by George D. Karibjanian
In the days of Leave it to Beaver, The Donna Reed Show, and Father Knows Best, the public perception was that all romantic relationships were of the opposite-sex variety. Same-sex attraction and relationships were nonexistent and were considered to be “taboo.” Although the last 40 years have brought a great deal of public acceptance of gay and lesbian individuals, it appears to many same-sex couples1 that the laws adjudicating testamentary dispositions with respect to estate planning were created by individuals living in Beaver Cleaver’s Mayfield, Donna Stone’s Hilldale, and Jim Anderson’s Springfield. As long as a same-sex partner is not deemed a “spouse,” same-sex couples do not have access to many of the same estate planning opportunities married opposite-sex couples are given.
The Marriage Quandary
Same-sex couples have the same estate planning and financial needs as opposite-sex couples — the goal of allowing the maximum amount of property to pass to their loved ones with the minimum imposition of transfer taxes and the maximum creditor protection. With same-sex couples, though, the planning difficulties begin with the ability to marry. Federal and state laws both afford certain rights and privileges to couples who are married. For example, a man and woman who can barely stand each other can marry in any state, even if the purpose of the marriage is financial and entertainment gain. Contrast this to the limited matrimonial opportunities available to a same-sex couple engaged in a deep and loving relationship.
As of September 2011, only seven states/districts recognize same-sex marriage: Connecticut, the District of Columbia, Iowa, Massachusetts, New Hampshire, New York, and Vermont.2 Some states, including California, Oregon, Washington, Nevada, Rhode Island, Maine, Maryland, Illinois, Wisconsin, and New Jersey, have passed legislation acknowledging a “domestic partnership” or a “civil union” that grants same-sex couples some rights, but not the full rights offered to married couples. As of February 2012, Colorado, New Jersey, Washington, and Missouri have pending or passed legislation equating the rights given to same-sex couples in a domestic partnership as those given to married opposite-sex couples (including inheritance and governmental benefits). On the opposite side, West Virginia has a bill on the November 2012 ballot that would restrict marriage to one man and one woman.
The Heart of the Matter — Defense of Marriage Act
State law is not the only impediment to estate planning for same-sex couples — many federal options were closed in 1996 with the passage of the Defense of Marriage Act (DOMA). Section 3 of DOMA amended Ch. 1 of Title 1 of the U.S. Code by adding new §7, which, when defining “marriage” and “spouse,” provides that the word “marriage” means only a legal union between one man and one woman as husband and wife, and the word “spouse” refers only to a person of the opposite-sex who is a husband or a wife.
DOMA has been the subject of many recent judicial and legislative challenges, the most significant of which came in July 2010 when, in Gill v. Office of Personnel Management, 699 F. Supp. 2d 374 (D. Mass. 2010), the federal district court for Massachusetts held DOMA to be unconstitutional.3 Note, however, that notwithstanding the Gill decision, DOMA remains in effect because the holding of Gill is both limited to its facts and is currently on appeal, and all actions based on the district court decision are stayed pending the appeal.
On November 10, 2011, the Democratic-led Senate Judiciary Committee (SJC) voted to approve §598, titled “The Respect for Marriage Act,” which would repeal DOMA. However, because the SJC vote occurred solely on party lines, even if it passes the full Senate, it will presumably fail because it is unlikely to pass the Republican-controlled House of Representatives.4
More recently, in February 2012, in Dragovich v. U.S. Dep’t of the Treasury (N.D. Cal. 2011), a California federal court refused to dismiss a DOMA challenge.5 Dragovich involved an action by same-sex domestic partners who were members of the California Public Employees’ Retirement System to challenge the constitutionality of §7702B(f),6 which excludes registered domestic partners as “family members” eligible to enroll in federally qualified, state-maintained, long-term care insurance plans for state employees. The Northern District Court for California held that there was sufficient evidence that §7702B(f) was enacted with pinings of animus against same-sex couples, and, as a result, such allegations were sufficient to state an equal protection claim under the rational basis test.
Pursuant to F.S. §741.212, Florida does not recognize same-sex marriages, even if the marriage is valid in another state.7 F.S. §741.212(2) has been upheld in both federal court8 and state court decisions.9
The Estate Planning Benefits of Marriage
Being married under federal law has its advantages with respect to taxes and property transfers. Some of the advantages are as follows:
1) Ability to File a Joint Federal Income Tax Return — Regardless of the status of tax law concerning a concept known as the “marriage penalty” (a full explanation of which is beyond the scope of this article), if one spouse earns considerably more income than the other spouse, overall savings can be achieved if the spouses file a joint return.
