Same-Sex Couples and Estate Planning: The Effect of Saying “I Do”

By Miguel Torres
Partner at Miles & Torres Associates, a San Francisco Estate Planning Law Firm

Marriage carries a number of estate planning and tax benefits that all same-sex couples should be aware of. Here is an overview of some of the key benefits for married couples and alternative approaches for non-married couples to protect yourself and your rights. 

Titling Assets as Community Property with Right of Survivorship
In California, since 2001, married couples can hold property as “community property with right of survivorship”.  This is a form of ownership that transfers property to your spouse at your death without a court proceeding. The surviving spouse gets the coveted “full step up in tax basis” wiping out any capital gains on the property thus allowing the surviving spouse to sell the property free of capital gains tax. If you are not married but would like to share property with your partner then you should consider putting your property into a trust and discuss the tax consequences of different forms of ownership with an estate planning attorney.

Retirement Accounts Rollover
A surviving spouse who inherits his or her spouse’s IRA or workplace savings account can transfer the proceeds into their own IRA in order to maximize the tax savings and investment power.  This option is only available to surviving spouses.  For IRAs, the registration type of both IRAs must be the same, Traditional to Traditional or Roth to Roth.  If you are unmarried, then make sure that your beneficiary designations are up to date so that your partner can still inherit your IRA, albeit with slightly less advantageous terms than are available to spouses.  Regardless of whether you are married or not, it is generally not advised to pass your IRA assets through a will or trust.

Tax savings for property inherited from your spouse
The unlimited marital deduction allows a person to inherit an unlimited amount of assets from his or her spouse free from estate tax.  Further, the portability provisions of the federal gift and estate tax law allows a surviving spouse to use any remaining portion of the deceased spouse's exemption amount, enabling the surviving spouse to make additional tax-free gifts and reduce the amount of estate taxes owed on the surviving spouse's death.  Non-married couples must rely on the individual's exclusion amount from federal estate and gift tax (the applicable exclusion amount for 2016 is $5.450 million).  

Better protection if spouse dies intestate
In California, if your spouse dies without a will or a trust, the courts decide where your assets go based on intestate succession laws – this is called probate.  Usually your spouse gets all of your community property and half to one third of your separate property.  However, if you are living together but you are not married, your property goes to your closest blood relatives instead of your significant other.  California does not recognize common law marriages.  Unmarried couples should have wills and trusts drafted to make sure that their assets transfer to a beneficiary of their choice rather than by operation of law. 

A spouse takes priority for financial decisions and if a conservator needs to be appointed
If you are incapacitated, your spouse can make many important financial decisions on your behalf without the necessity of additional legal instruments.  A non-spouse partner would need a power of attorney document to have similar rights. Moreover, for people who really cannot manage their finances or affairs, a conservator is usually appointed by the court. If your spouse becomes incapacitated and a court must appoint a conservator, most states give preference to spouses.  If you are unmarried it is a good idea to have a power of attorney for finances and an advance healthcare directive in place that specifically gives your partner rights to speak on your behalf for healthcare and finance decisions. In the directive you can also specifically request the court appoint your partner as your conservator.

Regardless of whether you are contemplating marriage, happily married or never plan to be, you should think carefully about who you want to take care of you if you are incapacitated and who you would want to have your property and other assets when you pass away.  These are the key decisions that go into your estate plan.  Meeting with an estate planning attorney can help you look more closely at these issues and develop a plan that best protects you and carries out your wishes.