New ESTATE PLANNING FOR SECOND MARRIAGES First Run … · 2014. 12. 3. · ESTATE PLANNING FOR...

ESTATE PLANNING FOR SECOND MARRIAGES First Run Broadcast: December 4, 2014 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Remarriage is commonplace and comes with a host of estate planning challenges. Planning for the equitable distribution of property in “blended” families – children or grandchildren from a prior marriage, the second spouse, and perhaps children from the second or subsequent marriage – is fraught with legal and emotional landmines well beyond customary tax planning. Failure to properly think through objectives and consequences, and to communicate and execute plans can easily leave a client’s estate exposed to open and raw dispute among competing heirs and eventually to destructive fiduciary litigation. This program will provide you with a guide to the practical, substantive and tax aspects of planning for clients who have remarried and their blended families.

• Estate and trust planning for remarriage and blended families • Understanding the emotional context of planning for remarried clients and blended

families • Use of pre-martial agreements to spot contentious issues, align interests, and decrease

post-mortem litigation • Estate and income tax planning issues for the second marriage, including exemptions and

credits • Effective use of trusts to prevent unjust enrichment of one component of a blended family • Common traps and overlooked opportunities with retirement benefits • Post-mortem planning techniques when the first spouse dies – and issues on the “second

death”

Speakers: Blanche Lark Christerson is a managing director at Deutsche Bank Private Wealth Management in New York City, where she works with clients and their advisors to help develop estate, gift, tax, and wealth transfer planning strategies. Earlier in her career she was a vice president in the estate planning department of U.S. Trust Company. She also practiced law with Weil, Gotshal & Manges in New York City. Ms. Christerson is the author of the monthly newsletter “Tax Topics." She received her B.A. from Sarah Lawrence College, her J.D. from New York Law School and her LL.M. in taxation from New York University School of Law.

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Estate Planning for Second Marriages

Teleseminar December 4, 2014

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Estate Planning for Second Marriages

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ESTATE PLANNING FOR SECOND MARRIAGES

Blanche Lark ChristersonDeutsche Asset & Wealth Management - New York City

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It’s not official, but… The IRS will release its 2014 inflation-adjusted numbers later in the fall. In the meantime, several tax data publishers have recently come out with identical projections for these numbers, one of which really caught our eye: namely, the 2014 basic exclusion amount, estimated at $5.34 million. The basic exclusion amount, it will be recalled, is part of the applicable exclusion amount, which protects transfers from gift and estate tax. (The other part of the applicable exclusion amount is the “deceased spousal unused exclusion amount” (DSUE), which applies if a surviving spouse, through “portability,” receives what remains of the predeceased spouse’s applicable exclusion amount; if there is no DSUE, the basic exclusion amount and applicable exclusion amount are the same.) It is no secret that legislation passed at the beginning of this year made the generous $5 million basic exclusion amount (BEA) permanent. As of 2012, the BEA has been indexed for inflation, when it went to $5.12 million. This year, it went to $5.25 million – meaning that in 2013, for example, a married couple can protect $10.5 million from gift and estate taxes (assuming they haven’t previously made lifetime gifts that eroded some of this exclusion); next year, applying the projection, they will be able to protect $10.68 million (making the same assumption about lifetime gifts). And if that married couple is doing multi-generational planning, they’ll be able to protect transfers up to these same amounts from the generation-skipping transfer tax (GST), since the GST exemption equals the BEA (note that the GST exemption is not portable, however, and dies with the taxpayer if it’s not used). The point about these ever-increasing numbers is that many people will no longer have federal transfer tax concerns, as their assets will be protected from gift and estate tax, and GST. People who live in states with their own estate tax, however, or who own property in such states, will still have to grapple with state estate tax issues, since state exclusion amounts are typically much lower than the federal exclusion (see the 07/01/13 Tax Topics for more on state estate taxes and portability). Nevertheless, let us assume, for argument’s sake, that federal transfer taxes are really not an issue because the taxpayer’s assets are unlikely to exceed the $5+ million threshold (or $10+ million in the case of married couples). What are some

2013-10 10/07/13 Tax Topics

Blanche Lark Christerson Managing Director, Senior Wealth Planning Strategist

Tax Topics 10/07/13 2

basic planning points to keep in mind that have less to do with saving tax, and more to do with good housekeeping? Here are some thoughts: • The importance of a will. A will disposes of a person’s “probate” assets at death. Such assets include

individually owned brokerage accounts and real estate, but do not include retirement accounts, which pass by beneficiary designation, and jointly held property, which automatically passes to the surviving owner by operation of law. If a person dies “intestate,” or without a will, that person’s probate property will pass according to state law, which generally divides the property between the surviving spouse and children, assuming there are any, otherwise to parents, and then to siblings and various other relatives. In other words, without a will, it is not possible to benefit special friends, significant others or charity, and there will be no trusts for minor children, who will receive their inheritance upon reaching majority (generally, 18 or 21, depending on state law). Finally, without a will, parents cannot name a guardian for their minor children if something happens to both of them. A will is therefore important, irrespective of tax planning.

• Revocable trusts. Revocable trusts are also known as “living trusts”; the trust’s creator is typically called the “grantor” or “settlor,” and usually serves as initial trustee. While the grantor is alive, he or she can revoke or amend the trust at any time; the trust is for the grantor’s benefit, and can provide for the grantor if the grantor becomes incapacitated – assuming assets have been transferred to the trust and an additional trustee is serving. At the grantor’s death, the revocable trust typically serves as a will substitute, and governs the disposition of assets the grantor transferred to it during life, and at death (usually through a “pour-over” will). Although revocable trusts don’t offer potential tax savings (unlike irrevocable trusts the grantor creates during life, and that typically are tax-driven), revocable trusts can facilitate the administration of the grantor’s assets at death.

For example, at the grantor’s death, a successor trustee can step in immediately to manage the trust’s assets, whereas the executor of a decedent’s will has no authority to act on behalf of the decedent’s estate until the local probate court accepts the decedent’s will for probate and issues “Letters Testamentary” – a process that can take from several weeks to several months. In addition, if the grantor transfers out-of-state property to the trust while still alive, there will be no need for an ancillary probate proceeding in that other jurisdiction to deal with the property at the grantor’s death. Also, because a revocable trust is generally not a public document – unlike a will – many people prefer the privacy a revocable trust can afford, and put the “meat” of their testamentary dispositions there (yes, it’s possible to read the wills of the “rich and famous” at the local surrogate’s court). Finally, long after the grantor’s death, it is a relatively simple matter for successor trustees of continuing trusts to step in under a revocable trust, unlike the court proceeding that is required for successor trustees of trusts created under someone’s will. Revocable trusts are very popular in jurisdictions such as California and Florida, and merit careful consideration.

• Make sure documents are current. In general, it is a good idea to periodically review planning documents, such as wills and revocable trusts (if applicable). Changes in the tax law, for example, can mean that these documents no longer work as intended. To illustrate, if the will of remarried Dad gives “the maximum amount I can protect from federal estate tax” to the adult children of his first marriage, Dad may be giving away far more than he originally thought, given the now permanent $5+ million basic exclusion amount. Also, major life events – including marriage, death, divorce or the birth of a child – may mean that a will no longer benefits the right people. Furthermore, if the testator moves to a new


jurisdiction, the testator’s will may not be read the same way, because local law could interpret certain provisions differently. The point is, periodically reviewing planning documents is good practice. It may even show that “vintage” documents still work – despite those major life events. For example, if Dad, Mom’s primary beneficiary, is now dead, Mom’s back-up disposition to her “surviving issue, per stirpes,” still achieves her goals by providing for her children – even those who were born after she wrote that will.

• Make sure beneficiary designations are current. Beneficiary designations typically govern the

disposition of property that passes by contract, such as retirement accounts (including IRAs and 401(k)s), annuities and life insurance. Just as with the planning documents mentioned above, beneficiary designations should be checked periodically to make sure they still name the appropriate parties. This is especially important if there has been a divorce: if the account owner dies with a stale beneficiary designation that still names the (now) ex-spouse, litigation frequently ensues. Based on case law, whether this designation will be enforced typically turns on the asset in question: if it is governed by federal law, which generally applies to retirement accounts, the beneficiary designation rules; if the asset is governed by state law, which generally applies to annuities and life insurance, divorce typically (but not always) negates dispositions to named, but now former, spouses. Note that if there is no designation (or the named beneficiary is dead, and no alternate is named), the asset’s governing document will direct the property to a default taker – usually the account owner’s surviving spouse, if any, or the owner’s estate. This may not be what the owner would have wanted, and may not achieve optimal tax results – particularly if the property passes to the owner’s estate.

• Other planning documents. Given life’s uncertainties, it may be advisable to have a living will, which

sets forth a person’s health care wishes when he or she no longer can, along with a “health care proxy” or “health care surrogate” (a document that appoints an individual to make those same health care decisions when the appointer no longer can). Because the law generally presumes that individuals would want everything done to keep themselves alive, living wills typically (but not always) rebut that presumption, and direct that the individual not be kept in a “persistent vegetative state”; such documents also set forth the individual’s wishes regarding artificial nutrition and hydration. A “durable” power of attorney may also be a good idea, as it authorizes an “attorney-in-fact” to transact business on behalf of the “principal” who executed the power of attorney; such a durable power survives the principal’s incapacity – which is, of course, when it is most needed; a “springing” power of attorney does not go into effect until a stated event occurs, such as the principal’s incapacity. Any power of attorney dies with the principal, however, and is not a substitute for documents (such as a will) that authorize others to act after the principal’s death.

• Check how assets are titled. As mentioned above, wills only govern the disposition of probate

property. Accordingly, it is important to check how assets are titled. For example, suppose Mom and Dad have beautifully drafted wills: these provide for some generous charitable gifts, and then create a trust for the survivor that will be protected from state estate tax, and pass tax-free to children at the survivor’s death. Mom and Dad, however, only have jointly owned property and retirement accounts, neither of which passes under their respective wills. Accordingly, if Dad dies first, for example, he will not have any probate property with which to fund the charitable gifts and trust for Mom. To remedy this situation, Mom and Dad could sever some of their jointly owned property (such as their bank and brokerage accounts) so that they now own it as “tenants in common,” a type of interest that is probate property and will pass under their respective wills.

