Traditionally, same-sex couples have been at a particular disadvantage because they could not get married even if they wanted to. Moreover, they often face resistance from family members who object to their lifestyle, raising the issue of will contests and other problems after death.
While this is still the case in most parts of the country, things are changing. Some states, Vermont and California, are beginning to acknowledge same-sex partnerships, giving them inheritance rights similar or equal to those of married couples. Massachusetts, meanwhile, recently became the first state to allow full-fledged marriage rights for same-sex partners.
If you live in a state that recognizes same-sex unions or same-sex marriage and you take advantage of those laws to create a legal union with your partner, you may think you're safe from many of the estate planning problems of unmarried couples. Instead, you may be facing even more problems than if you had never gotten married. Differing state and federal laws actually create a more complex set of planning problems for same-sex couples, who now need to grapple with multiple sets of different rules.
One reason is that the federal government won't recognize a same-sex marriage or civil union as long as the Defense of Marriage Act (DOMA) remains in effect. This act, signed by President Clinton in 1996, ensures that for federal purposes, marriage is defined solely as a union between a man and a woman.
Since the federal government won't recognize your union, neither you nor your partner will benefit from any of the federal perks for married couples. Here are some of the benefits lost under DOMA to couples who are otherwise under the rules of their state.
•Marital deduction: If you're married, you can transfer an unlimited amount of money at death to your spouse free of estate tax consequences benefit known as the marital deduction. A same-sex couple married by the law of Massachusetts will benefit from the marital deduction at the state level, but not at the federal. So the federal government will tax any money transferred to a spouse above the personal exemption amount.
•Gifts: The same hold true for gifts. The federal government tracks and taxes large financial gifts in order to prevent people from whittling down their assets ahead of death and, therefore, avoiding having to pay an estate tax. If you're married, you can give away unlimited amounts of money and property to your spouse without triggering a gift tax. If you're not married, any amount you transfer to your partner above $12,000 a year will require you to file a federal gift tax return. Say you assist your significant other with the mortgage payments to the tune of $13,000 a year. The extra $1,000 will be considered a taxable gift for same-sex couples, even those who are legally joined by the laws of their state.
•IRA rollover: Federal laws allow a surviving spouse to "roll over" a deceased spouse's IRA or other qualified retirement plan account into a new IRA. Under DOMA, a same-sex married couple in Massachusetts would not be allowed to benefit from this rule.
•Social Security: Nor can your partner benefit from other types of federal programs when you die, such as the transfer of Social Security benefits.
Meanwhile, what happens if you live in a state that doesn't recognize same-sex unions? Suddenly, all your rights fly out the window. While a handful of states have enacted rules recognizing same-sex unions, dozens have passed legislation that defines marriage as being between a man and a woman. So a marriage license in Massachusetts may mean nothing if you move to Minnesota or Alaska, where your partner can still be cut off without legally binding instructions from you that direct otherwise.
Consider: You live in Massachusetts and are legally married to your partner because that state recognizes same-sex marriage. As such, you feel it's not necessary to create a health care power of attorney. You figure that if you're ever hospitalized, your partner will have visitation rights because you're married. If you ever become incapacitated, your partner plans to seek legal guardianship, and vice versa. Sounds like a decent plan, no? Well, what happens if, while on vacation in sunny Florida, you fall off your surfboard and become unconscious? You will be admitted to a hospital in Florida, a state that doesn't recognize same-sex unions. Without a legal health care power of attorney, your partner could technically be shut out of the decision making.
Or consider this: Say you're married in a state that recognizes same-sex unions and you draft a will accordingly. Years later, you buy a property in Alaska because you and your partner enjoy the vigorous outdoor activities there. Without an updated will, that property will go directly to your blood relatives when you die, as Alaska doesn't recognize same-sex partnerships.
Even if you live in a state that recognizes same-sex unions, you cannot avoid planning. State rules relating to same-sex marriages are unstable at best, and can change just as swiftly as they arrive. Hawaii's Supreme Court, for example, determined several years ago that denying same-sex couples access to marriage licenses was against the state's constitution, the as Massachusett's 2003 Supreme Court ruling. A year later, Hawaii's legislature amended the state marriage laws to define marriage as a union between a man and a woman. Currently, same-sex couples who are residents of Hawaii can register as reciprocal beneficiaries but cannot be married.