Estate-Planning Tips for Same-Sex Couples

Christine Benz: Hi.I am Christine Benz for Morningstar.com. Estate planning for same-sex couples is a highly complicated issue. Joining me to share some guidance in this area is Jill Metz. Her firm specializes in legal guidance for same-sex couples.

Jill, thank you so much for being here.

Jill Metz: Thank you for inviting me.

Benz: Jill, let's start with the do-nothing approach, which is the approach that I think a lot of people take to estate planning. They don't lay any groundwork for an estate plan. What are the pitfalls for anyone who does nothing in the realm of estate planning, but perhaps especially for same-sex couples?

Metz: The landmines are more extreme for same-sex couples who don't have the legal recognition that happens in marriages because the law doesn't provide any protections, so there is no backup position. There is no estate transference or that would happen by state law to spouses or non-legal children in those relationships. So, without taking an affirmative step and putting some documents in place, you're basically leaving those people unprotected.

Benz: So, say you are in a committed same-sex relationship. You pass away, and you haven't left any estate-planning groundwork. Your assets wouldn't necessarily pass to your partner, which might be in accordance with your wishes; they might go to siblings, parents, or someone else.

Metz: They will absolutely go to biological family and not to your children in those relationships, who are not legally yours, or that partner.

Benz: What would the documents be that you would want to put in place to ensure that transferal of the assets to the person who you would like them to go to?

Metz: Well, it's really important to sit down with a professional and start with what assets you have--what they look like, how they're titled, and where the designations would transfer--so that you can make a complete plan. But in terms of documents that a lawyer would help prepare, you are looking at at least a will, if not a trust, to have everything private and outside of a probate process. Durable powers of attorney for health and property are absolutely necessary. Otherwise that person who is the significant person in your life gets closed off from all major decisions. They get excluded from your hospital room. They get excluded from your finances, and they're left out in the cold.

Benz: Those powers of attorney essentially say, in that case you can specify, "I would like this person to make financial decisions on my behalf if I am unable to do so. I would like them to make health-care decisions on my behalf."

Metz: It turns the control and the relationship 180 degrees. So, instead of the person being outside looking in, they are inside doing exactly what you expect them to do.

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Benz: You mentioned beneficially designations. That's an important part of the estate-planning process because in some cases they might trump estate-planning documents. So, let's talk about how you should phrase your beneficiary designations assuming you would like your assets to pass to your partner.

Metz: You have choices. You can name your partner as your beneficiary. You can name your children as your beneficially. You can name your estate as your beneficiary. And depending on what the asset is, for instance IRAs, this becomes really significant. But for other kinds of assets, it's the totally controlling designation. You cannot change it by separate documents. You have to go back to whatever the company is that you bought that asset from or who is the managing person of that asset and make the change with them. Many people don't know that. They believe that their wills or trusts that you're doing change all of that, but it does not.

Benz: So, all of that stuff should sync up?

Metz: Absolutely, that's why it's important to really talk to somebody who looks at the big broad picture and not just, "OK, I can do your will."

Benz: Right. So, how about for couples who would like to own property together? What are some of the key steps that they should take?

Metz: Again, it's really complicated for same-sex couples because federal law doesn't recognize a relationship no matter where you're at. The Defense of Marriage Act is a bar to that. It also doesn't make another state have to recognize your relationship even though you have a legally recognized relationship in one state. So some of that ownership, if you purchase together, you can own as joint tenants, that means upon one of your deaths, the other one owns the asset a 100%. But if you're already owning an asset and you want to add your partner, your significant partner to that asset, that could be considered a gift for federal tax purposes and have huge tax consequences. So, even the simplest thing like "I own my home, and it's now our home. We should both be on title," shouldn't be taken lightly without thinking about all the consequences.

Benz: Would you recommend that same-sex couples perhaps seek legal counsel before buying property together to make sure that they are doing it the right way?

Metz: Absolutely. It is one of the most significant assets people have. Before the last downturn, it was probably the most significant asset people had. You should absolutely get legal advice about the investment that you are making. Because the laws don’t make the relationships have a clear path about how they dissolve, if you don’t do a partnership agreement or some kind of contract between the people--we call then partnership agreements, whereby how you would dissolve that ownership of that asset, whatever it is, you can do cars, you can do real estate, you can do your bank accounts, you can do joint investment accounts, you can do it all in a partnership agreement--you will find yourself in a quagmire about how you are going to separate those assets back out.

Benz: Jill, from a legal standpoint, what’s the difference between heterosexual marriage and same-sex marriage or domestic partnerships or civil unions?

Metz: It’s really all in the federal government benefits that are provided based on those recognitions. Because of the federal Defense of Marriage Act, the legally recognized relationships of homosexual couples do not have any federal benefits; it's been added up to over a 1,000 of them that come. So things as simply as a child who is in your life and in your relationship who is not legally your child doesn’t receive your Social Security benefits if you should die, and wouldn’t receive any benefits there.

You don’t get the advantage of being able to pass your full estate to your homosexual spouse as heterosexual spouses can, and that’s significant. Some of the lawsuits in this area have specifically targeted the fact that people, who have planned their lives together and planned how their assets are going to work together for their retirement, find big holes missing because of this disparity between what the federal government provides.

Benz: So, the same would be true of the spousal benefit that you get with Social Security. It's not something that the same-sex couples would be eligible for?

Metz: Correct, even though their state has given them right to have a legally recognized relationship.

Benz: You mentioned employer-provided benefits. What are key things that people should know when looking at their benefits package from their employer and maybe they want their partner to be eligible for some of those benefits, as well? What are some of the key things they should bear in mind?

Metz: Well, the law is confusing again because if an employer is a self-insured benefits plan, they don’t have to recognize the relationship.

Benz: It’s employer by employer at this point.

Metz: Employer by employer. So, you have to actually go to your HR department and ask. There is nothing that bars them from doing it, so be proactive. But they are not required to do it.

Benz: So, if you company isn’t currently extending benefits to partners, ask "Why not? Have you considered it?" and so forth.

Metz: Right, because there is nothing in the law that bars them.

Benz: Last question for you, Jill. I’d like to touch on the topic of couples who have children and how this intersects with estate planning. What are the key documents that couples who have children would want to keep in mind?

Metz: Well, there has been a general educational element out there that has said that children born within these legally recognized relationships--whether they are civil unions, marriage, or domestic partnerships--are the children of both of those people, and that’s correct.

But, it’s not correct if you go to the state of Indiana, where you don’t have any legal relationship then to your child, because the state doesn't recognize those legally recognized relationships.

So, you have to do an adoption, and so if you don’t adopt those children who are not biologically yours, they don’t get your Social security benefits because they are not your children for federal government purposes. They would not be your children if you move to a state where it wasn’t recognized. So, it is crucial to do what we call second parent or co-parent adoptions, so that you can have that legally binding relationship with those children.

Benz: Well, Jill, thank you so much for providing an overview. Obviously, it's a highly complicated area with many different facets, but we much appreciate you being here to talk to us about it.

Metz: Thanks so much.

Benz: Thanks for watching, I’m Christine Benz for Morningstar.com.