Estate Planning For Same Sex Couples in a “Post DOMA” World

It has been two weeks since the United States Supreme Court issued its decision in United States v. Windsor in which the 5-4 majority found that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional.  This historic decision nullified the federal definition of marriage as a union between a man and a woman and qualified same sex married couples for federal benefits that were previously available only to heterosexual married couples.

Windsor specifically dealt with a same sex surviving spouse who had been required to pay over $300,000 in federal estate taxes due to her inability to claim the federal estate tax marital deduction.  This was despite the fact that the plaintiff, Edith Windsor, had been legally married to her spouse under the laws of the State of New York.  The majority’s decision, written by Justice Anthony M. Kennedy, held that DOMA created “two contradictory marriage regimes within the same state” and causes same sex marriages to be treated as “second tier marriages.”   The majority held DOMA unconstitutional for violating the Fifth Amendment due process rights of same sex married couples.

The practical result of this decision is that same sex married couples in the 13 states (and the District of Columbia) which allow same sex marriage are entitled to the same protections and rights under federal law as heterosexual married couples.  With 1/3 of the United States population and ¼ of the states now allowing full marriage equality, estate planning for same sex married couples in these states has changed significantly.  Amongst the new estate planning benefits are the following:

Federal Marital Deduction-The inability to qualify for this deduction was injury that allowed DOMA to be challenged.  Previously, same sex married couples could not protect their assets from federal estate tax using this deduction.  Now, assets passing to all surviving spouses pass free of both federal and state estate tax.

Gift Tax Implications-Prior to Windsor, lifetime transfers between same sex spouses were considered taxable gifts and had to be counted towards a spouse’s annual exclusion and lifetime exemption amounts.  Lifetime transfers between spouses are now considered non-taxable events for gift tax purposes.  Furthermore, same sex married couples can now utilize gift splitting to maximize their annual gift tax exclusion.  Prior to Windsor, this was available only to heterosexual married couples.

Portability-With the 2013 Tax Act, President Obama made the concept of portability, which allows a surviving spouse to claim the unused portion of a deceased spouse’s federal estate tax exemption, permanent.  This benefit will now be extended to same sex married couples as well.  However, it should be noted that portability only applied to federal estate tax and not New York or other state estate tax exemptions.

Qualified Retirement Plans-The Employee Retirement Income Service Act (“ERISA”) requires that the beneficiary of a qualified retirement plan must be the owner’s spouse unless the spouse consents to a substitute beneficiary.  Same sex spouses will now be entitled to the same default treatment.

While these changes are significant, many issues remain.  First, the decision in Windsor did not invalidate DOMA as a whole and did not find that states must allow same sex marriage.  This poses a significant burden on same sex couples in the states that do not allow same sex marriage.  Second, the available options for legally married same sex couples looking to move to other states remain limited.  Finally, because DOMA remains applicable to the states where marriage bans remain, there still remains a possibility that a state where same sex marriage is allowed could eventually reverse course and change its laws to ban same sex marriage.

Nevertheless, this change is welcomed by same sex couples and their advisors alike.  And while Windsor makes estate planning for same sex couples significantly easier, it still requires careful planning and consideration to ensure that their families are protected.

Please contact info@levyestatelaw.com for more information about estate planning for same sex couples.

Windsor, DOMA and the Future of Estate Planning For Same-Sex Couples

This past Friday, the United States Supreme Court decided to hear two cases related to the treatment of same-sex married couples.  One of the cases, Windsor v. United States, was brought as a challenge to the Defense of Marriage Act (“DOMA”) which was enacted in 1996.  Under DOMA, regardless of any recognition by states or other jurisdictions, the federal definition of marriage is limited to a marriage between a man and a woman.  This has been detrimental to same-sex married couples seeking equality with their heterosexual counterparts in numerous areas including estate planning and estate tax.

In Windsor, Edith Schlain Windsor sued the United States as the executor of her wife’s estate.  Windsor and her wife were New York residents and married in Canada in 2007.  While New York did not recognize same-sex marriages performed in New York until 2011, it did recognize marriages performed in jurisdictions where same-sex marriage was recognized.  Despite having her marriage recognized by New York, Windsor was denied the federal estate tax marital deduction by DOMA.

