Same-Sex Marriage and Estate Planning

The Supreme Court’s recent decision in the Obergefell v. Hodges case held that under the 14th Amendment, states are required to issue marriage licenses for same-sex couples who desire to marry, and also that states are required to recognize same-sex marriages that were lawfully licensed and performed out of state. Essentially, with the Obergefell decision, same-sex marriage is now legal everywhere in the U.S. This decision widens the scope of how taxes, estate planning, and familial rights will affect same-sex married couples moving forward. The decision does not address every issue relating to the rights of same-sex married couples, but it addresses several important issues nonetheless. The following are only some of the things that same-sex couples and their advisers need to consider in light of the decision:

  • Same-sex married couples may now file joint federal and state income tax returns and how that might affect their tax liability
  • The inheritance rights same-sex married couples have under state intestacy laws
  • The estate and gift tax exemptions and marital deductions afforded to same-sex married couples
  • The rights same-sex married couples have in making healthcare decisions
  • The rights and responsibilities same-sex married couples have in divorce, including child custody, child support, and alimony
  • The relevancy of domestic partnerships now that same-sex marriage is valid in all states
  • How newly wed same-sex couples should own assets
  • How might the laws in community property and separate property jurisdictions affect same-sex couples looking to marry or newly married same-sex couples

Although many same-sex couples may have already considered these topics and planned accordingly, especially those who were already married prior to the ruling, now that same-sex marriage is valid in every state, it is vital for same-sex couples to seriously consider how these topics might affect their lives moving forward. For those same-sex couples who have already done any estate planning, business planning, retirement planning, tax planning, or financial planning, it may be prudent to revisit those plans. For those same-sex couples who have not done any such planning, it is prudent to consider what planning you may want and need to do.

IRS Announces New Estate and Gift Tax Exemptions

In Revenue Procedure 2014-61, the IRS recently announced new tax changes that will be effective starting in 2015. The following are the more relevant changes in relation to estate planning and gifting:

  • The estate and gift tax exemptions increased due to inflation from $5.34 million to $5.43 million.
  • The estate and gift tax rate remains the same at 40%.
  • The annual exclusion for gifts remains the same at $14,000 per person. This means that each person can give as many $14,000 gifts to as many people as he/she desires, without having to file a gift tax return, pay gift tax, or reduce any gift tax exemption.

Additional changes have been made in relation to income tax rates and deductions.

For a summary of the new changes please visit the IRS Website.

For a complete record of the new changes, please see Revenue Procedure 2014-61.

What Are Defective Grantor Trusts?

A Defective Grantor Trust (“DGT”) allows you to transfer assets out of your estate and ultimately reduce your estate tax liability. The DGT may also be referred to as an “Intentionally Defective Grantor Trust (IDGT),” a “defective trust” or a “grantor trust.” This tool is most effective when you have an asset that will appreciate overtime, because the trust locks in the value of the asset at the time of transfer, meaning that future appreciation of the asset passes tax free to the beneficiaries. However, when a grantor creates a DGT, he or she is responsible to pay any income taxes generated by the trust. This is why the trust is called a defective trust, because the grantor must pay the taxes on the trust income.

To create a DGT, the grantor would first create and transfer assets into a Limited Liability Company (LLC) or a Family Limited Partnership (FLP). If the grantor created an FLP, he would retain a general partnership interest and transfer a limited partnership interest to the DGT. By doing this, the grantor retains control over the assets and has the power to make decisions for the FLP. This process works similar with an LLC, except that the grantor retains a voting interest and transfers a nonvoting interest to the DGT.

The grantor transfers the limited or nonvoting interest to the DGT either through a gift or a sale. If the grantor makes a gift to the trust, then a gift tax return must be filed. If the grantor makes a sale to the trust, then he will receive a note for a term of years payable from the DGT to the grantor. The note payments are normally paid from the trust income. Only the amount of unpaid principal on the note is included in the estate when the grantor passes away. Otherwise, if all principal of the note has been paid by the time the grantor dies, then the DGT is not included in the grantor’s estate.

