Estate Planning Challenges (and Benefits) for Same-Sex Couples

There are many changes going on nation-wide for same-sex couples as more and more states legalize gay marriage. But there are still a few areas of the law—estate planning being one of them—which present challenges no matter what your state of residence. This article in the Wall Street Journal points out just a few of the challenges same-sex couples still face, and one of the highest on their list is death and inheritance.

“The biggest problems [for same-sex couples] may not come until death do you part. Although same-sex spouses are legally entitled to inherit assets from each other whether there’s a will or not, since inheritance is governed through state law, they don’t have federal rights.”

In states which have legalized gay marriage (including Massachusetts, Vermont, New Hampshire, Connecticut, Iowa, and now New York) same-sex couples are still inhibited by federal law in the following ways:

  • Same-sex partners aren’t able to inherit retirement plans with the same ease that opposite-sex partners have. “Unlike opposite-sex spouses, same-sex spouses would have to transfer [401(k) and other] accounts to inherited IRAs and start taking distributions each year, rather than allowing the tax-deferred assets to continue to potentially accumulate tax-free earnings.”
  • Same-sex partners still won’t get the federal marital deduction—the ability to “leave each other unlimited assets without owing any estate tax”—regardless of their state of residence. These assets may be considered joint by the couple and by the state, but not by the federal government. This means assets will be taxed once upon the death of the first partner, and may be taxed again upon the death of the second partner.

But there may be one opportunity not available to traditional married couples which same-sex couples can take advantage of: gay couples are legally entitled to “set up a ‘grantor-retained income trust,’ a type of trust that family members aren’t allowed to create for one another. You put an asset into a trust and retain the right to income from it.”

No matter where they live, same-sex couples are simply going to have more challenges creating estate plans that will hold water on both a state and federal level. The good news is that in spite of these challenges it is possible, with the right help, to plan to protect yourself, your partner, and your family now, and in the future.