Equal Treatment of California Same-Sex Couples
The landscape of 2013 California Estate Planning schemes for registered domestic partners forever changed in June 2013 when the Supreme Court struck down a key part of the Defense of Marriage Act (DOMA) that defined marriage as between a man and a woman for federal law purposes. What does this mean? Registered domestic partners now have the same legal rights and benefits as heterosexual couples in the eye of the Feds. The story gets even brighter for Californians as the Court’s decision allowed same-sex marriages to resume in the Golden State by shutting down defenders of Proposition 8. What kind of benefits do spouses in California enjoy? From governmental benefits like receiving spousal social security, medicare and disability to family benefits like filing for joint adoption and making healthcare decisions, spouses in California enjoy a multitude of rights that aren’t available to individuals. Let’s take a closer look at how the expanded rights and benefits will impact the 2013 California estate planning atmosphere for the LGBT community.
New Benefits & Words of Caution for LGBT Community
Lifetime Gifts Between Spouses
Spouses can “split” gifts allowing them to transfer twice as much ($28,000) as individuals ($14,000). Additionally, spouses can give each other unlimited lifetime gifts without incurring a gift tax. The availability of gift-splitting and unlimited lifetime gifts enhances opportunities for same sex couples. Registered married couples can now make tax-efficient lifetime gift transfers of $10,500,000 to non-spouse family members (children, parents, nieces) as part of their overall 2013 California estate planning scheme. Transfers prior to the new law would have reduced the donor’s lifetime gift & estate tax exclusion amount ($5,250,000) and potentially caused a gift tax (currently at 40%) depending on the gift size.
Joint Return Filing Permissible
Registered domestic couples can now file joint federal and state tax returns. Joint filing generally produces less tax when the couple has widely disparate income levels. However, in some cases, partners will actually pay more taxes by filing a joint return. Having an attorney that understands the changes to the 2013 California estate planning environment for same-sex couples working side-by side with a CPA is the best way to minimize negative tax consequences in the long-run.
Amending Old Returns
The Court’s groundbreaking decision to federally recognize registered domestic couples applies retroactively in a way that may impact prior tax reporting. Partners that file amended income, estate, or gift tax returns as part of their overall 2013 California estate planning scheme may get a refund.
Moving States May Cause Problems
States aren’t restricted from denying same-sex marriage. Currently, only 13 states allow same-sex marriage. It’s unclear whether same-sex couples will be entitled to the same federal and state tax benefits and qualify for employer-based healthcare & retirement plans and any other spouse-based benefits if they move to a state that doesn’t recognize their marriage. There are also non-tax issues for same sex couples to consider when preparing their estate plan under the new 2013 California estate planning regime. Awareness is paramount to creating the right plan. Registered domestic partners need to understand that their 2013 California estate planning documentation is subject to attack until the Court makes decisions regarding treatment of domestic partners that have moved to a state that doesn’t recognize their union.
Employer Healthcare Coverage & Retirement Plans
Same sex couples are now eligible for tax-free employer healthcare coverage and can be reimbursed from their health flexible spending and reimbursement accounts for the costs of a same-sex spouse. Registered domestic partners will also automatically qualify for survivor and death benefits under pension plans, 401(K)’s and the like. Favorable withdrawal rules apply to spouses that inherit pension plans or IRAs as opposed to non-spouse beneficiaries.
2013 California Estate Planning Benefits
Added Simplicity of 2013 California Estate Planning Schemes
Married same-sex couples can now use the unlimited estate tax marital deduction. This allows them to transfer as much as they want on death without incurring an estate tax. Transfers between non-married couples is subject to the Fiscal Cliff legislation, which allows a single person to transfer up to $5,250,000 (married $10,500,000) on death before the imposition of an estate tax. Spouses can also elect “portability” so at death any unused estate and gift tax exemption passes to the surviving spouse.
New Trust Types Available
Registered partners of the LGBT community can now create easy-to-manage life estate trusts (QTIP, marital deduction trusts, & disclaimer trusts) that were previously only available to heterosexual married couples. The question remains – should they? A life estate transfers title of real property to an ultimate beneficiary, but allows the life estate recipient (surviving spouse) to live on the land until death. There are drawbacks to creating a life estate as opposed to a revocable living trust as part of a comprehensive 2013 California estate planning scheme. The beneficiary of a life estate trust gets a smaller “step-up” in basis when the property is inherited. Why? The real property goes through probate after the first owner dies, causing the owner to get title to the property sometime down the line. The result? Potential for capital gains on sale. Creating a revocable living trust, on the other hand, avoids probate altogether. The final beneficiary inherits the basis of the trust creator. The result? No capital gains taxes on sale.
Priority in Conservatorships
A reality of getting older is that we may not be able to handle our own financial or health affairs at some point. That’s where a conservatorship may come into play. Priority is granted to spouses if a conservatorship needs to be set up.
Elder Law Planning
The benefits afforded to same-sex couples isn’t limited to the young. Spouses of the LGBT elder community can create intentionally defective grantor trusts as part of their elder law estate planning. This will allow them to qualify for the Medi-Cal system by gifting, investing in assets that don’t qualify as “resources,” and ultimately assure avoidance of a state recovery lien. Proper Medi-Cal planning will allow same-sex couples to keep their home, car, and other assets while also ensuring continued long-term custodial care for all types of ailments.