Estate Planning for Same Sex Couples
The first question asked by many same sex couples in the wake of Windsor is “Should We Get Married?” Putting aside the emotional reasons for marriage, what are the estate planning benefits? While you can acheive a lot of the same things through estate planning, there are benefits to marriage of estate planning. Being married has two key federal and one state tax advantage, all of which you’d realize with or without a living trust.
- Married couples get a step up in basis when one spouse dies on all community property assets. That means that the surviving spouse won’t have to pay capital gains on any appreciated assets that she sells after the first death, other than any gain that happened after the death of the first spouse. For example, if one partner’s house has appreciated a lot since s/he bought it, and you marry and make that house community property, when one of you dies, that house would be valued at its date of death value, not the original purchase price. This means that there would be no capital gain tax if the house were to be sold then. And, on the death of the second spouse, there is a second step up in basis! This is all a benefit of marriage.
- Married couples get an unlimited marital deduction from federal estate and gift tax. That means that you and your spouse can give an unlimited amount of assets to each other, at death or during life, and no federal estate or gift tax will be due for those gifts. The failure to get this benefit was the underlying reason for the Windsor case. Had the marriage been recognized, the surviving spouse would not have paid any tax. For modest estates, this isn’t as big a concern now that the federal estate and gift tax exemption is $5.34 million, but that number may be reduced by Congress in the future, and it is a benefit that only spouses receive. Indeed, not two weeks after the new rate was made “permanent”, the government started looking at how to undo that permanent feature! It is only permanent until they say it isn’t.
- Married couples can pass real property to each other in California without a change in property tax rates. A transfer between spouses is an exception to Proposition 13’s reassessment requirement. This can be a huge ticket item in some cases. Being married means there is no reassessment. Being unmarried, this may not be available.
So, from a non-emotional and non-romantic perspective, these are the reasons why marriage is a good idea. As one same sex client said to me when asked how married life was working out, she replied “well, you know, a lot like before but now it will be harder to get out of”. These factors listed are part of the estate planning aspects and your individual facts may affect the outcome. You need to see an estate planning attorney to see how this would apply to you.