2) Federal Estate and Gift Tax Marital Deduction — Pursuant to §§2056 and 2523, property passing (during life or testamentarily) either outright to a surviving spouse or in certain trusts for the benefit of the surviving spouse, qualifies for the federal estate and gift tax marital deduction. The effect of the marital deduction is that the transfer taxation is deferred until the spouse disposes of the property either inter vivos or testamentarily. Same-sex couples are not afforded this ability. For example, compare the estate planning results of two married couples, one opposite-sex and one same-sex, each with two children. The first spouse to die in each couple has an estate of $7 million, and the second spouse to die in each couple has individual assets of $3 million. Whereas the opposite-sex couple can take advantage of the $5 million “applicable exclusion amount”10 (AEA), as well as the federal estate tax marital deduction, the same-sex couple can only take advantage of the AEA. Assuming that both a $5 million AEA and a 35 percent estate tax rate are in effect upon the survivor’s death, the children of the same-sex couple will ultimately receive $700,000 less than the children of the opposite-sex couple.
3) Spousal Rollover of an Individual Retirement Account — Opposite-sex married couples can take advantage of the “spousal rollover” upon the death of the first spouse, which means that the surviving spouse can treat the deceased spouse’s IRA as his or her own and avoid an immediate payout of the account over his or her life expectancy.11 Without the rollover, the IRA becomes payable over the life expectancy of the oldest beneficiary of the account (referred to as the mandatory payout).12 If the assets of the first spouse to die in the prior example include a $2 million IRA, the opposite-sex couple’s surviving spouse can “rollover” the IRA and defer the mandatory payout until the second spouse’s death or attainment of age 70 1/2. With the same-sex couple, however, the mandatory payout begins immediately upon the first spouse’s death. Assuming that a) the surviving spouse is 71 years old upon the first spouse’s death; b) the children are 35 and 30 years old, respectively; and c) the surviving spouse dies at age 74, the children of the opposite-sex couple will be able to have their respective shares of the IRA paid out over periods of 46.5 years (as to child one) and 51.4 years (as to child two). The children of the same-sex couple, however, must receive their share of the IRA over the remaining balance of the life expectancy of the second spouse at the time of the first spouse’s death, which was 16.3 years.
4) Portability of “Deceased Spouse’s Unused Exemption Amount” — As long as portability is part of the federal tax law, a spouse’s unused AEA may be transferred to the surviving spouse for potential use by the surviving spouse.13 A same-sex couple cannot adopt portability as part of their estate plan.
5) Property Benefits Through “Tenancy by the Entireties” — Many states, including Florida, recognize the property ownership concept of tenancy by the entireties (TBE), which is a joint form of ownership afforded only to married individuals. While TBE resembles property ownership as joint tenants with right of survivorship (JTWROS), there are two major differences. First, each co-owner of JTWROS property may unilaterally sever the joint ownership; this cannot happen with TBE property as the consent of both owners is required for a severance. Second, a co-owner’s interest in JTWROS property is attachable by such co-owner’s creditors, whereas TBE property is fully protected from such co-owner’s creditors unless both co-owners are liable to the same creditor on the same claim. The problem for same-sex couples in Florida is compounded by the fact that Florida is one of the few states that recognize TBE ownership of personal property.14 Because Florida does not recognize same-sex marriage, a same-sex couple cannot take advantage of TBE status.
6) Florida Homestead — Under Fla. Const. art. X, §4, if a property owner owns his or her primary Florida residence individually and is survived by a spouse or minor child, certain benefits and protections are afforded to the property as to the spouse and minor children. Because a same-sex couple is not considered “married” under Florida law, the spousal benefits do not succeed to the same-sex surviving spouse.
7) State Law “Elective Share” — Under most state probate laws, absent a waiver in a valid nuptial agreement, a decedent cannot disinherit his or her spouse.15 Because Florida law does not recognize a same-sex partner as a “spouse,” such a disinheritance is possible.
8) Gift-splitting — Under §2513, a gift made by one spouse to any person other than his or her spouse may be deemed to have been made equally by both spouses, if the spouses so elect. This is referred to as “gift-splitting.” Under gift-splitting, a wealthy married individual can utilize both his or her AEA and that of his or her poorer spouse (most of which might otherwise never have been used) to transfer wealth to successive generations. As the statute specifically states “spouse,” gift-splitting is not available for same-sex partners.
