After the landmark U.S. Supreme Court decision in United States v. Windsor, which found unconstitutional the portion of the Defense of Marriage Act (“DOMA”) that defined “marriage” as a union between a man and woman, and “spouse” as only a person of the opposite sex, and the decision in Whitewood v. Wolf, where the U.S. District Court struck down Pennsylvania’s ban on same-sex marriage, Pennsylvanians can enter into same-sex marriages and same-sex marriages from other states will be recognized as valid in Pennsylvania.
Soon after Windsor, the IRS and U.S Department of Treasury released a ruling stating that same-sex married couples will be treated as married for federal tax purposes. No doubt, the Pennsylvania Department of Revenue will do the same directly.
With this equal treatment, various tax and estate planning techniques are now available to same-sex couples which could provide substantial tax savings and asset protection options. If you decide to enter into a Pennsylvania same-sex marriage, you should consider taking the following steps:
- Overhaul Your Current Estate Plan: With the Whitewood decision, valuable estate planning options such as disclaim trusts, QDOTs, and tenants-by-the-entireties ownership are available. Married couples may make unlimited gifts to one another free of the federal gift tax, allowing assets to be moved for strategic asset protection purposes. A complete review of all your documents; wills, powers of attorney, living wills and IRA Trusts is in order to make sure your plan now reflects the best tax and asset protection options to fit your needs.
- Reassess Life Insurance: The Pennsylvania Inheritance Tax does not tax life insurance so many same-sex couples used life insurance to avoid the 15% tax that would have applied to other assets pre-Whitewood. Post-Whitewood, all assets pass to a same-sex spouse free of the Pennsylvania Inheritance Tax, so the life insurance may no longer be needed. Further, because of Windsor, there is no estate tax on assets passing to a surviving spouse, so if life insurance was purchased to provide liquidity to a surviving partner to pay the federal estate tax, that insurance might no longer be needed. Life insurance provides a useful estate planning and asset protection tool. It may be time to reassess that tool’s usefulness in your given situation.
- Plan Around Portability: The federal estate tax Applicable Credit is the amount of your estate that the federal government allows you to give at your death without paying the 40% federal estate tax. The Applicable Credit is $5M adjusted annually for inflation ($5.34M in 2014). Transfers to spouses are free of the estate tax, but without planning when one spouse dies and the other takes everything, the first spouse’s $5M exemption is lost. With proper planning, a married couple can “team up” and use both exemptions, allowing them to pass $10M (adjusted for inflation) free of the 40% tax, a $2M savings. This ability of one spouse to take and hold the first spouse’s applicable credit amount in the future is known as portability. If you have taxable estate that will exceed $5M, a proper estate plan will provide you with substantial savings.
- Maximize The Annual Credit: There are several types of gifts that you can make free of the federal gift tax. One exception is the annual exclusion, currently $14,000 in 2014. The exclusion is “annual”, as you can make a new gift each calendar year of $14,000. The gift can be to anyone, and you can make as many $14,000 gifts as you wish. With the Windsor decision, same-sex couples can now “gift split”, which means that one spouse can essentially borrow the other spouse’s annual exclusion amount and double the gift ($24,000 in 2014). For example, if one spouse has a child and grandchildren from a previous relationship, and that spouse wants to make an annual gift to these descendants, prior to Windsor, that gift was limited to $14,000 to the child and each grandchildren. Post Windsor, the spouse can utilize gift splitting, to use the other spouse’s ability to make an annual gift to the child and grandchildren. The first spouse can write a $24,000 check to the child and grandchildren from that spouse’s funds free of the federal gift tax.
- Gift Tax and GST Gift Splitting: Beyond the annual exclusion mentioned in the previous paragraph, same sex couples can also gift-split their $5M+ applicable exclusion amount and generation skipping tax exemption. This allows substantial tax savings and asset protection planning when one spouse has substantially more wealth than the other spouse.
- Assess Options for Retirement Plan Beneficiary Designations: If your retirement plan is covered by ERISA your spouse is automatically the beneficiary. Your spouse may allow you to name another person as beneficiary, but written consent is needed. For same sex couples contemplating marriage who have children from other relationships, this issue is something that should be addressed in a prenuptial agreement. After the marriage the new spouse will be the beneficiary, even if the beneficiary designation names the children. Qualified plans often make up a large portion of a person’s estate and the options for inheriting a retirement plan differ if the beneficiary is spouse rather than a non-spouse. A thorough review of the options given your specific situation would be wise.
Please contact Klenk Law for a free consultation and assistance with your estate planning.