In June, the United States District Court for the Southern District of New York held that the section of DOMA defining marriage as being only between a man and a woman was unconstitutional because it violated the equal protection clause of the Constitution.  In September, the United States Court of Appeals, Second Circuit, affirmed this finding and further held that classifications based on sexual orientation are subject to a higher level of scrutiny than previous courts had held.

The arguments for each side at the Supreme Court(scheduled for Spring 2013) will likely track those made at the Court of Appeals level.  The proponents of holding DOMA unconstitutional will likely focus on the heightened scrutiny required for laws based on sexual orientation.  They will also seek to show that marriage is generally decided at the state level and that DOMA, by interfering with a power reserved to the states, overstepped federal authority.   Proponents of retaining DOMA will continue to make the case that sexual orientation is not a suspect class and that the Federal government has a rational basis to legislate the definition of marriage.

If the Court upholds the Second Circuit ruling, the benefits to same-sex couples will be significant.  First, whereas New York couples are currently only entitled to a marital deduction on their New York estate tax, they will be entitled to the same deduction at the Federal level.  Secondly, lifetime transfers between same-sex spouses will no longer be subject to federal gift tax (or use up a portion of a spouse’s lifetime gift tax exemption.  Finally, assuming estate tax portability is retained, same-sex spouses will be able to utilize the remaining portion of their spouse’s estate tax exemption.

It is premature to predict an outcome and the ruling may be limited or broad.  Nevertheless, it appears 2013 will be, at the very least, an interesting year for preparing estate plans for same-sex married couples.

Please contact info@estatelaw.com for more information about estate planning for same-sex couples.

Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part II Best Fits For “Supersize” Gifts

As the window for making large-scale gifts shrinks each day, many individuals and families will be encouraged by their attorneys and other advisers to consider taking advantage of the 2012 Gift Tax Planning Opportunity.  While this unique event could be a windfall for many people, there are certain situations where utilizing the current gift tax exemption and gift tax rates are most beneficial to the donors.

Below is a non-exhaustive list of some of the ‘best fits’ for making a 2012 Gift:

1)    Individuals with a taxable estate at or above the current Federal Estate Tax Exemption-The current federal estate tax exemption, as with the gift tax exemption, is $5.12 million.  And just as the gift tax exemption will expire on December 31st, the federal estate tax exemption will reduce to $1 million 2013.

Given the likelihood that the estate tax exemption will be reduced, individuals who may have a taxable estate if they die in 2012 would be wise to consider gifting a portion of their estate before year’s end.  By doing so, they can increase the portion of their estate that passes to their heirs free of federal estate tax.

2)    Individuals with a taxable estate at or above their current State Estate Tax Exemption-Residents of Connecticut, New Jersey and New York face lower estate tax exemptions than residents of most other states in the U.S.  Even those individuals whose estates will likely pass free of federal estate tax could have a state estate tax imposed which would similarly reduce the value of the property passing to their heirs.  Making a 2012 Gift is especially useful in reducing potential state estate tax exposure because none of the tri-state area states impose a state specific gift tax.

3)    Family Business owners looking to transition their businesses to their family-One of the many reasons that business succession planning fails is that the incoming owners may be unable to pay the current owners the full value of the companies they are purchasing.  In a family business, a senior family member willing to transfer some or all of their business to their successors as a gift can avoid this hurdle while assuring that the business continues uninterrupted.  For those concerned about a loss of income or not receiving sufficient assets to live off of, using a planning technique like a GRAT or a sale to a defective grantor trust may allow the senior family member to be more generous with their gifting.

4)    Real Estate Owners-In some areas of the country, real estate have begun to rebound.  Nevertheless, the values are still significantly lower than they were prior to the 2008 Financial Crisis.  Gifting a second home or investment property this year could be more tax efficient than transferring it when values increase.  In addition, individuals interested in gifting their primary residence can utilize a technique known as a qualified personal residence trust (QPRT) to transfer ownership of the property while retaining the right to live in the residence for a set period of years.