• Lifetime gifts. Lifetime gifts have certain advantages from a planning perspective: property (and any potential appreciation on it) is removed from the donor’s estate, and the gift tax (assuming a gift is large enough to trigger it) is cheaper than the estate tax because of how it is calculated. Yet if federal transfer taxes won’t be an issue for the potential donor, why make lifetime gifts? As previously mentioned, state


estate tax may still be a concern, and lifetime gifts can potentially reduce that future bite. The donor, of course, may also want to help someone now – as opposed to later. Putting these points aside, however, what are some basic gift considerations that can get lost in the shuffle?

First and foremost, the gift – any gift – should not leave the donor feeling impoverished. In other words, the donor should be able to comfortably do without the property and any income it may generate. If the donor is giving something like stock or securities, it makes sense to give away high-basis property, so that the donee does not receive a large built-in capital gain. This is particularly true if the donor’s longevity is in doubt, as assets are generally “marked-to-market” at death, and built-in capital gains (and losses) on property are eliminated. In that vein, donors should keep in mind that they cannot give away a loss: in other words, if Mom, say, gives Daughter stock that is underwater (as in, worth less than Mom’s adjusted basis in it), Daughter will not be able to use that built-in loss. Finally, gifts need not be huge to have an impact, from both a tax and a human perspective. For example, donors can give away property worth up to $14,000 a year to as many people as they wish ($28,000 if their spouse consents) without eroding any of their $5+ million basic exclusion amount; over time, such gifts can not only remove significant dollars from the donor’s estate, but can also provide meaningful contributions to the lucky recipients. In addition, donors can pay someone’s tuition, medical expenses and health insurance premiums without affecting the BEA. And if the donor doesn’t feel flush enough to make an outright gift, the donor can make a loan. Although that loan must carry sufficient interest so that it won’t be treated as “below-market,” our current economic climate means that the rate can still be very low (the October “safe harbor” rate for a 3-year note, for example, is 0.32% (32 basis points)).

• Life insurance. Life insurance has routinely been used to help pay federal estate tax (the typical structure involves an irrevocable trust that owns the insurance so that it won’t be taxable in the insured’s estate, but still benefits the insured’s heirs). With the federal estate tax less of an issue, however, does insurance still play a role? The short answer is yes. Insurance protects a family against the premature death of the primary breadwinner, provides liquidity for an otherwise illiquid estate, and can help pay state estate taxes, which may still be a concern. Although many insureds may not like paying insurance premiums, they generally do like what insurance can do for them and their heirs – including leaving those heirs as much as possible.

• Trusts. Trusts are often tax-driven, and can confer benefits by keeping property out of a beneficiary’s estate, for example. With taxes less of a concern for many, however, do trusts still make sense? The short answer is again yes. Some of the non-tax reasons for trusts include saving a beneficiary from himself (or herself!), protecting the beneficiary from creditors (and predators), providing a solid asset management structure, and ensuring that property passes according to the trust creator’s wishes. To illustrate, let us look at the “portable” spousal exclusion (or DSUE) mentioned above. The DSUE means that Dad (assuming he dies first) no longer needs to create a “credit shelter trust” for Mom to ensure that he’s making use of his federal estate tax exclusion (prior to portability, Dad would be wasting his exclusion if he simply left everything to Mom). Yet Dad may still want a trust for Mom: suppose he’s concerned that she may be a soft touch for her importuning relatives when he’s not there to run interference. Similarly, Mom may want a trust for Dad: suppose she’s worried that he might remarry after her death and start a new family – if that happened, there goes their children’s inheritance! And so on. Finally, note that a state credit shelter trust can help save eventual state estate taxes when the surviving spouse dies, as state exclusion amounts are not portable.

• Digital lives and legacies. This topic is bigger than a breadbox. The long and short of it is that millions of people have well-developed digital lives, and are dedicated users of social media such as Facebook, Instagram, Twitter, etc. They often also use automated electronic bill paying for recurring charges, and


have multiple email accounts, blogs, websites, etc. The practical issue, for purposes of our discussion, is this: if people conduct so much of their lives online, what happens when they die? The law surrounding online assets and accounts is not well-developed, and many service providers don’t allow others access to accounts once it is known that the account owner has died. (So much for all those wonderful photos that have been stored in the cloud!)

So let us consider the following scenario: Alice is single, thirty-something, and a successful professional. She, like many of her friends, doesn’t write checks to pay her bills, and uses a debit card and the occasional credit card to make purchases. She receives all of her statements online, including those from her bank and brokerage house, as well as bills from the gas, electric, cable and cellphone companies, which she pays through automatic debits to her bank account. Alice files her taxes electronically, and doesn’t keep hard copies of the returns, although she does store them online. She connects with many of her friends via social media, uses email for her business correspondence, and stores all of her contacts in her smartphone, which is password-protected (Alice has never bothered using the address book her mother gave her because she never sends snail mail anyway). In other words, Alice does her best to live a clutter-free – and paper-free – existence. She dies unexpectedly, leaving a will that names her brother Bob as executor (yes, the will is the only hard copy document she has). How does Bob unravel Alice’s life, assets and contacts? If Alice had left a list of her assets and contacts – including account names and numbers, user IDs and passwords, email addresses and phone numbers – that would be helpful. Such a list won’t necessarily solve Bob’s dilemma, however: he could be violating a service provider’s agreement and possibly some laws if he accesses Alice’s online accounts using this information – even if that’s what she would have wanted. Is there a good solution here? As mentioned, this is a rapidly developing area. And although some providers now appear to offer what amount to online “safe deposit boxes,” such accounts are not problem-free, and present their own privacy issues. Perhaps the best advice in this relatively uncharted territory is to still leave some kind of paper trail for heirs.

To sum up. The ever-increasing $5+ million basic exclusion amount means that fewer and fewer people will be affected by federal transfer taxes. While this generous exclusion may make planning for such taxes unnecessary for many people (understanding that state estate taxes may still be a concern), it does not make basic planning obsolete: it is still important to make sure that one’s affairs are in order, and that documents are current. October 7520 rate issued The IRS has issued the October 2013 applicable federal rates: the October 7520 rate is 2.4%, an increase of 0.40% (40 basis points) from September’s 7520 rate of 2.0%. October’s mid-term rates are as follows: 1.93% (annual), 1.92% (semiannual and quarterly), and 1.91% (monthly), nearly a 0.30% (30 basis points) increase from September’s mid-term rates, which were as follows: 1.66% (annual), 1.65% (semiannual and quarterly), and 1.64% (monthly).


Blanche Lark Christerson is a managing director at Deutsche Asset & Wealth Management in New York City, and can be reached at [email protected].

The opinions and analyses expressed herein are those of the author and do not necessarily reflect those of Deutsche Bank AG or any affiliate thereof (collectively, the “Bank”). Any suggestions contained herein are general, and do not take into account an individual’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. No warranty or representation, express or implied, is made by the Bank, nor does the Bank accept any liability with respect to the information and data set forth herein. The information contained herein is not intended to be, and does not constitute, legal, tax, accounting or other professional advice; it is also not intended to offer penalty protection or to promote, market or recommend any transaction or matter addressed herein. Recipients should consult their applicable professional advisors prior to acting on the information set forth herein. This material may not be reproduced without the express permission of the author. "Deutsche Bank" means Deutsche Bank AG and its affiliated companies. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or its subsidiaries. Clients are provided Deutsche Asset & Wealth Management products or services by one or more legal entities that are identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. Trust and estate and wealth planning services are provided through Deutsche Bank Trust Company, N.A., Deutsche Bank Trust Company Delaware and Deutsche Bank National Trust Company. © 2013 Deutsche Asset & Wealth Management. All rights reserved. 016412 100713

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Planning and STATE estate tax With the large federal exclusion, many people are no longer subject to federal estate tax – but does that mean they have no estate tax concerns? Not if they live in a state with an estate tax or own property there. In that case, state estate tax can be a real presence and cost significant dollars. Yet the planning that can help mitigate state (and federal) estate tax also has potential income tax consequences. Here are some considerations to keep in mind: Planning basics. A $5 million exclusion protects transfers from federal gift and estate tax, and is now “permanent.” To the extent an individual doesn’t make lifetime gifts that absorb the exclusion, the exclusion will shelter transfers at death. Inflation indexing has increased the exclusion as follows: $5.12 million (2012), $5.25 million (2013) and $5.34 million (2014). Married couples can protect twice these amounts, and when one spouse dies, “portability” ensures that the survivor can effectively “inherit” any of the deceased spouse’s unused exclusion, as long as that spouse’s executor makes a portability election.

Lifetime gifts. Lifetime gifts can help reduce a donor’s potential estate tax by reducing the donor’s estate. Donors can make “annual exclusion gifts” and give $14,000 worth of property a year to as many people as they wish ($28,000 if the donor’s spouse agrees); they can also make direct payments for tuition, medical expenses and health insurance premiums. Such gifts are “extras” and do not count against the donor’s $5.34 million exclusion. Other lifetime gifts typically reduce the exclusion, and generally remove potential appreciation from the donor’s estate. Because of the basis rules, however, any gift of appreciated property passes along built-in capital gain. Basis rules. “Basis” typically refers to what someone pays for property. But what is the basis of property when someone dies or makes a lifetime gift? Here are the rules: • Individually owned assets. In general, a decedent’s assets – such as stocks, bonds and real estate –

are “marked to market” as of date of death; this eliminates built-in capital gains, as well as built-in losses.

