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Estate Planning for Same-Sex Couples

Albert Zdenek

Executive Vice President

Dec 30, 2020

Summary

When the U.S. Supreme Court made same-sex marriage legal across the country in 2015, it not only marked a historical moment, it also helped to turn an important financial corner for same-sex unions. This law ensured the federal government would now recognize these unions for tax and estate planning purposes, just as heterosexual couples had always enjoyed. As a same-sex couple, married or not, putting an estate plan in place to protect your financial assets and your family is imperative to ensure your loved ones receive your wealth and your children are protected when the time comes, especially when the unexpected happens.

For same-sex couples, estate planning is critical to maintain and protect your wealth

My partner Alain and I were excited when the U.S. Supreme Court made same-sex marriage the law of the land in 2015. While we actually married in 2012 (with the State of New York approving same-sex marriage earlier) it took until 2015 for our union to be recognized as legal for tax- and estate-planning purposes. After being together for more than 10 years, we could finally approach estate planning the same way straight or heterosexual couples do—or so we thought.

In reality, we found that we faced a host of other estate planning issues that are particular to the LGBTQ community. Now that we had the same rights as other married couples, we had to revise our estate plan documents to make sure our intentions were protected. And for other same-sex couples, whether married or not, estate planning is essential to protect not only financial assets but family relationships.

 

Not having a proper estate plan in place can have devastating consequences

Our friend Carl and his partner Louis had been together for more than 20 years. Carl had quit his job many years earlier to raise their daughter, Sian, now 14 years old. Carl and Louis bought property together, but it was always titled in Louis’s name since he had significant income and it was the easier path in receiving bank financing. They maintained separate checking accounts and investment accounts but had joint credit cards.

Then Louis died suddenly and unexpectedly. Overnight, Louis’s parents took over. Carl was ordered to leave the house he had shared with his family and told he could no longer see his daughter, even though he had cared for her as the primary parent. Sian had been born in surrogacy with Louis being the biological father – Carl was not. He was denied access to their vacation home and his name was taken off the credit cards. Carl found out that Louis never changed the beneficiary designation for his 401(k) account or work insurance plan, even though Louis had told him he would.

While Carl and Louis obviously were a couple, from a legal perspective Carl had very little in his name. Devastated and having no resources to fight this, he eventually just walked away.

While this might sound like an extreme case, similar scenarios are common. For example, if Louis had decided to leave Carl, you probably would have seen the same outcome. In either case, all or most of this could have been avoided with sound estate planning; Carl would have been aware of his rights and Louis and Carl could have built an estate plan that protected their assets and their family.

 

Foundational estate planning documents you need

Whether you’re a same-sex couple or a straight couple, if you have financial assets, real estate, or have family members who depend on you, you need an estate plan. Think of an estate plan as your instructions on how you want your affairs to be handled when you pass away—everything from your wealth to your loved ones.

A sound estate plan takes into account end-of-life planning but also disability or incapacity planning. According to the Social Security Administration, the odds are almost four times higher that you may be disabled or incapacitated than dying at most stages of life. This means that incapacity planning should be essential to protect you and your loved ones. At a minimum, you should have the following documents in place:

  • Financial Power of Attorney (POA): This document appoints a trusted person or persons to make financial decisions for you in case of incapacity or death. You can grant that person broad or limited powers, depending on what your needs are; for example, you may want this person to be able to pay bills but not sell property. A durable financial POA, for example, would allow the appointed person to make decisions on your behalf if you become mentally incapacitated.
  • Healthcare POA: Like a financial POA, a healthcare POA allows someone you appoint to make medical decisions for you in case of your incapacity. Again, depending on your wishes, you can grant the person wide powers or limit them to certain decisions (for example, whether and when you should be resuscitated).
  • Living Will (Advanced Medical/Care Directive): This document is similar to a healthcare POA but gives you the ability to list specific wishes concerning your medical treatment in the event you are unable to make those decisions.
  • HIPAA (Health Insurance Portability and Accountability Act) Authorization: HIPAA was enacted to help ensure privacy of your medical information when talking to physicians and other medical providers. It also allows you to give your appointed person authorization to access that information so that they can make medical decisions on your behalf.

