My wife has a cousin who is gay. This cousin lives in Massachusetts with her partner, who has two grown sons from her prior marriage to a man.  The couple formalized their relationship in a civil union, which is legal in Massachusetts.

Everyone in my wife’s extended family welcomes the couple as we would any other family member. They are both very nice people and we enjoy spending time with them. “Laurie” once asked me some questions about what unique issues confront same sex couples in their financial, tax and estate planning. I thought that they were good questions and would share them and the answers with you today in case you or someone you know might be interested.

The bold questions and statements are those expressed by my wife’s cousin. My general answers follow each question.

Are same sex couples treated as spouses for purposes of federal gift and estate tax law?

No. While some state laws recognize same sex civil unions and/or marriages, the federal government does not. Therefore, federal tax law does not treat a same sex union the same as it does a marriage between a man and a woman. Consequently, a married couple can transfer unlimited amounts between them for purposes of avoiding gift or estate tax, while a same sex couple cannot.

What does this mean for a same sex couple?

Assume that a same sex couple owns a home on Sanibel together. If one gives her interest in the home to her partner, or bequeaths her interest at death, the value of her equity interest transferred is subject to the gift and estate tax exemptions. Currently one can only give $12,000 annually to another individual without consuming all or part of one’s federal estate tax exemption amount (currently $2 million). In fact, one might actually pay gift tax if the equity interest transferred plus all prior taxable gifts exceeds $1 million. Similarly, at death there is no marital deduction for amounts left to a same sex partner, resulting in the possibility of estate tax if the gross estate is greater than the federal estate tax exemption amount.

Are there planning strategies to minimize the tax or potential for tax?

Yes. Estate planning attorneys deal with these same issues when transferring assets from surviving parent to their children or other parties who are not the spouse. Children, for example, do not enjoy the benefit of an unlimited marital deduction when receiving amounts from their parents. There exist various leveraging techniques that can be used to maximize the exemptions from tax. As in most instances, waiting until one is on his or her death bed minimizes the types of strategies available. Therefore, early planning opens up more opportunities.

Not having a marital deduction even though there has been a formal recognition of the union under a state sanctioned law doesn’t seem right.

Unfortunately, whether same sex couples are to be treated the same as a man and woman married couple has become a contentious political issue. People on both sides feel very strongly about it. Until the federal government changes the way it views same sex unions, a variety of laws, from social security benefits, to pension laws to income, gift and estate tax laws will not provide same sex couples the same opportunities that married people enjoy.

Do Revocable Trusts work just as well for same sex couples as they would for married couples?

Often the answer is yes. Remember that revocable trusts provide protection from disability, in that the successor trustee named in the trust document steps into the role of bill payer and investment and property manager without the need for a guardianship. A same sex partner may certainly be named and act as a successor trustee. Further, upon the grantor’s death, the trust distributes assets without the need for a formal probate process. The probate process is a court supervised process, and therefore is public. Trusts are private and are generally not filed in the public domain where anyone is able to see who the named beneficiaries may be. Therefore from a privacy standpoint, both traditional married couples and civil union partners benefit from the privacy afforded their families and beneficiaries.

©2008 Craig R. Hersch .Learn more at www.sbshlaw.com