2014-09 10/06/14 Tax Topics



No basis step-up is allowed, however, if a decedent receives appreciated property within one year of death and transfers it back to the donor (or the donor’s spouse) – so if Mom gives highly appreciated Blackacre to ailing Dad, and Dad transfers it back to Mom when he dies three months later, Blackacre’s built-in gain does not disappear.

• Assets held in trust. If an individual creates a trust during life or is a trust beneficiary, the trust’s assets will be stepped up (or down) at the individual’s death IF the individual “owns” the trust for estate tax purposes (meaning that the trust is includible in the individual’s estate). This is the case, for example, with a “Revocable Trust,” which is fully revocable by the “grantor” who created it, or with marital trusts for the surviving spouse that defer estate tax until the surviving spouse’s death (such as a qualified terminable interest property (QTIP) trust).

• Lifetime gifts. Cash has no basis. But gifts of appreciated property carry built-in capital gains, since

the donee takes the donor’s basis (increased by any gift tax paid). Yet gifts of depreciated property have a “dual basis”: for purposes of determining loss, the donee uses the gift’s fair market value at transfer; for purposes of determining (eventual) gain, the donee uses the donor’s basis. In other words, for example, if Mom gives Son stock that is worth less than she paid for it, she loses the loss – as does Son. The same “carryover” basis rules apply to lifetime gifts in trust.

State estate tax basics. About 18 states have some kind of “death tax,” including New York, New Jersey, Connecticut and Massachusetts, as well as the District of Columbia. State exclusion amounts are not portable (except for Delaware and Hawaii), and can vary greatly, from $675,000 (New Jersey) to matching the federal exclusion (Delaware and Hawaii). In general, however, state exclusion amounts are lower than the federal exclusion, a disparity that can complicate planning, particularly for married couples who create a “credit shelter trust” when the first spouse dies. • “Credit shelter trusts.” A credit shelter trust is usually created at the first spouse’s death. It typically

provides for the surviving spouse and children, and historically has equaled the maximum amount the predeceased spouse can protect from federal estate tax (in other words, the trust is taxable in the predeceased spouse’s estate, but is shielded from estate tax by that spouse’s exclusion). At the surviving spouse’s death, the trust passes tax-free to children (either outright or in further trust) because the surviving spouse is not the estate tax “owner” of the trust; trust assets that have appreciated since the first spouse’s death therefore pass estate-tax free to heirs. Full use of the federal exclusion, however, can trigger substantial state estate tax. Consider the following examples, which involve New York, and assume Mom and Dad have made no taxable lifetime gifts.

Example 1 – full use of federal exclusion. Mom and Dad live in New York, where the exclusion amount is currently $2,062,500 (it disappears entirely if a decedent’s taxable estate exceeds it by more than 5%). Mom dies in late 2014, with an $8 million estate; Dad and their two children survive her. Mom’s will creates a credit shelter trust for Dad and the children; the balance of her estate passes outright to Dad. The trust equals the maximum amount Mom can protect from federal estate tax, or $5.34 million; yet because the trust (Mom’s taxable estate) exceeds the New York exclusion by more than 5%, it triggers over $430,000 of New York estate tax. Considerations:

• Full use of the federal exclusion means that more assets (and potential appreciation) are protected

from both federal and state estate tax at Dad’s death.


• Protecting future appreciation from federal estate tax must be weighed against the “up-front” cost: New York estate tax reduces what Dad currently receives outright; is this “haircut” worth it – especially if widowed Dad moves to a state where there is no estate tax?

• Because the credit shelter trust is not includible in Dad’s estate at his death, there is no basis step-up for trust property that has appreciated since Mom’s death; this could result in significant income tax if heirs liquidate this inheritance.

Example 2 – exclusion capped at New York exclusion. Same facts as above, except that Mom’s credit shelter formula limits the disposition to the “maximum amount that can pass free of federal AND state estate tax.” Because the trust is capped at New York’s $2,062,500 exclusion, Mom’s taxable estate passes free of both federal and New York estate tax; Dad also receives more of Mom’s $8 million estate outright. As Mom’s executor, Dad elects portability for Mom’s $3.27+ million of unused exclusion, which gets added to his own exclusion. Example 3 – outright disposition to survivor. Mom and Dad have “sweetheart” wills that leave everything to each other (estate tax won’t be payable until they’re both gone). Mom dies on April 1, 2014, and leaves her $4 million estate outright to Dad, who is also her executor. Dad files the necessary New York estate tax return for Mom’s estate; he also files a federal estate tax return to elect portability for Mom’s unused $5.34 million exclusion. Dad dies on December 31, 2014. After expenses, Dad’s total estate is $6 million, or more than his $5.34 million exclusion. Thanks to Mom’s portable exclusion, Dad’s estate is not subject to federal estate tax; it IS, however, subject to New York estate tax of $510,800. If Mom had taken advantage of her $2,062,500 New York exclusion by creating a New York credit shelter trust for Dad in that amount, Dad’s taxable New York estate would have been that much smaller, and would only have incurred $273,900 in New York estate tax – a savings of $236,900. Planning point: Because the New York exclusion is not portable (like most state exclusions), it is a “use it or lose it” proposition for married couples. If Mom doesn’t use her New York exclusion, and Dad’s estate exceeds his New York exclusion by more than 5%, neither estate will have benefited from the exclusion, thereby incurring unnecessary New York estate tax, and reducing their children’s inheritance.

• New York NON-resident with New York real property. Suppose that Mom and Dad live in Florida, which has NO state estate tax. Mom’s estate totals $8 million, including her ½ interest in the $800,000 condominium she and Dad jointly own in the Hamptons on Long Island. Mom dies in 2014. Her will creates a credit shelter trust for Dad that takes full advantage of the $5.34 million federal exclusion. The condo passes automatically to Dad by right of survivorship. To Dad’s surprise, Mom’s $400,000 interest in the condo is subject to New York estate tax, even though it is under New York’s $2,062,500 estate tax exclusion. That is because New York taxes real or tangible property that is located in New York; its estate tax calculation treats Mom as if she were a New Yorker. Mom’s taxable estate (the $5.34 million credit shelter trust for Dad) exceeds the New York exclusion by more than 5%, and therefore triggers hypothetical New York estate tax of $431,600. Since Mom’s interest in the condo represents 5% of her estate, her New York estate tax is $21,580 (5% of $431,600). Planning point: People who reside in a state without an estate tax but who own real or tangible property in a state with an estate tax can still face STATE estate tax in that other state. To potentially address this issue, it is worth considering transferring such property to a multi-member limited liability company (LLC) or family limited partnership (FLP), in the hope that the property will be treated as intangible and therefore no longer subject to state estate tax.


Where this brings us: • Many people who are no longer subject to federal estate tax may still be subject to state estate tax.

• Sheltering future appreciation from estate tax in the surviving spouse’s estate typically entails the loss of

the basis step-up – this can be costly for heirs if they intend to liquidate their inheritance; the carryover basis rules create a similar problem for lifetime gifts of appreciated property.

• If a married couple is likely to be affected by state estate tax, it is worth taking advantage of the state

exclusion at the first spouse’s death.

Here are some suggested rules of thumb for applying these points: • No federal OR state estate tax issues: make sure planning documents are in place and are current. If

lifetime gifts of appreciated property are made, use high basis property.

Planning point: Regardless of how large someone’s estate is, planning documents need to be in place that properly dispose of assets at death, and provide adequate protections for, say, minor children and wayward heirs, perhaps through trusts. In addition, beneficiary designations for assets such as IRAs should be current and still name the right people – if the IRA owner is now divorced and neglects to change the designation to his new spouse, the likelihood is that the (now) ex-spouse will take. Planning point: There are many non-tax reasons for creating trusts, including creditor and predator protection, as well as controlling the ultimate disposition of assets while still providing for a beneficiary over the beneficiary’s lifetime (this is particularly true in the case of “blended” families, where Mom, for example, wants to provide for Second Husband (H2), but still ensure that the children from her prior marriage will inherit the trust property when H2 dies).

• STATE estate tax issues only: married couples should at least take advantage of the STATE estate tax exclusion through use of a state credit shelter trust: most state exclusions are not portable, and it is a “use it or lose it” proposition.

• State AND federal estate tax issues: married couples should again take advantage of the state

exclusion, and either make an outright disposition of the remaining property to the surviving spouse or consider use of a QTIP trust for the balance: as mentioned above, the QTIP trust will defer estate tax until the surviving spouse’s death, and its inclusion in the surviving spouse’s estate will mean that appreciated trust property benefits from a basis step-up at that spouse’s death.

• Federal estate tax issues alone: much will depend on the individual’s appetite for complexity and

current willingness to part with assets (something that can be a tough sell if the individual is concerned about outliving her assets).

To sum up. While the large federal exclusion may mean that many people no longer have federal estate tax issues, they may still have state estate tax issues. The challenge is balancing the desire to mitigate estate taxes with maximizing a basis step-up for appreciated property at an individual’s death. Put differently, planning has gotten harder, not easier!


October 7520 rate The October 7520 rate remains at 2.2%, where it was in September. The October mid-term rates are: 1.85% (annual), 1.84% (semiannual and quarterly), and 1.83% (monthly). The September mid-term rates were: 1.86% (annual), 1.85% (semiannual and quarterly), and 1.84% (monthly). Blanche Lark Christerson is a managing director at Deutsche Asset & Wealth Management in New York City, and can be reached at [email protected].

