Now that the United States recognizes same-sex marriage in all 50 states plus the District of Columbia, every American enjoys the legal protections marriage offers. However, just like heterosexual couples, there are certain steps you must take to exercise those rights when it comes to estate planning.
The Protections Offered by Marriage
If the only thing keeping you from getting married was the Arizona statute denying you that right, you should seriously consider marriage. As you likely know, legal marriage offers numerous protections that civil unions and domestic partnerships do not. This is true even in states whose laws afforded similar protections for civil unions as it did for marriages. Why? Because, as of December 2016, federal law only offers those same benefits to married couples.
The most obvious benefit relates to federal income tax. However, this also extends to estate tax deductions and gift tax transfers. Beyond taxes, you receive numerous benefits related to retirement plans and community property laws.
3 Vital Steps to Estate Planning
- Legally document your wishes, for both during your lifetime and after. This includes advance directives, such as medical and mental healthcare powers of attorney and a living will, as well as a durable power of attorney to ensure proper handling of your finances in the event you become incapacitated for any reason.
You also want to document your wishes as regards to your assets after your passing. This is especially important if you choose to not get married, as your partner has few legal rights to any property to which he or she is not named as a joint owner.
- Create a revocable living trust. A revocable living trust is a comprehensive addition to an estate plan that can provide tax planning, incapacity planning, probate avoidance and asset protection. This document allows you to maintain control over your assets during your lifetime, make changes as needed, and be highly specific in the distribution of those assets. Your beneficiaries also avoid the stress and expense of probate for assets titled in the name of your trust. The trust allows you to name a successor trustee, someone you explicitly trust to handle and manage your trust if you become incapacitated and when you die.
- Talk about your estate planning goals and needs. This is not a pleasant conversation for most couples, as it involves the two things people hate talking about the most: death and money. However, an open, honest discussion ensures both partners understand their financial situation and what to expect if the worst happens. If your children are younger, your discussion should include their guardianship.
You may prefer to discuss these issues in the presence of a neutral third party, such as an attorney experienced in estate planning. Your attorney has the background to help you navigate these topics and keep the process moving.
Including Retirement Accounts in Estate Planning
If you are unmarried, you can name anyone as the beneficiary of your retirement account. However, spouses enjoy certain perks. For example, there is no minimum or lump sum distribution requirement for a surviving spouse to roll over the funds of the deceased spouse’s retirement account. This may also allow income tax deferment on these funds.
If the deceased spouse’s retirement account was protected by the Employee Retirement Income Security Act of 1974 (ERISA), such as a 401(k) plan, his or her spouse typically benefits automatically.
Gift Splitting and Community Property
Gifts of up to $14,000 are tax-free for individuals, and up to $28,000 for married couples, for each donee. Both spouses must agree to the gift and file a Gift Tax Return. In other words, you may offer a gift of up to $28,000 each year to an individual of your choice, including children and their spouses, without paying any tax on that gift, as long as you both agree. For example, if you wanted to give your daughter and her husband the money to fund a down payment on a home, you could give them up to $56,000 ($28,000 each) without incurring any tax liability.
If you live in a community property state such as Arizona, converting separately held properties into jointly held properties helps your spouse avoid probate on these assets.
Review Current Estate Planning Documents
If you created estate planning documents prior to marrying, certain assumptions, such as estate tax liabilities, may have influenced decisions on how to leave your property. If you married your partner, he or she now enjoys the same unlimited deductions afforded married couples.
You may want to revisit some of those assets, placing them in a trust that names your spouse as your beneficiary, allowing him or her to defer federal estate taxes. In addition, you may include the federal generation-skipping transfer tax exemption.
Even if you and your partner do not marry, periodically reviewing your estate planning documents is a good idea. Make sure the beneficiaries and people listed as trustees or decision makers are accurate and up-to-date. This includes all of your estate planning documents, from advance directives to powers of attorney to trusts.