9) Social Security Survivor Benefits, Medicare, and Medicaid — A surviving spouse may be entitled to receive certain governmental benefits upon the death of his or her spouse. In addition, Medicaid excepts out certain assets owned by a spouse from the Medicaid qualification asset limit. None of these protections or benefits are granted to same-sex spouses (although it should be noted that certain provisions have been made for same-sex partners with respect to Medicaid at the state level, if beneficiaries are married to someone of the opposite-sex who is still living in the decedent’s residence).16
Estate Planning Techniques for Same-sex Couples
Despite the problems outlined above, same-sex couples nevertheless have several options in which to ensure that the assets pass to the surviving partner with the minimal possible impact of federal transfer taxes. The techniques range from basic, intermediate, and advanced.
Basic Planning Techniques
Basic planning techniques include outright gifting, by utilizing both the annual exclusion for federal gift tax purposes under §2503(b) (annual exclusion) and the AEA. Through annual exclusion gifts, any appreciation on the gifted amount escapes federal estate and gift taxation; therefore, over time, a significant amount of wealth can be transferred without the imposition of federal estate or gift taxes. The amount gifted can be enhanced if the donor’s AEA is utilized as part of the gifting plan. For example, $13,000 annual exclusion gifts over a 20-year period, compounded at five percent and ignoring withdrawals and taxes, can grow to $451,350; further, 10 percent compounding generates $819,032 in funds. Utilizing the AEA greatly increases the gifting power — annual gifts of $113,000 per year for 20 years compounded at five percent (again, ignoring withdrawals and taxes) generates $3,923,275, and compounding at 10 percent generates $7,119,282. The main disadvantage of outright gifting is that the same-sex partner has outright possession of the assets, so if the relationship ends at some future date, the gifting partner has forever relinquished the gifted assets.
The other basic planning technique involves the titling of property into JTWROS property. Unlike opposite-sex married couples, a same-sex partner effects a taxable gift of one-half of the gifted property upon completing the gift without the benefit of the marital deduction (with certain intangible personal property, for example, a bank account, however, the gift is not completed until the recipient withdraws funds from the account). The advantage to such titling is that upon the death of the gifting partner, the property passes by operation of law to the recipient partner, thereby avoiding any probate-related problems (such as a will contest). Even though, as stated above, JTWROS property is not protected from creditors; creditors may deem the asset as not as desirable as other assets because, even upon attachment, there is another joint tenant.
Intermediate Planning Techniques
A common theme of the basic planning techniques is that the richer partner transfers property to the poorer partner and, at the same time, forever relinquishes control over the property. Much like opposite-sex marriages, the richer partner has no recourse to regain the transferred property should the relationship terminate. For these reasons, immediate planning techniques involve the annual gifting and basic exclusion amount gifting techniques described above, but within the context of a trust concept.
By transferring property into a trust (often referred to as a “gifting trust”), the settlor of the gifting trust can control the ultimate disposition of property. For example, the trust can provide that the beneficiary’s interest may terminate if the beneficiary and the settlor cease to remain in a relationship. In addition, the settlor has full control over the ultimate disposition of the property upon the end of the relationship or upon the beneficiary’s death. The gifting trust can also grant the beneficiary the right to withdraw contributions to the trust (often referred to as a “Crummey right”) so as to allow contributions to the trust to qualify for the annual exclusion. However, if the settlor intends that the property should not be taxed in his/her estate for federal estate tax purposes, the settlor should not retain a reversionary interest upon the termination of the beneficiary’s interest. Retention of such an interest would negate the intended estate planning advantage.
Advanced Planning Techniques
Building on the trust concept, there are several more advanced techniques that allow for the leveraging of the applicable transfer tax exemptions on the transfer of assets to trusts.
One of the more important techniques for same-sex couples is one that was statutorily eliminated for opposite-sex couples — the grantor retained income trust (GRIT). Prior to October 1990, it was possible for an individual to transfer assets to the next generation at some date in the not-so-near future while retaining the full use of the property in the interim period, all while receiving a discounted benefit with respect to the amount of property subject to transfer taxation. If the settlor died during the term of the GRIT, the GRIT provided that the trust property would either be returned to the settlor’s estate or would be subject to a power of appointment in the settlor to direct the payment of taxes and expenses from the GRIT.