The opinions and analyses expressed herein are those of the author and do not necessarily reflect those of Deutsche Bank AG or any affiliate thereof (collectively, the “Bank”). Any suggestions contained herein are general, and do not take into account an individual’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. No warranty or representation, express or implied, is made by the Bank, nor does the Bank accept any liability with respect to the information and data set forth herein. The information contained herein is not intended to be, and does not constitute, legal, tax, accounting or other professional advice; it is also not intended to offer penalty protection or to promote, market or recommend any transaction or matter addressed herein. Recipients should consult their applicable professional advisors prior to acting on the information set forth herein. This material may not be reproduced without the express permission of the author. "Deutsche Bank" means Deutsche Bank AG and its affiliated companies. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or its subsidiaries. Clients are provided Deutsche Asset & Wealth Management products or services by one or more legal entities that are identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. Trust and estate and wealth planning services are provided through Deutsche Bank Trust Company, N.A., Deutsche Bank Trust Company Delaware and Deutsche Bank National Trust Company. © 2014 Deutsche Asset & Wealth Management. All rights reserved. 019504 100614


IRS releases 2015 inflation-adjusted numbers Last month, the IRS released its 2015 inflation-adjusted numbers (see Revenue Procedure 2014-61 and IR-2014-99). Here is a selected run-down of these numbers, along with other points to keep in mind: Income tax – top brackets. The top two rate brackets for individuals are 35% and 39.6%, which will apply to taxable income in excess of the following amounts: 35% 39.6% Married filing jointly, surviving spouses $411,500 $464,850 Heads of households $411,500 $439,000 Single taxpayers $411,500 $413,200 Married filing separately $205,750 $232,425 The income ranges for the 10%, 15%, 28% and 33% rate brackets all differ (and yes, there really is only a $1,700 difference between the 35% and 39.6% rate for single taxpayers). Trusts and estates have extremely compressed rate brackets, and are not eligible for the 35% rate; they hit the 33% and 39.6% rates if their taxable income exceeds the following amounts: 33%: $ 9,050 39.6%: $12,300 “Kiddie tax.” The “kiddie tax” applies to children under age 18 and, as of 2008, to children who don’t earn more than half of their own support and are age 18 or full-time students, ages 19-23. This means that if these children have more than $2,100 of unearned income (up from $2000 in 2014), it will effectively be

2014-11 11/24/14 Tax Topics



taxed at their parent’s top rate. (“Unearned income” refers to items such as interest income, dividends and capital gains.) Note that if parents elect to report their child’s unearned income on their own income tax return, that income will factor into the parents’ calculation for the 3.8% tax on net investment income (see below). AMT Exemption. The alternative minimum tax (AMT) is a parallel tax system that originally targeted a relative handful of wealthy taxpayers. It now reaches deep into the middle class, and affects over four million taxpayers. Thanks to legislation passed at the beginning of 2013, the AMT exemption is now permanently indexed for inflation (prior to that, Congress continually “patched” the exemption, usually annually, and typically at the 11th hour.) The 2015 AMT exemption amounts are as follows: Married filing jointly: $83,400 Heads of households & single taxpayers: $53,600 Married filing separately: $41,700 Estates and trusts: $23,800 AMT brackets. The 26% AMT rate applies to alternative minimum taxable income (AMTI) up to the threshold amounts below; the 28% rate applies to AMTI above these amounts: Married filing jointly, single taxpayers, estates & trusts: $185,400 Married filing separately: $ 92,700 Standard deduction. The standard deduction reduces a taxpayer’s taxable income, and is used when a taxpayer does not “itemize” deductions for things such as state and local income tax payments, charitable contributions and mortgage interest. As with many itemized deductions, the standard deduction does not count against the AMT. The 2015 standard deduction is as follows: Married filing jointly & surviving spouses $12,600 Heads of households $ 9,250 Single taxpayers & married filing separately $ 6,300 Personal exemption and phase-out. Taxpayers get a personal exemption for themselves and for each of their “dependents” (usually, their children). Regardless of filing status, the 2015 personal exemption is $4,000. Yet taxpayers whose adjusted gross income (AGI) exceeds a threshold amount will see those exemptions phased out – and disappear completely – if they have “too much” AGI (the phase-out is 2% for every $2500 of AGI over the threshold amount). PEP (the personal exemption phase-out) will apply as follows in 2015: AGI Threshold: AGI: Exemptions Phase-out Begins Fully Eliminated Married filing jointly, surviving spouses $309,900 $432,400 Heads of households $284,050 $406,550 Single taxpayers $258,250 $380,750 Married filing separately $154,950 $216,200


“Pease limitation.” Taxpayers with “too much” AGI can see most of their itemized deductions reduced by the lesser of 3% of AGI over the PEP threshold amounts listed above or 80% of those itemized deductions. This limitation applies to all itemized deductions except those for medical expenses, investment interest, and casualty, theft and wagering losses; in other words, “Pease deductions,” such as those for state and local taxes, mortgage interest and charitable contributions may get a “haircut.” Note, however, that unless a taxpayer’s AGI is exponentially higher than her Pease deductions, that haircut will likely be limited to 3%. Contributions to retirement accounts in 2015: • IRAs. The contribution limit for IRAs will still be $5,500. Taxpayers who are at least 50 can make

“catch-up” contributions of $1,000 (this number is frozen and is not indexed for inflation).

• Roth IRAs. Roth IRAs are funded with after-tax dollars, and have the same contribution limits as the IRAs mentioned above. Taxpayers can’t contribute to a Roth, however, if they have “too much” MAGI (modified adjusted gross income, which is generally the same as “adjusted gross income” (AGI)). In 2015, contributions will be phased-out at the following income levels:

Married filing jointly: $183,000 to $193,000 Heads of households & single taxpayers: $116,000 to $131,000 Married filing separately (not indexed): $ 0 to $ 10,000 Note: as of 2010, any taxpayer – regardless of income level and filing status – can convert a “traditional” IRA into a Roth, a move that may trigger significant current income tax.

• 401(k) contributions and other elective deferrals. The contribution limit for deferred plans such as 401(k)s increases to $18,000 (from $17,500), and catch-up contributions for taxpayers who are at least 50 increase to $6,000 (from $5,500).

Estate and gift taxes in 2015: • Basic exclusion amount. The basic exclusion amount protects transfers from gift and estate taxes,

and will rise to $5.43 million from $5.34 million in 2014 (a $90,000 increase); this means that a married couple can protect a total of $10.86 million from gift and estate taxes.

• Generation-skipping transfer tax (GST) exemption. The GST exemption protects transfers to people such as grandchildren from GST, an additional transfer tax. Because the GST exemption equals the basic exclusion amount, it too will rise to $5.43 million in 2015. This means that with proper planning, a married couple will be able to protect $10.86 million from GST in 2015.

• Annual exclusion gifts. These gifts remain at $14,000 per donee, or $28,000 if the taxpayer’s spouse

joins in the gift. (Such gifts do not erode the basic exclusion amount.)

• Annual exclusion gifts to non-citizen spouses. These gifts rise to $147,000 (up from $145,000).

Other things to remember for the waning days of 2014: • Charitable IRA rollovers. Congress has not yet acted on an “extenders” bill to continue various

temporary tax benefits that expired at the end of 2013, including charitable IRA rollovers. As discussed


in the 10/23/14 edition of Tax Topics, this provision has allowed taxpayers who are at least 70½ to give up to $100,000 from their IRA directly to a public charity, provided that certain requirements are met. Eligible taxpayers who have not yet taken their “required minimum distribution” (RMD) for this year and wish to make a charitable gift in this amount could still consider giving their RMD to directly to charity: if Congress does not renew charitable IRA rollovers, this “direct” contribution nevertheless would be eligible for a charitable deduction, just like any other charitable contribution.

• Being “current” with tax payments. To avoid interest and penalties on underpayments of income tax, taxpayers must be current with their tax obligations. This means that taxpayers must either pay in 90% of their current year’s liability (through a combination of withholding and quarterly estimated tax payments) OR avail themselves of the so-called “safe harbor”: paying in 100% of their prior year’s income tax liability (or 110% if their prior year adjusted gross income (AGI) exceeded $150,000 (or $75,000 if they are married and file their taxes separately)). High-income taxpayers have seen their taxes go up since 2013 because of the return of the top income tax rate of 39.6%, the 20% rate for most long-term capital gains and qualified dividends (this rate applies to taxpayers in the 39.6% bracket), and PEP and Pease (see above). As of 2013, there is also the 3.8% tax on “net investment income” (such as interest income, dividends, capital gains and royalties), as well as the additional 0.90% (90 basis points) Medicare tax on wage income in excess of $250,000 (married couples filing jointly), $200,000 (single taxpayers) or $125,000 (married couples filing separately). Although employers must withhold the additional 0.90% Medicare tax once an employee’s compensation exceeds $200,000, regardless of the employee’s marital status, there is no automatic withholding for the 3.8% tax, which can take people by surprise: it can apply if the taxpayer’s “modified adjusted gross income” (AGI plus otherwise excluded foreign income) exceeds the same $250,000/$200,000/$125,000 threshold amounts that apply to the 0.90% Medicare tax – thresholds that are not indexed for inflation. High-income taxpayers therefore may want to review where they currently stand with respect to their projected 2014 tax obligations. Same-sex married couples now have one tax filing season behind them. Recall that on June 26, 2013, the Supreme Court decided Windsor, and invalidated Section 3 of the Defense of Marriage Act, which defined marriage as only between a man and a woman (see the 08/30/13 Tax Topics for more on Windsor). As of September 16, 2013, same-sex married couples are treated as married for all federal tax purposes, regardless of where they live. In other words, if the couple lives in a state that doesn’t recognize their marriage, they probably still file as unmarried individuals for state purposes, even though they file as married – either jointly or separately – for federal purposes. The “marriage bonus” may reduce the couple’s federal taxes if the spouses have a significant income disparity, but the “marriage penalty” could significantly increase the couple’s taxes if they have similar amounts of income; in addition, the couple is more likely to be caught by the 3.8% net investment tax. (If same-sex spouses were still treated as legal strangers, they could have household income of $400,000 ($200,000 each) and not be subject to the net investment income tax; as a federally recognized married couple, however, they could be subject to the 3.8% tax at $250,000 of household income – see above.)

• Avoid the wash sale rule. The end of the year is often when taxpayers look carefully at their

investment portfolios and “harvest losses” to offset realized gains. So if Mom, for example, is selling stock or securities that are worth less than her “adjusted basis” (generally, what she paid for the asset), she’ll be caught by the wash sale rule if she repurchases those same assets within 30 days before or after the sale (even if she repurchases them in her IRA). If the wash sale rule applies, Mom can’t take


the current loss – it’s added to the cost basis of the repurchased stock or security and is thereby deferred (there’s no problem if Mom is merely selling winners and “harvesting gains”).

