Repeal and the NY Act. It is important for these couples to be proactive, and take advantage of their entitlements under the new law, despite the safeguards afforded to surviving spouses under the intestacy statute. Now is the time for married same-sex couples to meet with an estate planner and develop a plan that not only fits their needs, but also ensures that their spouses, children, grandchildren or other heirs are provided for and sheltered from an estate tax burden.