5)    Individuals with highly appreciating or income producing property-Property likely to increase in value over the next few years can either be gifted outright or to a trust using today’s values.  This allows the beneficiary of the gift to receive the full benefit of the appreciation while reducing the donor’s taxable estate.  Alternatively, by utilizing planning techniques like a GRAT or IDGT, the donor can freeze the value of their taxable estate while also providing their beneficiaries with a significant long-term benefit.  This is also true of property that produces significant income.

6)    Same Sex Married Couples and Domestic Partners-Without the benefit of a marital deduction at the federal level (New York same sex married couples) or at both state and federal levels (domestic partners), non-traditional couples are at a distinct transfer tax disadvantage.  In addition, whereas gifts between married couples are consider non-taxable events, gifts between same sex married couples and domestic partners are.  Fully utilizing the 2012 Gift opportunity may be a unique opportunity for these couples to make tax-free gifts to one and other.

7)    Individuals who have made intra-family loans-The current low interest rate environment have encouraged many family members to make loans to their junior family members.  However, if the junior family member does not pay back the principal of these loans and interest, the lender is deemed to have made a gift.  If the lender does not need or want the money back, a 2012 Gift can be used to forgive a portion or the entire loan amount.

Other individuals and situations may also be appropriate for 2012 Gifts.  Tomorrow, I will go over several planning techniques that can be used to maximize the benefit of making a 2012 Gift.

Please contact info@levyestatelaw.com for more information about 2012 Gifts.

Old Problems, New Solutions: Estate Planning For Non-Traditional Families. Part 3-Planning Complications For Non-Traditional Families

“At a certain point, I’ve just concluded that for me personally it is important for me to go ahead and affirm that I think same-sex couples should be able to get married.”-President Barack Obama, May 9, 2012

The historic comments made by President Obama regarding his support for gay marriage marks another important step towards same-sex couples receiving the same legal treatment as heterosexual couples.  This progress was further augmented by a ruling earlier this week by 1st Circuit Court of Appeals which held that the Defense of Marriage Act (DOMA) was unconstitutional.  As public support for these changes increases, it is likely that more progress will be made.

But as quickly as social views may be changing, the laws relating to estate planning are unlikely to change in such a rapid manner.  Additionally, other forms of non-traditional families such as domestic partnerships, single parents and parenting partners are unlikely to see their rights change.

With the optimism attached to the president’s words and the realistic knowledge that laws are slow to change, non-traditional families should be aware of the following issues related to their estate plans:

1)   Guardianship of Minor Children-The care of minor children when one or both parents die is a difficult one in any circumstance, but it becomes much more difficult when the choices may be limited or may be conflicted with other familial relationships.  For single parents and parents who have entered into parenting partnerships, it is incredibly important to determine who your child’s guardian will be if you should die or become disabled.

This issue can also become highly problematic if a former spouse is still alive or if other relatives disapprove of your relationship.  Without the fallback legal protections of marriage, who is appointed guardian after a parent dies could become tangled up in a lengthy court proceeding.

Preparing a will or a similar guardianship appointment document can ensure that your wishes as to the care of your child are known and respected.  Notifying your family members about your selection can also reduce the likelihood of a conflict after you have passed.

2)   Inheritance-Married couples, both heterosexual and same-sex, have automatic inheritance rights under the New York intestacy statute.  However, relying on this statute may cause fifty percent of your estate to pass to your children outright regardless of their age.

For other non-traditional families, no automatic inheritance rights exist.  Rather than inheriting fifty percent of a deceased parent’s estate, a child of a non-married couple would inherit the entire estate of their predeceased parent if no will exists.  Having a will in place allows a surviving domestic partner to inherit property from their deceased partner.  A will can also include a trust for the benefit of the deceased’s children, which can protect the assets from waste by a child who may be unprepared to manage an inheritance.

Alternatively, families may choose to use one or more revocable trusts to pass property to their surviving spouses, partners or children.  A revocable trust avoids the probate process for any assets contributed to it during an individual’s lifetime and can be coupled with a “pour over” will to receive any assets that remain in the deceased person’s estate.  A revocable trust should also be considered if a family believes that another family member may challenge their estate plan.