Things to remember for year-end gifts: • Gifts to individuals. Time is running out for 2014 annual exclusion gifts of $14,000 to family and

friends ($28,000 for a married donor whose spouse agrees to the gift). Cash gifts may be given up to 11:59 p.m. on December 31st and still count as a 2014 gift. Checks, however, must be cashed before January 1, 2015 to count as 2014 gifts (p.s.: the generous donor must also stay alive until the bank makes good on the check). In addition to annual exclusion gifts, generous donors can make direct payments for tuition, medical expenses and health insurance premiums – none of which count against the donor’s $5.34 million basic exclusion amount.

• Gifts to charities. For last-minute gifts to charities to qualify as a 2014 deduction, the check must be sent before January 1, 2015 (it need not be cashed before then, however).

Last chance for late “portability” filing “Portability” took effect in 2011. It refers to the ability of a surviving spouse to effectively “inherit” the predeceased spouse’s unused exclusion amount, which protects transfers from gift and estate tax (see the “basic exclusion amount” above). To elect portability, a decedent’s executor must timely file an estate tax return for the decedent’s estate, even if the estate is under the filing threshold ($5.34 million in 2014). (“Timely” means that the return is filed within nine months of the decedent’s death, unless the return is on a six-month extension.) Once the executor elects portability, any leftover exclusion from the predeceased spouse carries over to the surviving spouse, who then adds it to her own exclusion amount. To illustrate, suppose that Dad dies in 2014. He leaves his entire $3,000,000 estate to Mom, who’s a U.S. citizen. Thanks to the marital deduction, Dad’s estate passes estate-tax free, yet his $5.34 million exclusion is unused. To salvage Dad’s exclusion and claim portability, Mom (Dad’s executor) files a timely estate tax return for his estate. Result: she adds Dad’s $5.34 million exclusion to her own, and can now protect over $10 million from gift or estate tax. This scenario is how portability is supposed to work, but married couples with smaller estates might not have heard of it. Similarly, same-sex married couples couldn’t even claim portability until September 16, 2013, when they commenced being treated as married for all federal tax purposes. To address these two situations, the IRS issued Rev. Proc. 2014-18 on January 27, 2014. In a nutshell, this revenue procedure gives the executor of the predeceased spouse an opportunity to elect portability by filing an estate tax return no later than December 31, 2014 (yes, this permits an “untimely” return). Certain requirements must be satisfied, including the following: 1) the predeceased spouse was a U.S. citizen or resident who died in 2011, 2012 or 2013, and had a surviving spouse; and 2) the predeceased spouse’s estate was under the filing threshold for the year of death and NO prior estate return has been filed for the predeceased spouse’s estate. For those wishing to take advantage of this provision, December 31st will be here soon.


December 7520 rate The IRS has issued the December 2014 applicable federal rates: the December 7520 rate has dropped 0.20% (20 basis points) to 2.0%, from November’s 2.2% 7520 rate. The December mid-term rates are: 1.72% (annual), 1.71% (semiannual and quarterly), and 1.70% (monthly). The November mid-term rates were: 1.90% (annual), 1.89% (semiannual and quarterly), and 1.88% (monthly). Blanche Lark Christerson is a managing director at Deutsche Asset & Wealth Management in New York City, and can be reached at [email protected].

The opinions and analyses expressed herein are those of the author and do not necessarily reflect those of Deutsche Bank AG or any affiliate thereof (collectively, the “Bank”). Any suggestions contained herein are general, and do not take into account an individual’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. No warranty or representation, express or implied, is made by the Bank, nor does the Bank accept any liability with respect to the information and data set forth herein. The information contained herein is not intended to be, and does not constitute, legal, tax, accounting or other professional advice; it is also not intended to offer penalty protection or to promote, market or recommend any transaction or matter addressed herein. Recipients should consult their applicable professional advisors prior to acting on the information set forth herein. This material may not be reproduced without the express permission of the author. "Deutsche Bank" means Deutsche Bank AG and its affiliated companies. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or its subsidiaries. Clients are provided Deutsche Asset & Wealth Management products or services by one or more legal entities that are identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. Trust and estate and wealth planning services are provided through Deutsche Bank Trust Company, N.A., Deutsche Bank Trust Company Delaware and Deutsche Bank National Trust Company. © 2014 Deutsche Asset & Wealth Management. All rights reserved. 019967.112414


71414124.1

Estate Planning for Remarrieds, Unmarrieds

And Same Sex Couples

Presented by:

Missia H. VaselaneyTaft Stettinius & Hollister LLP200 Public Square, Suite 3500Cleveland, Ohio 44114-2302Direct Dial: (216) 706-3956

Fax: (216) [email protected]

[email protected]

216.706.3956 Page 171414124.1

Estate Planning for Remarrieds, Unmarrieds

And Same Sex Couples*

I. Introduction

There are many similarities and significant differences in the planning for “first married”

couples and the planning for remarried couples, unmarried couples and same sex couples

(hereafter sometimes referred to as “non-traditional” couples). Usually planners tend to

focus on estate planning for the traditional couple and family. When non-traditional

couples seek advice, many professionals approach the planning for these couples and

families from the perspective of their experience with traditional couples and families.

Treating non-traditional couples the same as first married couples (“the Ozzie and Harriet

couple”) may produce an estate plan that does not address the non-traditional couples

unique issues and may ultimately result in missed tax planning opportunities and

contention among family members and heirs. With the changing demographics of our

society non-traditional couples may soon far outnumber traditional couples. For this

reason estate planners need to become much more familiar with the planning

opportunities and pitfalls that exist regarding planning for non-traditional couples.

Finally, with the uncertainty regarding the continued existence of the estate tax, the non-

tax planning required for these non-traditional couples may produce a practice

development opportunity.

* The following presentation assumes estate tax exists.

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II. Comparing and Contrasting Estate Planning for Traditional and Non-

Traditional Couples

A. Generally. Most couples, whether traditional or non-traditional, have similar

basic estate planning goals. An individual first and foremost will want his or her

dispositive wishes fulfilled. Secondary goals will generally include reducing estate taxes

and avoiding probate. Estate planners, especially in planning for non-traditional couples,

must keep these goals, particularly the satisfaction of the client’s dispositive wishes,

upper most in his or her mind. Estate planners sometimes tend to let the tax issues drive

an estate plan to the detriment of the clients other goals, the achievement of which may in

fact be more important than reducing estate taxes.

B. Traditional and Remarried Couples vs. Other Non-Traditional Couples.

Traditional couples and remarried couples have distinct advantages over other couples.

The institution of marriage has always been highly regarded by American society. In

1888, in the case of Maynard v. Hill, 125 U.S. 190, 203 (1888), Justice Field defined

marriage as “creating the most important relationship in life, as having more to do with

the morals and civilization of people than any other institution”. Due to society’s

reverence for the institution of marriage, the law confers many rights and benefits on

married couples that are unavailable to other couples (other than the Federal Income Tax

“marriage penalty”). Rarely does the law distinguish between first married couples and

remarried couples in bestowing these rights and benefits.

1. Rights and Benefits.

a) Marital property rights (community, dower etc.)

b) Preference in intestate succession.

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216.706.3956 Page 371414124.1

c) A spouse has priority regarding appointment as other spouse’s

guardian in the case of incompetency.

d) Spouse has priority with regard to the appointment of an Administrator

of spouse’s estate.

e) Court supervision of property rights on the termination of the

relationship.

f) Federal (and sometimes state) estate tax unlimited marital deduction

and gift tax exemptions.

g) Spouses may file joint income tax returns.

h) Corporate benefits such as family health insurance coverage and

survivor pension benefits are available for married couples, but are rarely

allowed to non-married couples. However, some municipalities and some

corporations have amended their plans to include same sex or Domestic

Partners. (Some states allow same sex and opposite-sex couples who meet

certain criteria to register as Domestic Partners.)

i) Social Security survivor benefits.

j) Stepparent adoption allowed.

k) Communications between spouses are protected by the spousal

communication privilege.

l) A spouse can sue for loss of consortium, emotional distress and

wrongful death for injuries to the other spouse.

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C. What Marriages are Recognized

1. States. The legislature of each state has the right to prescribe what constitutes

a valid marriage and thereby who will marry. Vermont is currently the only state

to recognize any form of same-sex union, however the arrangement does not rise

to the level to be considered a marriage under federal law. Massachusetts appears

poised, as of the writing of this outline, to recognize full marriage for same-sex

couples. Other subdivisions of states have embarked in civil disobedience of state

laws prohibiting issuance of marriage licenses to same-sex couples, and the courts

will undoubtedly be asked to sort out the consequences of such purported

marriages.

2. Common Law Marriages. State legislatures also have the power to decide if

a “Common Law Marriage” should be recognized as a legal marriage. Mere

cohabitation by an opposite-sex couple does not constitute a common law

marriage. Generally, to be recognized as a common law marriage, in a state that

recognizes common law marriages, the couple must have (1) manifested an intent

to be husband and wife (own joint property, filed a joint income tax return); and

(2) held themselves out to the public as husband and wife. Due to the increased

cohabitation by unmarried opposite-sex couples, several states have changed the

existing statutes recognizing common law marriages. Most statutes “grandfather”

common law marriages that existed on the date of the statutory change, but deny

recognition to relationships that would have qualified for common law marriage

treatment, where such qualifications were met, after that effective date of the

change to the law.

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3. Conflicts of Laws Issue. First Restatement (Second) of Conflict of Law, 283

(1988), states that “a marriage is valid everywhere if the requirements of the

marriage laws of the state where the marriage takes place are met, except in rare

instances.” These rare instances include situations where recognition of the

marriage would go against strong public policy.