To prevent perceived abuses, in October 1990, Congress enacted §2702, which provides generally that if property is transferred in trust to (or for the benefit of) “a member of the transferor’s family,” and if an interest in the trust is retained by the transferor or an “applicable family member,” then any retained interest (subject to certain exceptions) is valued at zero. Section 2702 retained one form of GRIT, allowing a GRIT if the asset transferred in the trust is the settlor’s personal residence. It is within the definition of “member of the transferor’s family” that a major exception exists for same-sex couples, as §§2702 and 2704(d) define “member of the family” as the transferor’s spouse, ancestors, and lineal descendants of the transferor and the transferor’s spouse, brothers or sisters of the transferor, and the spouses of any of these persons. Therefore, §2702 is inapplicable to partners in a same-sex relationship, which includes a same-sex marriage or a civil union; thus, for a same-sex couple, any asset (and not just the personal residence) can be transferred into a GRIT.
For example, if a 50-year-old individual transfers $1 million into a 15-year GRIT, if the applicable valuation rate is five percent, the taxable gift of the remainder interest is only $422,600, or less than 50 percent of the value of the initial transfer.
Another advanced planning technique is the grantor retained annuity trust (GRAT). A GRAT works in a similar manner to a GRIT wherein the settlor transfers property into a trust, but instead of receiving an income stream, the settlor receives a fixed annuity amount for a defined period of time. If the settlor survives the annuity term, the remainder interest passes to the beneficiaries free of estate and gift taxes. The advantage of a GRAT, as opposed to a GRIT, is that it is possible to “zero out” a GRAT, meaning that the annuity amount may be structured so that the actuarial value of the retained annuity interest can be valued at close to 100 percent, resulting in a de minimis value of the taxable gift of the remainder interest. The parties’ legal relationship has no bearing on the effectiveness of transfers to a GRAT, meaning that it works for a same-sex couple in the same manner as it works for an opposite-sex married couple.
Charitable trusts are also an excellent planning device for same-sex couples where a person may have no one else other than the same-sex partner in which to benefit, but may not want his or her wealth to pass to the partner’s beneficiaries. In these situations, the individual can create charitable trusts and achieve estate and gift tax benefits. Charitable trusts must be in the form of either an annuity trust (similar to the GRAT, described above) or a unitrust, which requires a payment of a fixed percentage of the asset value determined at the beginning of the calendar year. Charitable trusts may also be either “lead” trusts, where the charitable interest is paid currently over a term of years, or “remainder” trusts, where the charity receives the remainder interest after the termination of the income interest.
If the same-sex partners are committed to each other to the point where they would marry (if it were possible), the partners should consider entering into a domestic partner agreement (DPA). As stated above, one of the main issues facing same-sex couples is the same issue that is faced by opposite-sex couples: What happens when the relationship ends? By creating a DPA, the partners can fix their respective rights for property distribution and can even create support rights where none exist under law. In order to dissuade challenges, it is recommended that the DPA be structured and executed with the same formalities as a valid nuptial agreement. This would include separate representation, full financial disclosure, and all execution formalities (i.e., recording the signing). It should be noted that any support rights created under a DPA are not likely to generate the same income tax benefits afforded to married opposite-sex couples.
Finally, in perhaps the most extreme planning technique, the older, richer partner may adopt the poorer, younger partner in order to ensure the proper testamentary devise of property.17 While F.S §63.042(1) provides that any person, a minor or an adult, may be adopted, F.S. §63.042(3) provides that “no person eligible to adopt under this statute may adopt if that person is a homosexual.” While this statute was apparently intended to apply to a same-sex couple, there does not appear to be any prohibition on application to an older-younger partner adoption. However, the Third District Court of Appeal in Florida Department of Children and Families v. In re Matter of Adoption of X.X.G and N.R.G., 45 So. 3d 79 (Fla. 3d D.C.A. 2010), ruled F.S. §63.042(3) categorically excluding homosexuals from adopting, served no rational purpose, and, thus, violated the equal protection clause of the Florida Constitution. The state indicated that it will not appeal this decision and, as a result, as of October 2011, it was estimated that over 100 men and women in South Florida’s gay and lesbian community have pending adoption cases.18
Additional Planning Documents
In addition to the basic estate planning documents such as a revocable trust, pour-over will, living will, designation of health care surrogate, and durable power of attorney, a same-sex couple should consider two additional documents.
