Marcum LLP has issued a set of 10 essential estate planning tips for lesbian, gay, bisexual and transgender and other nontraditional families.
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Marcum launched a national LGBT and non-traditional family practice last spring, offering specialized tax compliance and consulting services to the LGBT community.
“Nontraditional families must be proactive in their estate planning or they could be subject to severe financial consequences,” said Nanette Lee Miller, national leader of Marcum's LGBT practice group and partner-in-charge of assurance services for the firm's California offices. “The inequitable access that these taxpayers have to tax treatments afforded traditional families requires them to be especially vigilant in their planning.”
The firm’s Top 10 estate planning recommendations for non-traditional families include the following:
1. Prepare a Last Will and Testament
A will or trust ensures that assets are passed as intended. In the absence of a will, the intestacy laws of your state will govern distribution, and assets will not pass to an unrelated or unmarried partner.
2. Create a Trust
A trust can be a useful alternative to a will for LGBT couples whose families may not support their relationships, thereby making a contested will more likely. In addition to providing privacy by virtue of not becoming public record, as is the case with a will once it is probated, trusts are also more difficult to contest than wills which have stringent execution rules.
3. Beneficiary Designations
Certain types of assets, such as life insurance, 401(k) plans and IRA accounts, may be transferred directly upon death and are not subject to the probate process. However, when the designation forms are not filled out completely or correctly, the assets default to the decedent’s estate and become part of the probate estate. Therefore, LGBT couples may wish to list each other as beneficiaries on such accounts or policies. On non-retirement accounts, consider establishing transfer-on-death or payable-on-death provisions where state law permits such transfers.
4. Establish a Durable Power of Attorney
A durable power of attorney permits a client to designate an agent to handle all aspects of their financial affairs. A client may select a power of attorney that becomes effective immediately upon signing, or one that becomes effective at a future time or upon the occurrence of some contingency (commonly known as a “springing power of attorney”) such as incapacitation. Power of attorney documents become especially important for same-sex couples who are not afforded the same range of privileges and access to each other’s financial information as opposite sex married couples enjoy.
5. Establish Health Care Proxy and Living Will
A health care proxy allows a client to designate an agent to make medical decisions on their behalf if they are unable to do so for themselves. A living will sets forth their wishes concerning life-sustaining measures. These documents are crucial for same-sex couples, who are often denied “next of kin” status by hospitals and other medical care providers. This is especially true when a same-sex couple that is married in one state has a medical emergency while on vacation in another state that does not recognize their marriage. In such an instance, although the couple is married in their home state, the spouse may be treated as a legal stranger.
6. Establish a Designation for the Disposition of Remains
Such a document can be used to designate which individuals have the right to make funeral and burial decisions. If the decedent has any particular wishes concerning their final disposition, such wishes should be explicitly set forth in the designation. Further, language concerning who should have the ability to select a grave marker, and the language contained thereon, should be included in order to avoid battles with family members who may not agree with the language on the tombstone (i.e., “beloved partner”) of the decedent.
7. Establish a Cohabitation Agreement
For couples that are going to mix assets, financially support one another and incur debt together, a cohabitation agreement should be considered in order to delegate how the assets will be handled during the relationship and in the event the relationship ends. For same-sex married couples, a prenuptial agreement should be prepared for the same purposes. Prenuptial agreements are especially crucial for members of the LGBT community, many of whom have amassed substantial wealth when same-sex marriage was prohibited and now face entering into a marriage with significant assets to protect.
8. Establish a Joint Custody Agreement
Most states permit second-parent adoptions, and it is strongly recommended that couples consider such adoptions. However, a joint custody agreement is one alternative that helps protect the rights of both parents in their home state and while traveling to non-LGBT friendly jurisdictions.
9. Property Considerations
Owning property as joint tenants with the right of survivorship offers a simple solution to many of the difficulties unmarried or same-sex couples face regarding their assets, but this approach also has many pitfalls. By taking title to an asset (such as a bank account or real estate) in this manner, the surviving partner will become the owner of the property automatically by operation of law. Such transfers pass outside of the will and are not subject to probate, thereby eliminating many of the challenges that adverse parties can potentially bring. However, very careful consideration must be given to issues such as gift tax, state prohibitions against non-married persons executing joint deeds, coop board restrictions, proof of contribution and many similar issues, before any transfers are made or ownership on purchase is determined.
10. Retirement Planning
One of the most popular retirement tools, the Roth IRA, is federally governed. Therefore, one partner of a same-sex couple is unable to create a Roth IRA for the benefit of a stay-at-home partner, married or not. Further, while a federally recognized married person can inherit a 401(k) without incurring taxes, unmarried 401(k) beneficiaries may be subject to extra taxes without proper estate planning.
“Carefully preparing an estate plan is essential for same-sex couples who are not presently afforded the same asset transference, tax elections or custodial rights available to traditional families,” said Janis Cowhey McDonagh, a partner in Marcum’s New York City office and a member of its Trusts and Estates Practice group. “The recent Second Circuit Court of Appeals decision on the Defense of Marriage Act, which may lead to a Supreme Court decision that levels the playing field, creates additional urgency for same-sex couples to consider their estate plans.” McDonagh frequently lectures on LGBT estate and income tax issues.
LGBT couples also have a difficult time accessing the Social Security benefits of their partners, even when their home state recognizes their marriage. In order for same sex or unmarried couples to ensure sufficient savings for retirement, the working partner should maximize contributions to their own 401(k) especially when their employer has adopted a contribution matching policy. Further life insurance, especially if one partner depends on another’s income to survive, should be purchased and used as part of the larger estate plan.