The idea of planning for after you’re gone is daunting, but proper estate planning is vital for anyone who wishes to protect their assets and loved ones. It could be even more critical for same-sex couples and LGBTQ families, even after the 2015 Obergefell v. Hodges Supreme Court decision.
The legal recognition of same-sex marriages opened up a multitude of previously unattainable tools and tax-savings that come along with a legal and recognized marriage. Yet, same-sex couples still may have situations that require extra or special planning, such as adoption by non-biological parents or navigating complicated dynamics with family members who may not accept them.
A Pew Research Survey shows that four in ten LGBTQ adults have been rejected by a close family member or friend due to their sexual orientation, which can have ramifications on their estate planning. Same-sex couples’ estate plans could be more vulnerable to sabotage by unsupportive family members, such as:
- Having their wills contested by a family member that may not recognize the validity of their relationship
- Custody battles over non-biological children in the event of the biological parent’s death or incapacity
- Family attempts to interfere with a spouse’s ability to make medical and financial decisions for their partner
While there isn’t necessarily a need to draft estate planning documents differently from heterosexual spouses, same-sex couples should make a pointed effort to review their existing estate planning documents, especially those drafted before 2015. You want to be sure they include language (e.g. wife/husband/spouse) consistent with current laws to help protect loved ones and to help ensure your wishes are carried out after you’re gone. Keep in mind the following estate planning considerations for same-sex couples:
1. Make Sure Your Assets Transition According to Your Wishes
One study found that the LGBT community is less likely than their heterosexual counterparts to have a will. For instance, while 56% of LGBT investors with a net worth between $100,000 and $1 million have a will in place, 70% of non-LGBT investors in the same bracket already have a will. The difference is greater for investors with a net worth over $5 million, where 72% of LGBT investors have a will and 91% of non-LGBT investors do.
What does that mean for same-sex couples? Wills are particularly important for those members of the LGBTQ community who are not married but who are in serious relationships (which is the majority—as of 2017, only about 10% of LGBT Americans were married). If you are in a domestic partnership or other serious romantic relationship and you die without a will (the legal term for this is intestate) then the intestacy laws of the state you live in will determine who gets your assets. These rules vary greatly by state which means your assets could be divided among a number of “heirs” including surviving spouses, parents, children, siblings and even aunts and uncles. Domestic partners are rarely included in the state statutes, and will likely be disinherited regardless of your intentions. Therefore, if you want to determine what happens to your property and assets when you pass, a will is your best option.
Keep in mind the importance of keeping your will and beneficiary designations up to date. For many people, their retirement accounts and life insurance are their largest assets, and their beneficiary designations supersede whatever is written in their wills. If you previously named an ex-partner or spouse as beneficiary on an IRA and forgot to change it, that person will collect that asset regardless of who you leave the asset to in your will.
You may be asking, “but won’t my family just contest the will anyway?” If you believe that is the case and you don’t want to risk jeopardizing your spouse’s inheritance—not to mention saving your spouse/partner the pain and stress of a contested probate case—you may consider creating a trust. Establishing a trust can offer superior asset protection to wills and could be worth discussing with your financial advisor.
However, despite any benefits of establishing a trust, it can be expensive. If that is not a viable option, then consider adding a “no contest” clause or particular language into your will that discusses why you are leaving your estate to your spouse instead of other family members. Spelling out the reasoning behind your wishes (e.g. Jane Doe loves her family but chooses to leave her estate to _____ because _____), gives someone less room to contest it later during probate.
You should also keep a paper trail of your old estate planning documents. If your will is ever contested, it’s more difficult to prove fraud or undue influence if several documents demonstrate a consistency of your wishes regarding your spouse and their inheritance.
2. Go Beyond a Will for End of Life Care
A will is what many people think of when it comes to estate planning, but same-sex couples shouldn’t stop there. Same-sex spouses tend to be challenged more often than heterosexual spouses when they need to make medical and financial decisions for partners who are incapacitated or unable to communicate. This is why same-sex couples, especially, need to document their wishes. Make sure you work with a professional to ensure you have all the documents you need to carry out your final wishes, including:
- Durable financial power of attorney — designates a person to handle your financial affairs if you become too ill or incapacitated. There are different kinds of powers of attorney, and the rules and requirements vary by state.
- Health care power of attorney (also called a health care proxy) — designates a person to make medical decisions on your behalf if you are too ill or incapacitated. This is particularly important for same-sex couples who are unmarried or in domestic partnerships to ensure that the individual you want to make your decisions is able to do so.
- HIPAA privacy authorization form — an often-overlooked, but critical, form that allows doctors and other health care professionals to disclose pertinent health information and records to your designated health care power of attorney or trustee. A trustee, for example, may need your medical records to establish your medical condition or mental capacity for the purposes of managing your estate.
- Health care directive — designates the type of health care you would like to receive at the end of your life in the event you are incapacitated or unable to speak for yourself.