3)   Estate Taxes-The New York Marriage Equality Act allowed same-sex couples to utilize the New York state marital deduction for estate tax purposes.  Same-sex couples can now pass unlimited assets to their spouses upon their death without incurring a New York State estate tax.  However, because of DOMA, the corresponding federal marital deduction is not available to same-sex couples.

For other non-traditional families, estate taxes will apply to any assets above the federal ($5.12 million) and New York ($1 million) estate tax exemptions.  Families can reduce their potential estate tax liability by utilizing the annual gift tax exclusion of $13,000 per beneficiary per year or by contributing a portion of their estate to charity.

Families may also prepare for an eventual estate tax liability by purchasing additional life insurance to provide the necessary liquidity to their estate.  In order to avoid additional estate taxation, the life insurance should be owned and administered by an irrevocable life insurance trust.

4)   Gift Taxes-All non-traditional families must also be mindful of potential gift tax liability under the federal tax code.  While a heterosexual married couple can pass assets freely between spouses, non-traditional families may incur a gift tax if they pass assets to their spouses, partners or children above the annual gift tax exclusion of $13,000 per person.  Any excess will be credited towards their lifetime gift tax exemption.  And while that exemption is currently $5.12 million, it is scheduled to be reduced to $1 million at the end of 2012.

This gives families additional incentive to maximize their use of the annual gift tax exclusion every year.  For larger transfers, families may wish to consider the use of more advanced planning structures like sales to defective grantor trusts or GRATs to zero out the gift tax liability.  Families can also use family owned entities such as limited partnerships and LLCs to reduce the value of the assets being transferred.

For non-traditional family, estate planning is more complicated and with less advantages than are afforded to traditional families.  Nevertheless, a properly drafted and administered estate plan can provide any family with the financial protection and security that they deserve.

Please contact info@levyestatelaw.com for more information about estate planning for non-traditional families.

Old Problems, New Solutions: Estate Planning for Non-Traditional Families. Part 1-An Introduction to Estate Planning for Non-Traditional Families

Over the past forty years, the number of traditional “nuclear families” (defined as a mother, father and children) has declined from approximately 40% of the total households in 1970 to 20% in 2010.  Changing lifestyles, economic conditions and growing acceptance of non-traditional family arrangements factor into this change which has dramatically shifted how adults cohabitate and how children are raised.

This change also requires a different approach to estate planning from the typical planning used by a nuclear family.  Over the next week, we will discuss a variety of planning issues faced by non-traditional families including specific issues related to blended families (families created from one or more previous marriages).  In addition, we will discuss how non-traditional families can utilize a wide variety of tools to deal with the complications related to their estate planning.

“Non-traditional families” encompass a group of family arrangements that vary in one way or another from the traditional family.  They include:

1)   Single Parents-This includes parents who have divorced their former spouse and are raising children on their own, parents who have adopted children or parents who do not have or never had a relationship with the child’s other biological parent.

2)   Co-parenting Arrangements-Traditionally, these arrangements have been used by divorced couples to ensure that their children received support from both parents.  More recently, individuals wishing to become parents without cohabitation, marriage or a romantic relationship have begun using this type of arrangement.  Co-parents may be friends or may be introduced through professional matching services.

3)   Blended Families-As mentioned above, a blended family is created when one or more divorced individuals remarry and incorporate their existing children into one family unit.  Complications can arise if there are children born outside this relationship and children born of both new spouses.

4)   Non-married families-Some individuals begins families with their partners without marrying.  For some, such as LGBT individuals, it may not be legally possible to marry.  For others, it may be a conscious choice to remain unmarried even though their relationship may be long-term and the partners may have children together.

5)   Same-sex married couples-New York, the District of Columbia and seven other states currently allow same-sex couples to marry.  Despite the rights granted to these families at the state level, the Federal Defense of Marriage Act (DOMA) complicates and limits the rights granted to these individuals and their families.

While progress has been made towards providing the same or similar rights to non-traditional families, the traditional estate planning benefits granted to a traditional nuclear family do not extend to a non-traditional family.  Consequently, non-traditional families must be aware of the following issues related to their estate plans:

1)   Guardianship of minor children-Ensuring that a child is cared for by the right people after a parent dies is one of main reasons individuals create an estate plan.  For single parents, the lack of a second parent makes this issue of the utmost importance.  For non-biological parents or co-parents, it is also essential that proper documentation be in place to allow a surviving parent to remain the legal guardian of a minor child.

