By Peter Reiss
Marriage Equality Decision Provides Numerous Estate Planning Benefits For Same-Sex Spouses
The U.S. Supreme Court’s decision in Obergefell v. Hodges (decided 6/26/15) made it clear that LBGT individuals may marry, and removed many inequities and obstacles these individuals had previously encountered in their estate, tax and benefits planning. Married same-sex couples now have access to valuable estate planning tools previously available only to heterosexual spouses.
Married individuals may make unlimited tax-free gifts and bequests to each other. In cases where a couple’s combined assets exceed $5.43 million, the surviving spouse may make use of the unused portion of the deceased spouse’s federal estate and gift tax exemption, with the result that up to $10.86 million of the couple’s lifetime gifts and bequests may be free from the federal estate and gift tax, regardless of who actually owned the assets. In Pennsylvania, bequests to one’s partner prior to the Obergefell decision were subject to the 15% state inheritance tax rate on transfers to unrelated individuals (with no exemption); now the rate applicable to these bequests is the “spousal rate” of 0%.
Real property owned by same-sex spouses may now be owned as “tenants by the entireties”, a form of ownership that passes the property to the surviving spouse on the death of the deceased spouse without the need to probate a will. While unmarried individuals were previously able to own real property as joint tenants with right of survivorship (“JTWROS”), the conveyance of the property from one owner to both of them was subject to a 2% transfer tax on half the value of the property. This transfer between married spouses of the same sex is now tax free.
It is important to know that owning assets as joint tenants or as tenants by the entireties, naming a spouse (or anyone) as a beneficiary of a retirement plan or life insurance policy or as a “transfer on death” or “pay on death” (“TOD” or “POD”) beneficiary will control the disposition of that asset upon the death of the transferor/owner. The asset will not be subject to probate. These types of arrangements are known as “testamentary substitutes”. Of course, if the joint tenant or beneficiary does not survive the account holder or grantor, the asset will be included in the holder or grantor’s probate estate and be subject to the provisions of that person’s Will, unless an alternative beneficiary designation has been made.
Spouses are entitled to special treatment as beneficiaries of their spouse’s IRA or other retirement plan. A surviving spouse has one option that nobody else has: rolling over inherited IRA assets into an IRA in the spouse’s name and treating these assets as if they were the spouse’s own. This may be a good choice if the spouse doesn’t have an immediate need for the IRA assets and is looking to keep the money in a tax-advantaged account for as long as possible. If the surviving spouse has not reached age 70½ but the deceased spouse had, this option enables the survivor to delay taking distributions until reaching age 70½, rather than continuing the deceased spouse’s MRDs.
Medicare, Medicaid and Social Security apply to all spouses, regardless of their gender. Spouses may be entitled to benefits under their spouse’s employee benefits plans, including but not limited to health insurance programs.
Should one member of a same-sex marriage become incapacitated, it will be easier for the other spouse to be appointed as the plenary guardian of the incapacitated spouse’s person and estate. A Power of Attorney, which serves many other important purposes, is a useful method for the Principal to express his/her preference for his/her Agent-spouse to serve as a guardian in the event of a subsequent incapacity.
In light of this major change in the legal treatment of same-sex spouses, those with newly recognized marriages and those considering marriage should consult their tax and estate planning professionals to review their estate planning documents (wills, powers of attorney and health care declarations) and their “testamentary substitutes” (how their assets are titled and their retirement plan and life insurance beneficiary designations).