We’re seeing an increasing trend across the country of financial and healthcare institutions not accepting incapacity documents if they were signed more than four years ago. We’re told this is due to litigation risk. While there is no specific federal or state law that says incapacity documents become invalid after four years, as many financial and healthcare institutions are not taking these risks, neither should you.

Aside from these documents, you should also consider a will or an estate plan if you have assets you want to protect. If done properly, you can avoid probate, reduce estate taxes, and protect spouses and children from divorce and creditors.

 

Important considerations for same-sex couples

There are some specific factors same-sex couples may want to consider. We encourage you to explore these issues with your partner, your wealth advisor, and a qualified estate attorney, especially one who understands LGBTQ legal issues.

If you are married:

  • Estate planning documents drafted before 2015 may need to be revised so your older documents are aligned properly to reflect the current law. Exact and correct wording in estate documents is extremely important and can help you avoid expensive legal challenges.
  • If you have money or assets you inherited before marriage, you may not want to commingle these assets. Perhaps you would rather set aside these assets for other family members in the event of death or remarriage.
  • As discussed, if your documents are more than four years old, it makes sense to review and update them.
  • If you’re married, federal law entitles surviving spouses to about one-third of the deceased spouse’s estate, depending on where they reside. So, if you have assets that you want to preserve for other beneficiaries, you should revisit your estate plan to make sure these assets are carved out.
  • Also, it’s likely that you both have retirement accounts, like a 401(k) or an individual retirement account (IRA). Make sure you check and update your beneficiary form to ensure that your spouse is the designated beneficiary.

If you are unmarried:

  • Hopefully, each of you has a will. If you don’t have a will, the government will make decisions for you, and these decisions might not be what you originally wanted. If you want your assets to go to your intended partner, a will or estate plan is the best way to make sure your wishes are carried out.
  • Do you own a business? Have other property? Without a proper estate plan, the transfer of an ongoing business, real estate or other property may be at risk. You don’t want a business you built with your partner to wind up in someone else’s hands.
  • Who gets custody of the adopted child or children? With a surrogate child, what rights does the biological parent have versus those of the non-biological parent? Adoption, especially by a non-biological parent, is strongly advised to avoid future custody battles.
  • Some states have laws that recognize marriage if you’ve lived together for a period of time. You or your intended spouse may have been married before and not even know it. You don’t want your current partner or heirs to have to deal with a past love showing up after your death and laying claim to part or all of your estate.

 

Should we get married?

A question I hear many times from same-sex couples is: Should we get married?

Generally speaking, when deciding to leave parts of an estate to their partner, it’s generally easier for unmarried same-sex couples to set this up before they get married. So, LGBTQ couples who want to wed may want to consider a prenuptial agreement or place assets they want to leave for other beneficiaries into a trust to protect these assets. Also, if you or your partner have any past legal unions or marriage, it’s a good idea to clear these up before getting married. This may take time and some expense, but it’s better to tackle those issues upfront than later.

It’s also critical to have the “money talk” with your partner; this should happen whether you’re getting married or not. If one partner has past financial entanglements or unresolved lawsuits, it’s good to disclose these issues and talk through them. One couple postponed their marriage after realizing that one of them had a low credit score, preventing them from securing a mortgage to buy a house. Also, when you combine incomes, you may end up paying more in income tax, so having these conversations early on will help you both to develop a plan that considers your entire financial picture.

 

Start planning now

I am always amazed that estate planning is the last piece that a couple considers (if at all). Even when they do start the process, it normally takes years for most couples to finalize an estate plan, and then it’s rarely updated to account for changing laws. Hopefully, the nightmarish scenario that Carl faced will spur you to start and finalize or update your estate plan. For same-sex couples, it may be beneficial to work with an estate attorney who has experience dealing with LGBTQ issues. Now is the time to get started. You owe it to your loved ones and to yourself to protect your wealth; you should get to decide how your hard-earned assets are distributed. We encourage you to reach out to your advisor.

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