The thought of planning for a world without you can be hard to imagine, but estate planning is critical to protect your assets and loved ones. Despite the positives of the 2015 Obergefell v. Hodges Supreme Court decision, this planning can be even more important for same-sex couples and LGBTQ+ families.
Due to the legal recognition of same-sex marriages in Obergefell, an array of previously unavailable tools and tax-savings are now available. Even so, same-sex couples still face circumstances that require enhanced planning, such as adoption by non-biological parents or navigating complicated family dynamics with members who may no longer be accepting.
A Pew Research Survey found that 4 in 10 LGBTQ+ adults have been rejected by a close family member or friend because of their sexual orientation. Consequently, same-sex couples can be more vulnerable to sabotage by unsupportive family members. This includes family members contesting a will that may not recognize the validity of a same-sex relationship or custody battles over non-biological children in the event of the biological parent’s incapacity or death.
While there isn’t necessarily a need to draft estate planning documents differently from heterosexual spouses, same-sex couples should make a concerted effort to review their existing estate plan. Whether simply reviewing or documenting your wishes for the first time, keep in mind the following estate planning tips for same-sex couples.
#1 Document Your Wishes Via a Will and Beneficiary Designations
A study by Spectrem Group found the LGBTQ+ community is less likely than their heterosexual peers to have a will. 56% of LGBTQ+ individuals with a net worth between $100,000 and $1 million were found to have a will in place. This figure was 70% for non-LGBTQ+ individuals in the same bracket. This disparity grows for individuals with a net worth over $5 million, where 91% of non-LGBTQ+ individuals have a will versus 72% of those in the LGBTQ+ community.
You may be wondering, “What does this mean for same-sex couples?”
Wills are extremely important for unmarried members of the LGBTQ+ community but find themselves in committed relationships. According to Gallup, this is the majority of LGBTQ+ individuals as only 10% were married at the time of the poll. If you are in a domestic partnership or serious romantic relationship and you pass without a will, intestacy laws of the state of residence will determine who receives your assets. These rules vary widely by state, meaning your assets could be divided among a number of individuals, including surviving spouses, parents, children, siblings, and even aunts and uncles. It is vital to understand that domestic partners are rarely included in the state statutes and will likely be disinherited regardless of your intentions. A will is a must-have if you want to control what happens to your property and assets upon death.
In addition to creating a will, recording beneficiary designations is another critical step to ensure your wishes are executed. For most people, their retirement accounts and life insurance policies are their largest assets. It is important to know that your beneficiary designations supersede whatever is written in your will. If you previously named an ex-partner or spouse as beneficiary on an IRA and forgot to change it, that person will collect your assets regardless of who you leave them to in your will.
#2 Prioritize End of Life Care
A will is the keystone to most estate plans; however, this is just the iceberg tip for same-sex couples. Same-sex spouses are challenged more often than heterosexual spouses when making medical and financial decisions for partners who become incapacitated. This means same-sex couples need to be hyper-focused on documenting their true desires. Additional documents to carry out your final wishes include:
- Financial Power of Attorney. This designates a person to handle your financial affairs if you become incapacitated.
- Health Care Power of Attorney. This designates a person to make medical decisions on your behalf should you become incapacitated. This is particularly important for same-sex couples who are unmarried or in domestic partnerships to ensure the individual you want to make your decisions is able to do so.
- HIPAA Privacy Authorization Form. This often-overlooked form allows doctors and other health care professionals to disclose pertinent health information to your designated Health Care Power of Attorney.
- Health Care Directive. This outlines the type of end-of-life health care you would like to receive in the event you are incapacitated or unable to speak for yourself.
#3 Utilize the Unlimited Marital Deduction
Since the legalization of same-sex marriage by the Supreme Court, same-sex couples can now enjoy the unlimited marital deduction for federal estate and gift taxes that many heterosexual married couples have benefited from for decades. A same-sex spouse can now also roll over assets from a deceased spouse’s retirement accounts) to their own account without a mandatory minimum distribution or lump-sum distribution. Prior to 2015, this wasn’t the case for same-sex couples.
By taking advantage of the marital deduction and asset roll-over, same-sex couples can revisit their financial and estate plan to free up considerable liquidity. This highlights how estate planning isn’t a set-it-and-forget type of action; it’s ongoing, and you might have to roll-back plans you put in place pre-Obergefell.
#4 Tie-Up Loose Ends with Children
Same-sex parents have a unique set of estate planning concerns when it comes to children, especially when only one partner is the biological parent. A child, either born or adopted into a same-sex marriage, needs to be intentionally named throughout estate planning documents.
This begins by designating guardianship for minor children in your will. Without a will, no guardianship is established and the courts must choose guardians on your behalf. The court may or may not choose your partner or spouse, which means it’s best to not leave this to chance.
To prevent opening the door to custody battles, the non-biological parent should consider adopting the child. Depending on the state, this is often referred to as a second-parent adoption, co-parent adoption, or stepparent adoption. This is particularly true if the child was born before the couple married since not every state has marital presumption laws. Adoption establishes a legal relationship to avoid a custody battle if anything happens to the biological parent.
Adoption also plays a key role in the passage of assets. Typically, when parents die their assets are passed down to their children. If this is an estate planning goal for a same-sex couple, adoption should be considered since it’s more common in same-sex marriages for only one parent to be biologically related to the child.
#5 Review Real Property Titling
Same-sex couples should also review real estate documentation. This is especially true for property purchased before marriage equality to ensure the ownership is listed according to the couple’s wishes. Examples of asset tilting include:
- Tenants in Common. This provides both individuals a share of ownership while allowing each individual to pass their share to someone else in the event of their death.
- Joint Tenants with Rights of Survivorship. This denotes that both individuals are owners. When one individual passes away, the other joint owner will automatically gain sole ownership.
Another necessary consideration that may dictate how you want to title your assets is the state you live in. In community property states (e.g., California), couples may want to convert separately owned property to community property to receive a step-up in basis upon the death of the surviving spouse. However, this also means your spouse has control over 50% of the property. Other states allow a Tenancy by the Entirety ownership, which is similar to Joint Tenants noted above, but this is only available to married couples and provides additional protection against creditors of either spouse.
Completing Your Estate Plan
Proper estate planning is vital to ensuring your wishes are carried out during your lifetime and that your assets pass to your loved ones in a way most aligned with your goals. These estate planning goals can be more complicated for members of LGBTQ+ community to achieve. To help navigate these intricacies, it’s smart for all couples – but especially same-sex couples – to work with skilled professionals. Book a call with an advisor today to better understand how we can partner with you and ensure your wishes are reflected in your estate plan.
