This summer, the U.S. Supreme Court overturned the Defense of Marriage Act, which defined marriage between one man and one woman. While the landscape continues to evolve in regards to how far this will reach for federal taxes and benefits, it appears to improve the estate planning outlook for same-sex marriages.
It is important to understand that the overturn of the act applies to legally married same-sex couples only. Those involved in domestic partnerships or civil unions are excluded in the same way as heterosexual non-married couples. With that being said, what does that mean from an estate planning perspective?
First, it means that legally married same-sex couples will receive the same federal estate tax treatment as any other married couple. Consequently, they can transfer an unlimited amount of wealth to one another during life and at death without incurring federal gift or estate taxes. Additionally, they can now use the portability feature of the federal estate tax exclusion for married couples.
For example, suppose Bob and Bill are legally married and Bob dies with an estate valued at $7 million. If Bob died before this year, then Bill could inherit those assets, but there would be an approximate federal estate tax liability of $750,000. Then, when Bill dies three years later, his estate (which includes his assets plus his inheritance) will be taxed beyond his estate tax exclusion for that year as well.
With the overturn of the act, all married couples now receive the same federal estate tax treatment. Using the previous example, if Bob dies in 2013, then the full value of his $7 million estate can pass to his legal spouse, Bill, without incurring any federal estate tax. Then when Bill dies three years later, he will be able to use the portability feature of the estate tax exclusion, hereby increasing his individual estate tax exclusion by the $5.25 million that Bob did not use when he died (assuming the portability election was made at Bob’s death).
While these changes are significant for wealthy same-sex married couples, there are some considerations for those with estates less than $5.25 million, as well, including:
Retirement benefits: Many employer retirement plans, such as the 401(k) and defined benefit pension plan, fall under federal guidelines. Therefore, as these plans receive guidance regarding next steps to remain compliant with the law, same-sex spouses should be afforded the same beneficiary treatment as traditional spouses.
State-estate tax treatment: Even though legally married same-sex couples are recognized on the federal level, that has no bearing on state-specific treatment of these marriages. Therefore, for all other benefits or assets, it is imperative that these couples have their estate plan in order. For instance, South Carolina is not a state that recognizes same-sex marriages. Therefore, if a same-sex spouse dies without a will, then their assets that pass through probate will likely transfer to their other family members and their spouse will not be recognized as a viable beneficiary.
Bypass probate: There are several easy ways to avoid probate with your assets. Some of the more common options include joint ownership of property with rights of survivorship and specifically naming one another as beneficiaries on insurance policies, IRAs, 401(k)s, and bank accounts. As long as these assets pass by beneficiary designation, they avoid the probate process. Moreover, for those who prefer to maintain privacy about their personal affairs, beneficiary designations allow that privilege.
The act’s overturn expands the reach of federal benefits for all married couples, but it does not replace the need for a solid estate plan. Contact your estate planning attorney to determine how this impacts you and what changes are necessary to align your estate plan with your personal goals.
Life is a journey. Plan for it.
Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.