2)   Inheritance rights-The New York intestacy statute governs the order in which property passes if an individual has no will.  Families that include non-biological relatives, non-married partners and, depending on the state, same-sex spouses are not ensured any inheritance rights under this statute.  A last will and testament or a comparable testamentary instrument (such as a revocable trust) is necessary if you wish to pass property to these relatives, partners and spouses.

3)   Taxes-Married individuals receive numerous tax benefits that non-married individuals and same-sex spouses do not receive.  For gift tax purposes, a married heterosexual couple can transfer unlimited assets between spouses during their lifetime.  Due to DOMA, this benefit is not available to same-sex married couples.

 The estate tax benefits for heterosexual married couples are similarly skewed.  In addition to their own personal estate tax exemption, married couples may pass unlimited assets to each other at death using a marital deduction.  This is unavailable to non-married partners and co-parents.  Same-sex married couples may utilize the marital deduction for New York estate tax purposes, but it is unavailable for federal estate tax, again due to DOMA.

4)   Medical and financial decisions during incapacity or disability-Married couples in New York (both opposite sex and same-sex) have the ability to make medical and financial decisions for their spouses if they become incapacitated or disabled.  For non-married families, these rights are granted to the disabled or incapacitated individual’s biological family rather than any partner.

The complications in planning an estate for a non-traditional family are numerous, but they are not insurmountable.  In the next post, I will discuss some specific issues and solutions that related to blended families.

For more information on estate planning for non-traditional families, please contact info@levyestatelaw.com.

Using Testamentary Trusts: Part One-Tax Based Trusts

Property that passes under a Last Will and Testament is distributed in two distinct manners.  For those with minimal assets and concerns regarding taxes, asset protection and waste, an outright transfer of property is simplest and most efficient way to pass property.  But, in most situations, concerns about protecting the testamentary assets leads to the use of trusts established under the Will known as testamentary trusts.

Testamentary trusts come in two forms: trusts that are structured to delay, minimize or eliminate estate taxes and trusts used to protect the underlying assets from waste by a minor or disabled beneficiary.  Next week, I will discuss the latter type of testamentary trust.  Today, we look at the three main types of tax based testamentary trusts used by estate planners.

Marital Trust-The most common form of tax-based trust is established to take advantage of the federal and New York state marital deduction for estate tax purposes.  Under the laws of both the state and federal estate tax system, unlimited assets may be passed to a surviving spouse without incurring an estate tax.  Upon the death of the surviving spouse, the assets in a marital trust are treated as part of the surviving spouse’s taxable estate.

Marital trusts can be structured to provide the surviving spouse with a lifetime income interest as well as the ability to receive principal distributions.  Beyond tax savings, a marital trust can ensure that the assets in the Trust will be transferred to your children and not to any subsequent spouse if your spouse remarries.

Unlike the other testamentary trusts mentioned in this post, same-sex couples for New York estate tax purposes can now utilize a marital trust.  However, it should be noted that assets in a marital trust for a same-sex couple would be subject to federal estate tax under current federal law.

Credit-Shelter Trust-A distinct disadvantage of a marital trust is that the assets in a marital trust are subject to estate taxes after a surviving spouse passes.  For individuals and couples with assets in excess of the current estate tax exemption, it is possible to preserve a portion of their assets from estate tax even after the surviving spouse passes.  This is accomplished by using a credit-shelter trust.

A credit-shelter trust is funded with a portion of a decedent’s estate up to the federal or New York state estate tax exemption.  The surviving spouse receives the income generated by the trust property for their lifetime and can also receive principal distributions for their health, education, maintenance and support.  A decedent’s children may also be beneficiaries of the trust.

Upon the death of the surviving spouse, the remaining assets in the trust pass federal estate tax-free.  However, if the federal exemption were used, New York state estate tax would be due.  A secondary disadvantage is that utilizing a credit-shelter trust removes a certain amount of flexibility and therefore, it is not always the ideal strategy for individuals who have estates below the federal estate tax exemption.

