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Same-Sex Couples Must Plan Carefully

Uncle Sam gives the best wedding presents. A Simon Pearce vase is divine, but it pales in comparison with the married filing jointly tax rates and unlimited marital estate tax deduction.

Regrettably, even though they embody the same levels of love and commitment, same-sex couples do not receive these gifts from Uncle Sam.

Financial planning for same-sex couples is rife with difficulties. Few states provide rights to same-sex couples, and among those that do, the rights are not uniform. (See below.) The federal government currently denies all marriage rights to same-sex couples, though that may soon change. Because of numerous gray areas, all such couples need financial planning, especially if they have children. Plans must make the couple’s intentions very clear in the event they are contested. They should also be revisited often to stay current with legislation.

Given the complicated variation among states, moving or traveling can be especially treacherous. If you do not live in the state where you were married or if you plan to travel extensively out of state, some key planning moves can ensure that your relationship and intentions are respected.

Generally, hospitals allow visitation rights to spouses and other family members. If the state does not recognize your relationship, your partner is not considered a family member. He or she may therefore be denied visitation rights and the ability to make medical decisions on your behalf.

To prevent this situation, execute a power of attorney, which permits your partner to act as your agent in both health and financial matters. Although it can be inconvenient, you should carry a copy when you travel. Do not assume that the arrangement will be respected in other states, particularly if it differs significantly from that state’s power of attorney forms; however, such documentation should help the healthy partner present his case to hospital staff.

States that allow same-sex marriages or that provide an equivalent often have intestate rights for surviving partners. These allow for a portion, if not all, of the deceased partner's property to pass to the surviving partner, even if the deceased did not execute a will. However, a state that does not recognize the relationship will not have these rights. If you die without a will in one of these states, your partner will not be provided for from your estate. Your property will instead pass to your biological family based on the state’s laws.

The first defense against this is to have a will that provides for your partner and your children. Make sure your family members are aware of how you would like your property to be distributed after your death to avoid surprises and potential will contests. You may want to include positive statements as to why you choose to leave property to your partner instead of your biological family.

You can also dispose of assets outside of your will, where possible. Retirement accounts, life insurance policies and trusts pass to their beneficiaries outside of the probate courts. Titling property as jointly owned with rights of survivorship will permit the surviving partner to inherit the jointly owned property.

Your will should also make clear your intent regarding burial arrangements and that your partner should be granted possession of your remains upon your death. Typically, the deceased’s remains are given to the next of kin. If a same-sex relationship is not recognized, the surviving partner will not be deemed a family member. He or she will not be granted authority over the body and its disposition. Historically, courts have respected the deceased’s intent and therefore it is important to have support for your last wishes.

States permitting same-sex unions will usually permit non-biological parents to sign a child’s birth certificate as a parent. However, this does not necessarily provide full parental rights, especially in states where the relationship is not recognized. Adoption by the non-biological parent is a potential solution. This is particularly important in the case of a medical emergency and intestacy. Without adoption, the non-biological parent might be denied the right to make medical decisions for his or her child or to visit the child in the hospital. Should the biological parent die intestate, the non-biological parent may not be granted custody by the state. Furthermore, if the non-biological parent dies intestate, the child might not be eligible to inherit from him or her.

When executing estate-planning documents, same-sex couples have less room for error than heterosexual couples. You do not want the legitimacy of the documents to be challenged. If they are overturned, the state’s laws are unlikely to create your desired outcome. Therefore, choose a financial planner and attorney team that is familiar with the laws regarding same-sex couples. Also, your documents and plans should be reviewed often to stay current in the highly dynamic legal environment.

Divorce is difficult for any couple, regardless of sexual orientation, but it is even more so for same-sex couples. A married same-sex couple may not be able to divorce if they reside in a state that does not recognize their marriage. Furthermore, states that do recognize same-sex partnership typically have residency requirements for divorce. You can get married while on vacation in Massachusetts, but the reverse cannot be done.

In states where same-sex relationships are not respected, the split is more like dividing a business than a family. A stay-at-home partner’s contributions to the family unit might not receive the same weight when dividing assets. As unsavory as it is, it is important to plan for potential divorce. Pre- and post-nuptial agreements can make the process less painful and allow the partners to move on with their lives more quickly.

The rights of marriage dissolve with divorce, but special planning arrangements do not. In the event of a separation, same-sex partners will need to undo the extra measures they have put in place. This includes making new wills, naming new beneficiaries on retirement plans and insurance policies, and revoking health care proxies and powers of attorney. Adoption of children is permanent, and the partners will need to reach some sort of custody agreement.

With the repeal of the military’s “don't ask, don't tell” policy and the constitutionality of the Defense of Marriage Act in question, the federal government’s anti-same-sex marriage stance appears to be weakening. This may encourage coordination of state laws and make planning easier. When Uncle Sam finally gives this wedding present, same-sex couples will no doubt send a most heartfelt thank-you.

State Laws Vary for Same-Sex Couples

Marriage, Domestic Partnership and Civil Unions:
A handful of states have acknowledged the inequity of separate treatment, and have provided same-sex couples with the same rights, privileges and responsibilities of heterosexual couples on the state level. Five states — Connecticut, Iowa, Massachusetts, New Hampshire and Vermont — and the District of Columbia permit same-sex couples to marry. Delaware, Hawaii, Illinois and New Jersey allow, or will in the next year, civil unions, which are equivalent to marriage except for the name.

Nevada, Oregon and Washington offer domestic partnerships with rights similar to those of marriage, while Maine’s and Wisconsin’s versions provide limited rights. Wisconsin’s Constitution was amended to ban any legal status that is substantially similar to marriage for same-sex couples.

California has the most complex state legislation. California allowed same-sex marriages for a few months in 2008. This ended when the state passed Proposition 8, which amended the constitution to ban future same-sex marriages but did not retroactively revoke those marriages entered into before its adoption. Therefore, California recognizes some marriages as marriages. It currently allows for a version of domestic partnerships between same-sex partners that is virtually marriage with a different name. These partnerships even come with community property rights, which automatically split ownership of certain property and income between the two partners.

Tax Status and Inter-State Recognition:
Generally, states that permit same-sex marriage or an equivalent recognize similar commitments from other states. Again, California is the most complicated, as it will only recognize marriages from other states entered into before Proposition 8 passed. Marriages performed after its adoption are recognized as having the same rights as marriages, but cannot be called marriages outright. Other legal relationships that are similar to California’s domestic partnership arrangement are also recognized.

California, Connecticut, the District of Columbia, Iowa, Massachusetts, New Jersey, Oregon and Vermont have also allowed same-sex partners to file joint income tax returns for 2010. In these states, same-sex couples can benefit from the wider tax brackets that married couples enjoy. However, this can be administratively burdensome, as the married filing status cannot currently be used on the federal return.

Nevada, New Hampshire and Washington do not have individual income taxes. The Delaware, Hawaii and Illinois civil union laws were not in effect for the 2010 tax year.

Maryland, New York and Rhode Island recognize same-sex marriages performed in other states, even though they do not permit them. However, none of these states permits same-sex couples to file joint tax returns.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.
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