First, the couple should have a hospital visitation authorization designation. In response to Langbehn v. Public Health Trust of Miami-Dade County, 661 F. Supp. 2d 1326 (S.D. Fla. 2009), wherein the federal Southern District of Florida upheld the denial of hospital visitation by a same-sex partner even upon the presentation of a valid designation of health care surrogate, the same-sex couple should consider having a form specifically authorizing hospital visitation.19
The second document is a burial cremation affidavit, which will ensure that the surviving same-sex partner will be able to obtain the remains of the deceased partner. In some states, without such a special designation, it may not be possible for the same-sex partner to receive such remains. Consider the case of Mark Goldberg, who, in 2008 and despite having a full complement of reciprocal estate planning documents, struggled through bureaucratic red tape for over four weeks before he was able to claim the remains of his partner of 17 years.20
The lack of spousal recognition under federal and most state laws presents considerable estate planning challenges for same-sex couples. However, there are ways to, at least partially, overcome some of the planning disadvantages faced by same-sex couples. Through considerable “outside the box” thinking, the astute planner can achieve most, if not all, of the same-sex couple’s planning objectives.
1 For purposes of this article, unless specifically indicated otherwise, references to “same-sex couples” will refer to unmarried same-sex couples.
2 On February 7, 2012, the U.S. Ninth Circuit Court of Appeals, in Perry et al. v. Brown et al., ___ F.3d ____ (9th Cir., February 7, 2012), held that California’s “Proposition 8,” which overturned California’s statutory provisions authorizing same-sex marriage, was unconstitutional on equal protection grounds. While it is doubtful that this opinion will allow immediate resumption of same-sex marriages, the decision will likely be heard on appeal to the U.S. Supreme Court.
3 Gill, 699 F. Supp. 2d 374 D. Mass. 2010, 109 Fair Empl. Prac. Cas. (BNA) 1333, 106 A.F.T.R. 2d 2010-5184, 2010-2 USTC P 50,509, 49 Employee Benefits Cas. 2751 (D. Mass. Jul. 08, 2010) (NO. CIV. A. 09-10309-JLT).
4 Senate Panel Approves Repeal of Defense of Marriage Act, South Florida Sun-Sentinel, November 10, 2011.
5 N.D. Cal., No. 10-cv-01564 (January 26, 2012).
6 Unless otherwise stated, all section references in this article are to sections of the Internal Revenue Code of 1986, as amended.
7 Fla. Stat. §741.212.
8 Wilson v. Ake, 354 F. Supp. 2d 1298 (M.D. Fla. 2005).
9 Kantaras v. Kantaras, 884 So. 2d 155 (Fla. 2d D.C.A. 2004).
10 As defined in §2010(c)(2).
11 See generally §408(d)(3)(C)(ii)(II).
12 See generally §401(a)(9).
13 Portability, while intended to simplify estate planning, has numerous flaws that require Congressional correction. A complete analysis of portability and such flaws are beyond the scope of this article. For a more thorough analysis of portability in estate planning see Lester Law & Andrew T. Huber, Estate Planning with Portability in Mind, Part 1 & 2, 86 Fla. B. J. (March & April 2012).
14 See generally Beal Bank, SSB v. Almand & Associates, 780 So. 2d 45, 58 (Fla. 2001).
15 See, for example, Fla. Stat. §§732.201- 732.228.
16 Guidance, signed by deputy administrator of the Centers for Medicare & Medicaid Services Cindy Mann, on June 10, 2011.
17 See generally In re Adoption of Holland, 965 So. 2d 1213 (Fla. 5th D.C.A. 2007).
18 South Florida Sun-Sentinel, October 2, 2011.
19 In response to this decision, President Obama issued a presidential memorandum to the secretary of the Department of Health and Human Services affirming the rights of patients at hospitals that receive Medicare and Medicaid to receive visitors of their choosing.
20 Nancy J. Knauer, Gay and Lesbian Elders: Estate Planning and End-of-Life Decision Making, 12 Fla. Coastal L. Rev. 163 at 194-195, 201-202 (Fall 2010).
George D. Karibjanian is a senior counsel with Proskauer Rose, LLP, in Boca Raton. He received a B.B.A. in accounting from the University of Notre Dame, a J.D. from Villanova University, and an LL.M. in taxation from the University of Florida. His practice is exclusive to estate planning, probate, and trust law.
This column is submitted on behalf of the Tax Section, Domenick R. Lioce, chair, and Michael D. Miller and Benjamin Jablow, editors.