Disclaimer Trust-For individuals and couples with assets below the federal estate tax exemption, it is likely that their estate planning will focus on funding a marital trust.  In some circumstances, assets can grow between the time an estate plan is enacted and the date the first spouse passes.  Even if a credit-shelter trust is not mandated under a will, using a disclaimer trust can allow a surviving spouse to receive similar benefits.

A disclaimer is a post-mortem (after death) planning technique by which a surviving spouse renounces some or all of their inheritance.  If a disclaimer trust were included in a will, the disclaimed assets would pass as if the surviving spouse had predeceased and the disclaimed assets would fund the disclaimer trust.

Assets held inside a disclaimer trust will pass estate tax-free upon the death of a surviving spouse.  The benefit of using a disclaimer trust over a credit shelter trust is that it allows the surviving spouse flexibility in deciding whether to preserve certain assets and shelter them from estate taxes after they die.   The disadvantage is that funding a disclaimer trust requires an affirmative step by the surviving spouse and additional paperwork will be required.

The use of tax-based trusts under a will allows a surviving spouse the benefit of their spouse’s assets while also preserving the maximum amount of those assets from excess taxation.  This benefit, coupled with the traditional benefit of using a testamentary trust, makes having one or more of these trusts included in your Will a very smart idea.

Please contact info@levyestatelaw.com for more information about testamentary trusts.

Estate Planning 2012: A Look Ahead

A new year has begun and it is already looking to be a very interesting year.  The upcoming national elections have once again been dubbed “the most important election ever” by the media and despite the hyperbole, there is no doubt that the upcoming election could potentially reshape the direction of our nation.

This is especially true for those of us in the estate planning world.  In late 2010, the president and Congress agreed to reinstate the estate tax with a $5 million exemption and a top tax rate of 35%.  This change came with a significant catch-the new exemption and rate would expire December 31, 2012 and absent an agreement prior to that date, the exemption would return to $1 million and a top rate of 55%.

Given the gridlock in Washington over the last twelve months and a national election that will likely worsen that gridlock, this massive change may become a reality come this time next year.  But, this is not the only possible change to look out for.  These additional issues bear watching throughout the next year:

Changes to the Federal Gift Tax:  For the last year, estate planners have noted the limited and significant opportunity for individuals to make large lifetime gifts while the gift tax exemption remained at $5 million.  There was some concern that the gift tax exemption would be reduced to produce revenue during the Super Committee negotiations, but nothing came of that (much like the negotiations themselves).  With an exemption now at $5.12 million, there remains an ever-decreasing window to make large lifetime gifts.

Interest Rates:  For individuals looking to sell assets to their relatives or to pass them on through vehicles like GRATs, the federal interest rates have remained at historically low rates.  There are indications that these rates may rise before the end of 2012, so this advantage may soon disappear.

Market Volatility: The current volatility in the stock market is another reason to consider vehicles such as GRATs.  Individuals can transfer assets to their relatives at a lower value than they will likely have over time.  This allows individuals to use a smaller portion of the lifetime gift tax exemption while providing their beneficiaries with a higher valued asset.

Changes to the Federal Income Tax: Along with the expiration of the current estate and gift tax rates and exemptions, absent action before December 31, 2012, the federal income tax rates will revert back to the rates that were in place prior to the Bush tax cuts.  Additionally, the President has proposed several changes to the income tax system that would reduce the use of the itemized deduction for wealthier Americans.  The Democrats in Congress have also suggested a surtax on individuals making more than $1 million a year.

Same Sex Marriage Laws:  Beyond taxes and asset values, changes to the legal status of same-sex couples remains an issue to watch with regard to estate planning.  The administration’s decision to stop defending the Defense of Marriage Act and the continued challenges to state bans on Same Sex Marriage (most notably, the lawsuit against Proposition 8 in California) may alter the way same sex couples plan their estates during the next 366 days.

It is likely that other factors will alter the way estate planners counsel our clients during 2012.  However, having seen the estate tax repeal and subsequent reinstatement during 2010, something no one ever imagined would happen, it would be crazy to predict what will actually happen this year.  The best you can do is sit back, watch and make sure your planning is up to date!

Please contact info@levyestatelaw.com for more information.