Attorney Vincent Liberti Jr, LL.M. Explains Estate Planning and Same Sex Spouses

Orange, CT - Too many people believe same sex spouse’s have the same rights as opposite sex spouses.  For estate and gift taxes, that is not true.  Estate planning for same sex spouses entails careful consideration of the application of various laws.  There are four key legal factors that affect a Connecticut same sex married couple’s estate plan:  1) the federal Defense of Marriage Act (DOMA); 2) Connecticut’s Kerrigan decision; 3) new federal gift and estate tax laws; and 4) new Connecticut estate and gift tax laws.  Given the many competing laws involving estate and gift taxes involving same sex spouses, proper planning now is essential to protect both spouses and avoid future estate and gift taxes.           

The federal DOMA establishes that marriage is between a man and women.  Until this law is repealed same sex marriage is not recognized on the federal level.  As a result, for estate and gift tax treatment on the federal level, same sex spouses do not have the same rights as opposite sex spouses.  The basic lost opportunity is the inability to transfer assets between same sex spouses without it being taxable as a gift.  For this reason, same sex spouses must be vigilant with their record keeping in case they must prove to the IRS who owns which assets upon the death of a spouse.  Opposite sex spouses who are United States citizens may freely transfer assets between them with no gift tax consequences.  Another lost opportunity is doubling how much a couple may own (called an exemption from estate taxes) before being taxed for estate taxes.  Simply putting one’s spouse’s name on the tile of one’s home or bank account will be a taxable gift.  A properly drafted trust will enable opposite sex spouses to double the amount one is allowed to own before estate taxes are due.  Federally, same sex spouses do not have this tax advantage.

Since Connecticut’s Kerrigan decision and its ensuing statutory changes, same sex spouses have the same legal rights as opposite sex spouses in Connecticut.  As of October 1, 2010, all Connecticut civil union partners will be considered married spouses.  Therefore, for Connecticut purposes only, any Connecticut spouse – whether same sex or opposite sex -- may transfer assets between them without gift tax consequences.  In addition, through properly drafted trusts, spouses – same or opposite sex – may double the assets a person may own before being taxed for estate taxes.

Starting January 1, 2010, Connecticut’s new tax laws allows one to own (or gift) up to $3.5 million before estate taxes are due.  Its new estate tax rates range from 7.2% to 12%.  Through a properly drafted trust, spouses may own $7 million before being taxed for estate taxes.  However, the estate tax form now must be filed within six months of death, not nine months, as the federal government requires.  In addition, Connecticut requires one to file the form whether or not Connecticut estate taxes are due.  Connecticut enacted its new estate tax exemption anticipating Congress would extend indefinitely the $3.5 million exemption.  Since the federal exemption will decrease to $1 million in 2011, Connecticut might reduce its exemption to $1 million to match the federal exemption.

Besides this future uncertainty in the Connecticut estate tax exemption, how must same sex spouses properly plan in order to protect each other (and children)?   They cannot simply put the non-owning spouse on the title of the home or any other real estate.  Nor may they place each other on the title of investments or bank accounts.  Although one may gift up to $13,000 annually to another, such transfers over this exclusion amount create taxable gifts.  For those spouses with potential taxable estates, utilizing an estate-planning lawyer is essential because there is no one magic estate plan.  Using revocable trusts to double their Connecticut estate tax exemption should be part of their estate plan along with using financial and medical powers.  Financial powers allow an appointed person to access one’s finances when one can not do so.  Likewise, medical powers appoint someone to make medical decisions when one’s abilities to communicate properly to a doctor are impaired.  For couples with one spouse holding assets with high values, transferring assets to certain trusts may lower estate taxes while simultaneously allowing both spouses to have full use of the property.  It may also create asset protection against creditors.  Low real property and investment account values provide an excellent opportunity to transfer assets into these trusts at this time, since there may be a small gift tax assessed on the current value of the property placed into these trusts.  Nevertheless, the gift amount will be less than an outright gift to the non-owner spouse and the appreciation on the asset will be removed from the first spouse’s estate for estate tax purposes thus avoiding the assessment of an estate tax.

Connecticut same sex spouses now have equal treatment in the state for estate and gift tax purposes.  Federal estate and gift tax benefits still complicated asset ownership and transfers for same sex spouses.  Although a proper estate plan is important to us all, same sex spouses should take extra care to obtain advice on the legal effects of asset ownership and the application of estate and gift taxes.  Proper planning now is essential to protect assets, provide for loved ones and avoid potential estate and gift taxes later.

Vincent A. Liberti Jr. has an advanced degree in estate planning and wealth preservation. He is a Partner in The Wealth Preservation Practice of the business law division at Pepe & Hazard LLP., with offices in Hartford, orange, Waterbury and Stamford. Attorney Liberti is licensed to practice law in Connecticut, Massachusetts and New York.