While some states recognize same-sex marriage, under the Defense of Marriage Act (DOMA) the federal government is not required to. The practical effects of a lack of recognition by the federal government are abundant. For instance, any property left outright to a same-sex partner is potentially subject to the federal estate tax regardless of state recognition of that couple’s marriage under state law, because such a transfer would fail to receive the benefit of the marital deduction, which allows spouses to transfer assets to one another tax free at death. Further, any jointly owned property will be fully taxable upon the first partner’s death unless the surviving partner can show that he or she owned half of such property. Property owned jointly by a married couple carries an equal ownership presumption, but because the federal government does not recognize same-sex marriages, this automatic presumption does not apply.
In order to avoid these negative consequences, same-sex couples with estates above the exemption limit may use different planning techniques such as lifetime gifting within the annual exclusion amount, the use of irrevocable trusts, or qualified personal residence trusts (QPRT).
By taking advantage of the gift tax annual exclusion amount, a benefactor can gift up to $13,000 to one or more person without incurring a gift tax or using any of his or her lifetime exemption on gift or estate taxes. This is a simple and effective way to shift wealth away from one’s taxable estate. Placing assets into an irrevocable trust will not only remove assets from one’s taxable estate, but will also have the added benefit of controlling the assets’ disposition on the Grantor partner’s death, and will protect the trust assets from creditors in the event that the Grantor has a spendthrift partner. A QPRT holds gifted real estate that will ultimately pass to the trust’s beneficiaries outside of the benefactor’s estate. These are only some examples of planning techniques that are useful in reducing the size of one’s taxable estate and may prove useful to any non-marital couple.
Contributed my MH Phoenix and Avondale Estate Planning Attorney Andrea Claus
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