4. The Defense of Marriage Act (“DOMA”). In 1996, in response to several

attempts by gay and lesbian couples to challenge existing laws, in several

different states, which did not clearly prohibit same sex marriages, the DOMA

became law. The Act denies federal recognition of same-sex marriages leaving

the states with the option of refusing or recognizing these marriages within their

borders should they become legal in other states. A majority of the states swiftly

passed laws that refused to recognize same-sex marriages. It appears now that

Vermont and Massachusetts recognize “civil unions” and same-sex marriages,

respectively; a “full, faith and credit” constitutional challenge may be brought.

The challenge would exist if a same-sex couple who were residents of Vermont

and/or Massachusetts, married and later relocated to another state, which refused

to recognize such marriage as valid.

5. IRS Position. The current position of the IRS is that it will recognize a

relationship as a valid marriage, if the applicable state does so. The IRS appears

to make no distinction between same-sex or opposite-sex marriages.

D. Unmarried Opposite-Sex Couples and Same-Sex Couples. Many same-sex

couples feel the disadvantages they suffer under the law are the direct result of their

same-sex status. However, the lack of rights and privileges is not derived from their

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216.706.3956 Page 671414124.1

status as a same-sex couple; so much as it is from the fact that they are unmarried. As

stated above, the difference is that unmarried opposite-sex couples have the choice of

whether or not to marry.

III. Estate Planning for Remarried Couples

A. Generally. For purposes of this discussion, a remarried couple is one where at

least one of the partners has at least one child prior to the marriage, whose natural parent

is not the other partner. This classification of remarried couples may include couples,

where neither couple has actually ever been married and may not include remarried

couples where neither party has had a child or children in his or her previous marriage.

The following discussion of planning for remarried couples may also apply to marriages

where both partners have no children and desire to have their respective assets left to

their respective families. (The following discussion assumes no antenuptual agreement

has been executed.)

B. Guardianship. A spouse has priority if an individual becomes incompetent. This

may not be this individual’s desire, especially in a short-term second marriage. In this

circumstance the client should consider having a funded living trust supplemented by a

power of attorney naming the party the client wants to handle his or her affairs should he

or she become incompetent. In some jurisdictions, a power of attorney alone may avoid a

guardianship, however a trust may provide more structure especially in the circumstance

of a non-traditional couple.

C. Intestate Succession. One statistic has placed the figure of people who die

without even a simple will at 75%. For this reason, states had to enact laws which govern

the distribution of these individuals property. Intestate succession statutes vary from

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state to state, but usually they provide for a pattern of distribution similar to the

following:

1. A married individual’s property will pass 100% to the surviving spouse if

there are no children.

2. If a married individual has a child or children. The spouse will receive a

percentage of the estate while the children will share the balance. (Some states

have changed their statutes to distribute 100% to the surviving spouse, where the

surviving spouse is the natural parent of all the decedent’s children.) A typical

distribution scheme in this situation is that after the spousal allowance, that the

balance of the net estate, if there is only one child, is divide 50/50 between the

spouse and child. If there is more than one child, the net estate is divided 1/3 to

the spouse and 2/3 to be divided among all children.

D. Administrator. When a married individual dies without a will (or a will where a

named executor is unable to serve), the surviving spouse generally has first priority to

serve as Administrator. (An executor is the individual named by the decedent; an

administrator handles the same task but is chosen by the court.) This may not be the

decedents intent, especially where 2/3 of the assets are for the benefit of the children.

Also, if the decedent has a family business, and has not done other planning, the spouse

may end up controlling such business as Administrator of the estate.

E. Simple Wills. Simple wills in a remarriage are the “he who lives longest wins”

plan. Many remarried couples try to use a first marriage distribution plan. They execute

simple wills which leave everything to each other and then to their joint children. The

flaw in this plan is that there is usually nothing to prevent the surviving spouse from

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executing a new will which leaves everything to his or her children only. Another

frequently seen defective plan involves each spouse executing a simple will, which leaves

everything to his or her respective children. In this circumstance, it is not uncommon for

the surviving spouse to elect against the estate of the first spouse to die. The spousal

election is usually equal to 1/3 of the probate estate. The decedent may have designated

the surviving spouse as the beneficiary of certain non-probate assets, while intending that

the balance of the assets pass to the children. The spouse would receive the non-probate

assets and the spousal election.

F. Probate Avoidance Techniques.

1. Distinction Between Assets Subject to Probate and Assets Includible in

Taxable Estate. An asset may be included in the decedent's estate for death tax

purposes, but not be includible in the probate estate. For example, the decedent's

assets held in joint tenancy, in a bank account, or in a funded revocable living

trust will be included in the decedent's estate for tax purposes, but are not subject

to probate. Moreover, if the decedent retained any of the incidents of ownership

in a life insurance policy on the decedent's life, or transferred such ownership

within three years of death, the proceeds will be includible in the decedent's estate

for tax purposes (see I.R.C. §§2035 and 2042), but if payable to a beneficiary

other than the decedent's estate, the proceeds will not be subject to probate.

Assets which have been gifted by the decedent in such a way that the decedent

retained a prohibited right or power (see I.R.C. §§2036 through 2038) will also be

included in the taxable estate, but not in the probate estate. It is important to keep

in mind that avoiding probate does not necessarily avoid estate taxes. It is also

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important to keep in mind that these techniques should not be utilized without

thorough evaluation, especially by non-traditional couples, as they may produce

unintended results.

2. Methods of Avoiding Probate. There are a number of methods for planning

an estate that will avoid the probate process and the disadvantages regularly

associated with such process, without causing any great risk that the asset or

proceeds will not be distributed as the decedent desired. The remainder of this

section reviews those important alternatives.

a) Joint Ownership with Rights of Survivorship. Ownership of real and

personal property in joint tenancy is the most common method of avoiding

probate. Joint tenancy is an estate in real or personal property held by two

or more persons jointly with rights to share in its enjoyment. Upon the

death of a joint tenant, the entire estate passes immediately to the

surviving joint tenant or tenants. The survivor(s) automatically own(s) the

entire asset without the need for probate or any other form of court

intervention. The death certificate of the deceased joint owner is all that is

necessary to establish the title of the surviving joint tenant(s). Often there

is a presumption against the creation of a joint tenancy in real or personal

property other than bank accounts, unless the legal instrument transferring

the property states that the property is conveyed or transferred in joint

tenancy. The safest way to establish joint tenancy is to state clearly on the

deed, assignment, or other document creating title, "in joint tenancy," "as

joint tenants," or "as joint tenants with right of survivorship and not as

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tenants in common." The absence of such language will ordinarily create

a tenancy in common, which does not have the survivorship feature. A

joint tenant's share of the estate may be conveyed by a joint tenant at any

time, thereby terminating the joint tenancy. If the joint tenants cannot

agree on how to divide the property, either may bring a partition suit and

ask the court to divide the property. No one can destroy or affect the joint

tenancy or prevent the entire interest owned by the deceased joint tenant

from passing to the survivor.

(1) Advantages and Disadvantages of Joint Tenancy. The

following summarizes the advantages and disadvantages of joint

tenancies:

(I) Advantages

(i) Joint tenancies are easily understood.

(ii) Joint tenancy can be used to avoid probate,

although joint tenancy property is required to be

included in the estate tax return.

(iii)Joint tenancy property is often free from the

claims of creditors of the deceased joint tenant if no

prior lien was attached.

(II) Disadvantages

(i) Joint tenancy property cannot be passed by the

will of the joint tenant dying first; instead, the

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property passes to, and is subject to disposition by,

the surviving tenant.

(ii) The estate may be deprived of liquid funds

necessary to pay death costs, claims, and taxes.

(iii) Joint tenancy property may be caught up in

discord between spouses because of the inability to

reach agreement on management of the property

and the right of noncontributing spouse to acquire

one-half of the property through partition or

severance.

(iv)If the joint tenancy property is subject to a

mortgage, the property will pass to the surviving

joint tenant, but the estate may be required to pay

the mortgage out of the residue, thus frustrating the

decedent's family giving plan.

(v) Creditors of either joint tenant may attach the

person's interest in the property during life.

(vi)There may be unfavorable gift and estate tax

consequences depending on the specific facts of

each case.

(2) Example. An example of a misplaced joint savings account

was created by a widowed mother of three. She transferred her

life's savings into a joint account with one nearby daughter for

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convenience. Upon the widow’s death, her one daughter received

the entire account. It did not matter that the widow’s will provided

all three children were to share the money equally.

(3) Tax Issues and Traps of Joint Ownership with Rights of

Survivorship. There are many tax issues and traps for the unwary

that develop from joint ownership with rights of survivorship,

including the following:

(I) The creation of a joint tenancy between spouses

does not create a taxable gift because of the unlimited

marital deduction.

(II) The creation of a joint tenancy with a non-spouse

creates a taxable gift when the contributions are unequal.

When a donor conveys to himself or herself and a donee as

joint tenants and either party has the right to sever the

interest, there is a gift to the donee in the amount of one-

half of the value of the property. The gift usually occurs

when the non-contributor claims or takes a portion of the

joint interest.

(III) In the case of the property held in joint tenancy

between spouses, only one-half of the value is included in a

deceased joint tenant's estate. The deceased's one-half

interest acquires a stepped-up basis. Compare this with

community property states where both halves acquired

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stepped-up basis. This adjustment to the surviving spouse's

basis is a major incentive for classifying property as

community property, and creates complex tax issues when

moving from a community property state.

(IV) In the case of property held in joint tenancy with a

non-spouse, termination may trigger gift tax consequences.

The entire interest of the property is included in the estate

of the joint tenant who dies first, unless the estate is able to

prove the amount of consideration furnished by the

survivor. The contribution of the survivor must not be

traceable to the decedent. There is an exception where the

property was acquired by the decedent through inheritance.