A DGT has many advantages. One is that it allows grantors to reduce the value of their estate for estate tax purposes. Also, appreciation of the assets transferred into the DGT pass tax free to the beneficiaries. Further, by the grantor paying the income tax, the beneficiaries do not have to otherwise pay the taxes and the grantor continues to reduce the value of his estate for estate tax purposes. Additionally, by making a sale to the trust, the beneficiaries do not have to pay income tax as they would if the assets were gifted outright to the beneficiaries. Grantors can also preserve their estate tax exemption by making a sale, rather than gifting all of the assets into the trust. Moreover, a DGT also allows grantors flexibility in setting up the trust and the note payments from the sale.

A DGT can be complicated and must be set up carefully, otherwise it can expose the grantor to significant estate and gift tax liabilities. The process requires a competent estate planning attorney who understands the law, is thorough in making sure the DGT is executed properly, and who is able to help the client understand why a DGT is useful and how it works. The Morris Estate Planning Attorneys provide this level of expertise and professionalism in helping clients setting up DGTs.


Durable Power of Attorney for Healthcare

None of us enjoy contemplating what would happen to ourselves or those close to us in the event we become incapacitated. Rather than think about those things, we tend to think “it will not happen to us,” or otherwise postpone thinking about it. This is a dangerous mentality, because failing to plan for these situations can lead to drastic consequences. A Durable Power of Attorney for Healthcare is an important way to mitigate the consequences of incapacitation.

A Durable Power of Attorney for Healthcare (DPOA HC) is a document that gives someone else the power to make healthcare decisions for you in the event you become incapacitated and are unable to make your own healthcare decisions.

A DPOA HC sets forth what types of decisions can be made on your behalf if you become incapacitated. For example, a DPOA HC covers decisions regarding life support, medical facilities and treatments, funeral arrangements, and other decisions.

A DPOA HC also sets forth who is going to make these decisions for you. The person you select to act on your behalf is called the healthcare agent. You should select someone who you trust and who you know will be there for you in the event you become incapacitated. It is also prudent to select a trustworthy back-up agent in case your initial agent is unable to make decisions.

One advantage of a DPOA HC is that gives you peace of mind knowing that if you were to become incapacitated, that you have someone you trust handling your healthcare decisions. Further, it will reduce the likelihood of family members and loved ones quarreling over what decisions should be made and who is going to make the decision. A DPOA HC also saves time and money because without one, you may have to go through a court process to determine your mental capacity and have the court appoint a person to make decisions for you.

To work effectively, a DPOA HC must meet statutory requirements and otherwise be carefully drafted. We, at the Morris Estate Planning Attorneys, can provide you with the type of professionalism, skill, and service you need to execute a valid DPOA HC and ultimately make an otherwise difficult circumstance more manageable for you and your loved ones.


What is Probate?

Probate is the legal process to transfer assets when someone passes away. Through probate, clear title and ownership are established as to the assets of the deceased person.

Generally, probate is required if the person died with an executed will (testate), or if the person died without a will (intestate). If the person dies testate, then the probate court will distribute the assets of the estate in accordance with the will. If a person dies testate, then the will either names an executor to oversee the estate, or the court will appoint an administrator if the will does not name an executor. If the person dies intestate, then the probate court will distribute the estate according to the state intestacy laws. Normally, intestacy is not recommended because the person loses control over how his/her estate will be distributed.

In most cases, people want to avoid probate for several reasons. One, probate is usually time-consuming and can take anywhere from six months to two years, depending on the size of the estate. Second, probate can be expensive, as the estate has to pay executor/administrator fees, attorney fees, and court-filing fees. Third, probate is often inflexible because the probate court controls the process. Finally, there is a lack of privacy in probate because it is a public process. However, depending on the size of the estate, some smaller estates can avoid excessive costs and time through certain expedited forms of probate, such as a set-aside proceeding or a summary administration.

There are various ways to avoid going through probate. For example, assets held in a living trust avoid probate and are distributed according to the terms of the trust. Also, jointly-owned assets, such as joint bank accounts, usually avoid probate as long as the surviving owner is alive. Probate can also be avoided through life insurance and retirement plans, as long as there are valid beneficiaries designated.

Whether you need help with estate planning so you can avoid the probate process, or whether you need help going through the probate process, the Morris Estate Planning Attorneys have the experience and expertise to help you.