3. Take Advantage of the Unlimited Marital Exemption
Before the Supreme Court ruling legalizing same-sex marriage, if one member of a couple planned on leaving a bequest to a partner, many couples would purchase a life insurance policy to help cover estate taxes.
Now, same-sex couples can enjoy the unlimited marital deduction for federal estate and gift taxes, which is something many heterosexual married couples have enjoyed to great financial success for decades. Therefore, gay and lesbian spouses can now generally leave an unlimited amount of assets to their surviving spouse without triggering a federal estate tax, as long as both are U.S. citizens.
A same-sex spouse can also now roll over assets from a deceased spouse’s retirement accounts to their account without a mandatory minimum distribution or lump-sum distribution. That previously wasn't an option for same-sex couples.
By taking advantage of the marital deduction and rolling over assets, same-sex couples can revisit their financial and estate plan to free up considerable liquidity. This exemplifies how estate planning isn’t a set-it-and-forget type of action; it’s ongoing, and you might have to roll-back plans you put in place pre-Obergefell.
4. Close the Loop for Your Children
Same-sex parents have a unique set of estate planning concerns when it comes to children, especially when only one partner is the biological parent. A child, either born or adopted into a same-sex union, needs to be specifically identified throughout the estate planning documents.
For example: you can designate guardianship for minor children in your will. Without a will, no guardianship is established and the courts must choose guardians making its “best guess” as to who the biological parent would have preferred and what would be in the best interest of the child. The court may or may not choose your partner or spouse.
In order to prevent opening the door to custody battles, the non-biological parent should strongly consider adopting that child (often referred to as a second-parent adoption, co-parent adoption, or stepparent adoption, depending on your state). This is particularly true if the child was born before the couple got married, since not every state has marital presumption laws. Adoption establishes a legal relationship to avoid having to battle for custody if anything happens to the biological parent.
Adoption also plays an important role in the passage of assets. Typically, when parents die their assets are passed on to their children. If this is an estate planning goal for a same-sex couple, adoption should be considered since it’s more common in same-sex marriages for only one parent to be biologically related to the child.
5. Consider Real Estate Ownership
Same-sex couples should also review real estate documents, especially for property purchased before marriage equality, to make sure that the ownership is listed according to the couple’s wishes:
- Tenants in Common gives both individuals a share in ownership of the property (house), but allows each individual to will their shares to someone else in the event of their death.
- Joint Tenants with Rights of Survivorship signifies that both individuals are owners; if one individual passes away, the other will automatically gain sole ownership.
The state you live in may also dictate how you want to title your assets. For example, in community property states, the couple may want to convert separately owned property to community property in order to receive a step-up in basis upon the death of the surviving spouse. However, this also means that your spouse has control over 50% of the property, and you will be unable to leave 100% of the property to a different person, such as a child. Other states allow a Tenancy by the Entirety ownership, which is similar to Joint Tenants above. Tenancy by the Entirety is only available to married couples and provides additional protection against one spouse’s creditors.
Before making any binding decisions, you should get sound legal advice to take into account your unique situation.
6. Tie-Up Loose Ends from Before Marriage Equality
Estate planning challenges remain for many LGBTQ individuals who entered into legal unions before marriage was even an option. The patchwork of prior state laws has had some unintended consequences for estate planning.
For example, before the 2015 Supreme Court decision, some same-sex couples tied the knot in states that recognized their marriages, then moved to states that didn’t recognize those marriages. Thinking their nuptials “didn’t count anyway” in the non-legal states, couples may have split up but never legally dissolved their marriages. On top of that, some states have automatically converted registered domestic partnerships or civil unions into legal marriages. That means people are now married and may not even know it, which opens the door to future claims against their estate.
In order to protect their estate and their interests, LGBTQ individuals must resolve the tangled web of domestic partnerships, civil unions, and other legal arrangements they may have created with prior partners from before marriage was made legal.
7. Work with Professionals for Comprehensive Financial Planning
Proper estate planning is vital to ensuring that your wishes are carried out during your lifetime, and that your assets pass along to your loved ones in the manner you desire after your death. These are issues that can potentially be more complex for the LGBTQ community.
For all the aforementioned considerations and more, it’s smart for all couples, but especially same-sex couples, to work with skilled professionals. Comprehensive financial planning makes sure your unique needs are addressed. Wealth Enhancement Group has all the specialists you need, all in one place, to review your financial life from every angle to make sure you and your family are taken care of, including estate planning, tax planning, retirement income planning, Social Security claiming strategies, and more.
JD, CFP®, Series 7 Securities Registration,1 Series 66 Advisory Registration,† Life and Health Insurance License Kate has been a financial planner at Wealth Enhancement Group since 2007. Previously, she assisted in the management of trusts and portfolios for high-net-worth clients. She is involved with the Roundtable™ and provides her expertise to help walk clients through the best way to organize their estates to ensure their assets are passed in the most...Read More