(V) Use of joint tenancy may frustrate other tax

planning. For example, use of joint tenancy can result in

over-qualification of the marital deduction, resulting in

property being taxed a second time.

b) Insurance, Savings, and Retirement Plans and Annuities. Insurance

policies, annuity contracts, profit-sharing and pension plan accounts,

Keoghs, and individual retirement accounts (IRAs) are just some examples

of assets that may be passed by contract, agreement, or beneficiary

designation and avoid probate. Contingent beneficiaries should be named

in the event the primary beneficiary named does not survive to receive the

benefit. Mistakes and neglect in properly designating and changing

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beneficiaries result in many problems in estate administration. Many

beneficiary designations are made and forgotten in the files of insurance

companies and banks. Later marriages, divorce, births, deaths, financial

needs, and estate planning goals are not taken into consideration. Imagine

the surprise when a former spouse turns up as the beneficiary after a bitter

divorce (In many states divorce acts to treat the former spouse as

predeceased in any existing will or trust agreement, however this does not

usually remove the former spouse as a beneficiary on non-probate assets).

or an after-born child is forgotten. Beneficiary designations should always

be signed and reviewed when any family or planning changes occur. If no

beneficiary designation exists, most policies, plans, or accounts have an

automatic designation. If your estate is large enough to be subject to

federal estate taxes, coordinate the designation with tax planning.

c) Retirement Plan Distributions. Since December 31, 1984, there is no

estate tax exclusion for qualified profit-sharing, pension, Keogh, IRA, and

other employee benefit plans. This means that they may be subject to both

income tax and estate tax. The income tax rules governing these plans are

very complex and vary depending on design of the plan, source of

contributions, and conditions at death. In addition, tax laws, rules, and

regulations are changing constantly. In the event of the death of an

individual who has money remaining in a retirement account, expert tax

advice should be obtained before any distributions are made. Written

retirement plan beneficiary designations are important estate planning

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documents to assure the eventual flow of assets to pre-selected

beneficiaries with the minimum amount of tax impact. Often the

retirement plan distributions become the estate's largest asset.

d) Payable on Death Accounts. In most states an individual may enter

into a contract with a bank or other institution authorized to receive money

whereby the proceeds of the owner's account may be payable to another

person upon the owner's death, notwithstanding the provisions of his or

her will. Such accounts as "payable on death" or "payable on the death of"

may be abbreviated to "P.O.D." During the depositor's lifetime, he or she

has the sole control of the account and may withdraw it or change the

beneficiary at will. From a tax and estate planning point of view, this

form of holding title is similar to a bank account in joint tenancy created

with one tenant's separate funds. The outstanding difference is that the

non-contributing party (and his or her creditors) has no right of withdrawal

during the depositor's lifetime. If the P.O.D. trust is not revoked during the

depositor's lifetime, the beneficiary will receive the proceeds on the death

of the depositor.

e) Transfer-on-Death Deed. Some states have enacted legislation to

provide for a transfer-on-death deed, adding to the arsenal of methods to

avoid probate administration of estates, which include payable-on-death

bank accounts, joint ownership of personal and real property with rights of

survivorship, transfer on death designation for securities, and beneficiary

designation for life insurance and qualified retirement plans. The most

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important advantage of a transfer-on-death (TOD) deed is that the

beneficiary or beneficiaries have no interest in the property during the

lifetime of the owner of the interest. The interest of the named transfer-

on-death beneficiary is not subject to attachment by such beneficiary's

creditors, is not transferable through the estate of the named transfer-on-

death beneficiary if such beneficiary precedes the owner's death, and the

spouse of the named transfer-on-death beneficiary has no interest in the

property during the life of the owner of the interest. The owners of the

interest may change or revoke the deed, and may sell or do anything with

the property during the owner's life without the consent or signature of the

designated transfer-on-death beneficiary. To change the designated

transfer-on-death beneficiary or add a new beneficiary, the owner need

only execute another deed in which a new or no transfer-on-death

beneficiary is named. Generally, the owner of real property may create a

transfer-on-death interest in either the entire or any separate interest in the

property. Such interest may be designated to one or more individuals

including the owner (grantor). Finally, such deed need not be supported

by consideration and need not be delivered to the transfer-on-death

beneficiary to be effective.

G. Trusts

1. QTIP Trusts. Remarried couples have the perfect tool, as opposed to

other non-traditional couples, for planning their estates. A Qualified Terminal

Interest Property Trust (“QTIP”) allows an individual to provide for his or her

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surviving spouse, while still controlling the ultimate distribution of the assets

contained in the trust. A QTIP also qualifies for the unlimited marital deduction,

if requirements are met. (A technical discussion of these requirements is beyond

the scope of this outline. Please see Tom Austin’s outline from the 2001

conference for a detailed discussion.) The basic requirements are that the

surviving spouse must be the only beneficiary of the trust during his or her

lifetime and the spouse must receive at least all the income from the trust for life.

In most states income is defined as interest and dividends but not capital gains.

Due to the manipulation of income that may be possible, the choice of Trustee

should be carefully considered. One option is to have the surviving spouse and

one of the decedents children act as Co-Trustees. The client may wish to structure

the trust as an “income only” trust, particularly if the surviving spouse is likely to

enter a nursing home. Placing all assets in trust for the surviving spouse, where

the trust allows for principal distributions for the surviving spouse’s health,

maintenance and support, may deprive the children of any inheritance.

2. Lifetime QTIP. QTIP Trusts also can be used during life to equalize

assets, in order not to waste a “poorer spouse’s” credit.

3. A/B QTIP Trust. Generally, a client’s estate plan is structured as an A/B

trust, so as to take advantage of both the Unified Credit Equivalent (“the credit”)

and the unlimited marital deduction. In the case of a remarried couple the A Trust

should be structured as a QTIP. Many times it turns out the A Trust has been

structured as an Outright Marital Trust or a Power of Appointment Trust, thereby

giving the surviving spouse complete control. This mistake is usually made by

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either an inexperienced estate planner or an estate planner who is only focusing

on obtaining tax saving and not on the family situation. In structuring the A/B

Trust, consideration should be given to either distributing the B Trust to the

decedent’s children or holding it for the children’s benefit, even if the spouse

survives. The needs of the surviving spouse should be considered, but so should

the age of the spouse in relation to the ages of the children. The client may wish

to only give a portion of the B Trust to the children, or on the other hand,

especially in a larger estate, the client may not want to maximize the marital

deduction. With the changing credit amount, careful drafting is necessary to

avoid unintended results.

4. Life Insurance and Individual Retirement Accounts. In some situations

so as not to complicate the drafting of the client’s trust agreement, Life insurance

and/or Individual Retirement Accounts (IRA’s) can be left directly to the children

or to a trust for their benefit. Careful consideration should be given to both the

income and estate tax consequence of such an arrangement. If the client has a

taxable estate, the life insurance should be owned by an irrevocable trust to

minimize and/or eliminate the transfer tax consequence. An Irrevocable Life

Insurance Trust can leave a much greater sum of money to the children, while still

maximizing the marital deduction. Leaving an IRA directly to the children

generally will result in continued income tax deferral, and may attain income tax

savings, if the children are in lower brackets. (Qualified Plans at many companies

will make only deferred payments over the life of the surviving spouse, therefore

naming the children as beneficiaries of such plans may result in income tax

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acceleration. In addition, in order to name children as beneficiaries of such a plan

requires the spouse’s consent.) One benefit of designating the children as

beneficiaries of the client’s IRA or as beneficiaries of the client’s life insurance

(not owned by an Irrevocable Life Insurance Trust), is that the client can change

the beneficiary without the expense of redrafting the estate planning documents.

However, the client should keep the planner informed to avoid any unintended

results.

5. “Anti-hovering” Money. Whether a client leaves a portion or the entire B

Trust to his or her children, or makes them the beneficiaries of life insurance or

other non-probate assets, it is a good idea to leave something to the children, even

if the spouse survives. This gesture may minimize potential conflict between the

spouse and the children. It may keep the children from hovering, waiting for the

spouse to die to inherit what they feel is rightfully theirs.

6. Funded Trust. In some states it is possible to disinherit a spouse.

Normally the statutory spousal election only applies to probate assets. Anything

that passes outside of probate is not subject to that election. Making sure that all

assets avoid probate will, in effect, disinherit a spouse. It may be difficult to

transfer real estate to a trust without the knowledge of the other spouse, even if

the real estate is only held in the trust grantor’s name due to dower rights and

community property rights which exist in some states. A fully funded trust may

be an alternative to an antenuptual (only for death not divorce) in these states,

especially if the trust is fully funded prior to the marriage.

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IV. Estate Planning for Opposite–Sex Couples and Same Sex Couples

A. Generally. Opposite-sex couples choose not to marry for a number of reasons.

Previously divorced clients may be marriage shy. Older individuals may not want to risk

their assets should the other spouse enter a nursing home. They may not want to lose

social security or other benefits that may result should they remarry. The couple may not

want to be subject to the income tax “Marriage Penalty.” Same-sex couples, as discussed

previously, are prevented from marrying. The estate planning for these couples can be

very similar to the estate planning for married couples, except that the tax benefits and

priority rights do not exist. These couples may resemble traditional couples in the fact

that they have children together and there are no children outside this relationship. They

may resemble remarried couples in that one or both have children from prior marriages.

B. Guardianship. The partner will have no priority with regard to the appointment

of a guardian and because of not being related by blood will have little chance of being

appointed. At least a Power of Attorney should be executed to remedy this problem. In

addition, a health care power of attorney should be executed to ensure that the partner is

not prohibited from being involved in healthcare decisions or prevented from seeing the

other partner by biological family members. This is particularly important in the case of

same-sex couples, where families may be much more unaccepting of their family

member’s lifestyle, especially in the case of AIDS.

C. Intestate Succession. The partner will not be included at all and will have no

priority regarding appointment as Administrator.

D. Wills. Using simple wills in these situations may leave the estate plan subject to

attack by the natural objects of the decedent’s bounty, those who would have inherited

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had the decedent died without a will. The surviving partner will not have any statutory

protection. (If there are only children from this union, this probably will not be an issue.)

