NEW YORK (Reuters) - Despite their recognition by some U.S. states, same-sex couples still face a number of hurdles that advisers must keep in mind when creating financial estate plans.
Currently, five U.S. states recognize same-sex marriages and a number of others offer some degree of legal recognition of same-sex domestic partnerships.
However, there is no such recognition on a federal level, which means same-sex couples do not get the marital deductions on U.S. taxes. They also cannot make large gifts or pass on assets to each other without paying taxes.
“If Bill Gates died tomorrow, his wife would inherit $50 billion tax free,” said Kyle Young, a Short Hills, New Jersey-based adviser with Wells Fargo & Co. “For our wealthy (same-sex) clients, anything they pass on to their partners over $5 million is hit with a 35 percent estate tax.”
While gay marriage has realized greater acceptance in many parts of the United States, the laws of many states still do not offer the same benefits traditionally enjoyed in unions of men and women.
Traditional married couples do not have to pay estate or gift taxes when transferring assets between spouses. Same-sex couples are subject to these federal taxes, even in states that recognize same-sex marriage.
If one partner has more assets, he can transfer some assets to his partner each year, said Young, whose team specializes in advising same-sex couples.
Each year, individuals can make gifts up to $13,000 to any number of people. That can even up the two partners’ estates and hopefully avoid a big estate tax bill when the richer partner dies, said Young.
If estate tax cannot be avoided, Young recommends that the wealthier partner should set up an irrevocable life insurance trust to cover the cost of the taxes.
Advisers noted it is better to establish a trust than to take out a life insurance policy, the proceeds of which are tallied when estate taxes are calculated. Under a trust, the trustee owns the policy and distributes the proceeds directly to the surviving partner.
Beyond estate-tax challenges, same-sex couples are more likely to face challenges to their wills, usually from family members who do not approve of their lifestyle, said Jill Hollander, an adviser at Corte Madera, California-based Financial Connections Group.
Hollander, who also specializes in advising same-sex couples, always asks clients whether their families are supportive of their relationship.
“It can really influence how you structure the estate if you know that there’s someone in the background who might try to take advantage of the situation,” Hollander said.
Hollander often recommends that clients establish a living revocable trust, along with a will, to protect their assets.
A client can transfer assets into the trust and also act as the trustee, meaning they have full ownership and control of their assets and can change or cancel the trust at any time.
The client can then name their partner as a successor trustee who can distribute the assets as the client wishes.
A trust, unlike a traditional will, keeps assets out of the probate process and is more difficult for other family members to contest. It is also keeps details of the estate private; a will becomes public information during probate.
Hollander also recommends that couples draw up power-of-attorney documents giving partners control over their finances and medical issues should they become incapacitated or die. If not, the courts usually let family members make those decisions.
Reporting by Helen Kearney, editing by Gerald E. McCormick
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