A partner’s will may be subject to claims, by family members, of undue influence by the

other partner. Caution must be used in following all formalities regarding the execution

of the will. Heirs-at-law should be specifically mentioned in the will and disinherited.

Some commentators suggest including heirs in the will, who would potentially contest

the will and also include a “no-contest” clause. This may not work because, if the will is

declared invalid, so is the clause. It may, however, deter some uninformed heirs.

Opposite-sex and same-sex couples should update their wills regularly to demonstrate

their continued desire to benefit each other. All prior wills should be retained and

marked as superceded. A client may also want to include funeral instructions in the will.

Although the will is not admitted to probate until after the funeral, it demonstrates the

decedent’s intent. Prepaid funeral arrangements also should be considered to prevent

biological family members from taking control of the situation.

E. Probate Avoidance Techniques. As discussed above, joint and survivorship and

other non-probate estate planning strategies are very risky due to their unintended tax and

legal consequences. If these mechanisms are used, the client should clearly document his

or her intent to avoid any challenge after death. The advantage of using these probate

avoidance techniques, including fully funded living trusts, are that they are usually more

difficult to challenge and the transfers are not a matter of public record. However, in

some cases, appearing secretive can make other heirs, particularly children, more

suspicious of the situation leading to increased legal action. Again clearly documenting

the client’s intent should reduce these risks.

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F. Trust. Much the same as in the case of a married couple, a trust can be used to

support a partner while leaving the ultimate distribution of the assets in the control of the

grantor. Sometimes there is no desire to control the ultimate distribution of the assets. In

such an instance, the easiest course of action would be an outright distribution to the

other partner. Unless the estates are modest this will result in double taxation of the

transferred assets and the loss of one partner’s Credit. These trusts, however, are not

eligible to defer estate tax on assets in excess of the Credit, until the surviving partner’s

death. The advantage non-married couples have over married couples is that these trusts

do not have to be structured as QTIP Trusts. The trust may have more than one

beneficiary, does not have to pay all income and may terminate at a desired event such as

the marriage of the surviving partner. Other types of trusts beyond the scope of this

article may be used to leverage one partner’s Credit and annual gift tax exclusions to

provide greater income to the other partner. Such trusts may include Charitable

Remainder Trusts, Charitable Lead Trust, Grantor Retained Annuity Trusts and Grantor

Retained Income Trusts. Same-sex couples in particular may wish to execute and fund

living trusts for privacy reasons. Not only will such trust avoid probate and being a matter

of public record, the trust can be named as the beneficiary of a partner’s employee

benefits, such as life insurance and qualified plans. A trust certificate can be created and

provided to the plan administrator, which contains the minimum information necessary to

meet the requirement for naming a trust as a beneficiary of a qualified plan.

G. Gifting. The ability of these couples to equalize assets, to take advantage of both

partners’ Credits, is severely restricted due to the unavailability of the unlimited marital

exclusion. In addition, gifts between these partners may be reclassified as taxable income,

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subject to both regular income tax and self-employment tax, to the partner receiving the

gifts. This may happen in a situation where one partner works and the other partner

provides domestic duties. Also, if one partner owns the home and the other lives there

rent free and is the one who provides domestic services, half the rental value of the home

may be deemed taxable income to the non-owner partner.

H. Life Insurance. As long as a partner is still insurable, life insurance can be used

to provide for the other partner. In cases where it is likely that disinherited relatives are

likely to enter into litigation, a client can chose to leave all his assets to his heirs-at-law,

while providing for the partner through life insurance. In order to minimize the tax

consequences, the insurance should either be owned by the other partner or by an

Irrevocable Life Insurance Trust. If the partner owns the insurance to the extent the

proceeds are not consumed during the surviving partner’s life, they will be taxable on his

or her death. If the non-insured partner should predecease the other partner, any cash

surrender value would be taxable in his or her estate and the disposition of the policy

would be governed by such partner’s estate plan. In these situations, there also may be an

issue of whether or not the partner has an insurable interest with regard to the other

partner’s life. Life insurance especially, for same-sex couples may not be feasible due to

insurability issues.

I. Guardianship of Children. If children result from an opposite-sex relationship,

the fact that the couple is not married will not prevent the other partner from becoming

guardian of the children, as he or she is the natural parent. In situations involving both

opposite and same-sex couples, where one partner is the only natural parent of a child or

children and this partner wants to name his or her other partner as the guardian of this

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child or children, the partner should execute a will naming the other partner as guardian.

If this action is not taken, the blood relatives of the children may be appointed guardian

by the court and prevent the surviving partner from having contact with the child or

children. This is particularly tragic in the case of lesbian couples, where the child or

children were conceived during the relationship by artificial insemination.† Adoption by

the other partner, without severing the natural parent’s (the other partner’s) parental

rights, is usually precluded by state law, regardless of whether the unmarried couple is an

opposite-sex or same-sex couple. Only step-mother or step-father may adopt a child

while preserving his or her spouse’s parental rights.

V. Non-Estate Planning Remedies Available to Unmarried Couples.

A. Cohabitation Agreement. Where marriage is not an option, a non-traditional

couple can enter into a cohabitation agreement. Such an agreement fulfills the same

function that an antenuptial agreement does in a marriage. Such an agreement may

address issues such as:

1. The treatment of income earned by either party during the relationship.

2. What property was owned and what debts are owed prior to the relationship.

3. The rights with regard to property acquired during the relationship by

purchase, gift and inheritance.

4. How different debts incurred during the relationship should be handled.

5. What any change in ownership or the purchase of joint property during the

relationship means.

† Popular culture is starting to recognize these trends – note on NBC’s “ER” program, in the Spring, 2004 season,Dr. Carrie Weaver’s partner Sandy Lopez, the biological parent of an infant child, was killed, and Dr. Weaver suedthe child’s blood relatives over custody.

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6. How living expenses and household responsibilities are to be shared. (Income

tax consequences must be considered.)

7. How property is to be divided if the relationship terminates.

8. Agreement to transfer property on death and/or option to purchase property

from the other’s estate.

9. If arbitration is to apply to the agreement.

B. Creating a Partnership. An unmarried couple may, with the proper purpose,

establish a partnership. The benefits of such an arrangement may include enforceable

property rights, reduction in income and estate taxes, deferral of income, valuation

discounts for transfer tax purposes, and such an arrangement would create an insurable

interest for each partner on the other partner’s life.

C. Adult Adoption. Adult adoption has been used by some couples, especially same-

sex couples, as an estate planning tool. One partner may adopt the other partner, thereby

making the adoptee an heir-at-law of the adopting partner. Care must be taken in

undertaking such a course of action. An adoption is irrevocable. However, the adopting

partner could still disinherit the adopted partner, but such partner would still be an heir-

at-law, and in a position to challenge such “parent’s” will. Another important factor in

considering adult adoption is the fact that the adoptee loses all his or her rights as a child

of his or her natural parents. Many states allow for adult adoption only under very limited

circumstances such as where the adoptee is mentally retarded or permanently disabled, or

where a step or foster parent relationship was established prior to the adoptee attaining

majority. Finally, adult adoption is sometimes considered where one partner is the

beneficiary of a Dynasty or “Bloodline” Trust. By adopting his or her partner, a client

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could make him or her the beneficiary of such trust. However, many carefully drafted

trusts anticipate this situation by defining children or descendants, as including adopted

children, but only if they were adopted as minors. Another option similar to adoption is

available in some states. Each partner can make the other partner his or her designated

heir.

D. Remedies at Law. Even if no formal planning is undertaken, at the termination of

a relationship, either during life or at death, a partner may still recover some benefit from

the other partner or such partner’s estate. Marvin v. Marvin 18 Cal. 3d 660 (1976),

established contractual rights and equitable remedies for individuals involved in an

intimate cohabitating relationship. Some states have chosen not to accept the view

proposed in Marvin, while other states have chosen to extend it to same-sex couples.

Other actions have been brought in these situations based on the theories of quantum

meruit, unjust enrichment and the theories of constructive and resulting trust.

VI. Ethical Considerations

A. Who is Your Client? When either a traditional couple or a non-traditional couple

approaches an estate planner for legal advice there is always a question of who is the

client and can the planner ethically represent both partners. Although this issue is obvious

in the case of a non-traditional couple, this issue is sometimes ignored in the case of the

“Ozzie and Harriet” couple, but should never be ignored in any other type of couple.

Even in situations involving first married couples, not addressing this issue can cause

serious consequences. Even these couples can have different goals. One partner may

disclose information to the planner, which he or she says should not be shared with the

other partner. Such a situation would put the planner in an ethical dilemma. If an estate

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planner is to represent both partners, it is essential that a clear engagement letter be used

which should contain a waiver of conflicts and confidentiality of communications

between each individual partner and the planner, however, not a waiver of confidentiality

between the couple and the planner. A planner should be cautious in agreeing to represent

both partners, even if a waiver is obtained. If it appears that an actual conflict exists

between the partners, despite their representations to the contrary, the planner should

refer one of the partners to another planner.

B. Asset Gathering. It is essential in all situations that a complete listing of all

client’s (clients’) assets, including the exact titling of such assets be obtained from the

client (clients). A planner must also obtain a thorough knowledge of the client’s

(clients’) heirs-at-law, especially in the case of a non-traditional couple. It is generally a

good practice to have this information contained in a completed client questionnaire that

the client (clients) signs off on, which states that the information provided is a clear and

complete representation to the best of the client’s (clients’) knowledge.

C. Fee Payment. In the case of a non-traditional couple, a planner should be wary of

one partner paying the fee, as this may give the appearance of undue influence and

unethical conduct on the part of the planner.

VII. Conclusion

Estate planning for non-traditional couples can be interesting and creative engagements.

These couples share many of the issues and concerns of traditional couples and other

issues and concerns that are unique to them. Working with these couples can be

rewarding for a planner who is sensitive to these couples’ needs and fully aware of the

planning options available.

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