Planning for Same-Sex Couples in Michigan

While the Federal and state rules regarding same-sex marriage are changing rapidly because of the recent Supreme Court opinion and legislation in some states, Michigan currently does not recognize same-sex marriage. This failure to recognize same-sex marriage makes estate planning even more important for same-sex couples in Michigan because many protections that exist automatically for opposite-sex couples do not protect same-sex couples.

A few years ago, we met with a same-sex couple who asked how they could insure that their partner not only had the right to make legal and medical decisions in the event incapacity, but how they could guarantee their partner would be entitled to assets. While both partners worked, one contributed more monetarily and had a greater amount of assets, including their home. Knowing their desire to protect each other, we designed their estate planning documents to meet their needs.

One of the clients was particularly concerned that in the event of her incapacity some of her family, who disapproved of her relationship, would attempt to exclude her partner from being present and making decisions on her behalf. Knowing that in the absence of other instructions, the Probate Court prefers to name a family member as Guardian or Conservator, we prepared Durable Powers of Attorney, Patient Advocate Designations, and Living Wills, clearly specifying that each of the women wanted the other present and in control of making decisions in the event of their incapacity.

After addressing the clients’ concerns regarding care in the event of emergencies, we turned to what happens after one of them passes away. Under Michigan law, if a person dies without a Will or a Trust, the state intestacy statute determines how assets are distributed. That statute ignores same-sex partners in making distributions and can leave one partner homeless and perhaps even penniless. The first step we took to avoid this situation was to transfer their residence to the two of them as "joint tenants with right of survivorship." While this form of ownership does not provide the same creditor protection to same-sex couples as it does to married opposite-sex couples, it does still guarantee that the survivor of them would own the residence. Additionally, we set up a Living Trust for each of them and provided that upon the death of one, the other partner received all of the tangible personal property, household items, and jewelry to insure that neither would end up owning a home but have to give up other tangible reminders of their loved one.

The Living Trusts also provided that each of their assets would be held in trust for the survivor of them. While in some situations, for tax or personal reasons, it would make more sense to leave assets to a same-sex partner outright, it was important to our clients that in the event any assets remained after the death of the second of them those assets would go to each of their family members who supported them and their choices. However, each named their partner as the successor Trustee so that during her lifetime she would retain almost total control over the assets and never need to request assets from someone else.

Over the years, we have amended these client’s documents to comply with changes in the laws that affect their relationship. But while times and laws are changing, and more states, as well as the Federal government, are treating same and opposite-sex couples equally, until Michigan law does the same it is important for us as professionals to provide guidance to our clients so that they are aware of the ability to control their situation. It is also important to remember that each situation is unique and calls for an analysis of what the partners want, and not presuming that every same-sex couple’s needs will be met with the same plan. 

Additional DOMA Issues

     As we discussed in our last post, the United States Supreme Court issued its decision in the case of US v. Windsor, more commonly known as the Defense of Marriage Act (DOMA) case. The Court struck down a provision in the law that required the Federal Government to treat same-sex spouses as unmarried for purposes of federal law. It is still unclear when the decision goes into effect and whether it only covers same-sex couples married in a state allowing same-sex marriages and residing in that state. While not related to estate planning, which is normally our primary focus here, there are important planning issues affected by this change about which you and your clients should be aware.

     One area with potentially far-reaching consequences is retirement planning. When reviewing the retirement planning for married same-sex clients remember:

1. In general, the required minimum distribution (RMD) rules are more liberal for married plan participants whether the participant is in pay status or not.
2. The spouse of a deceased employee can roll over a distribution attributable to the employee subject to the same rollover rules as if the spouse were the employee
3. In certain situations, a participant must have spousal consent before the participant can leave retirement benefits to someone other than the spouse, before a lump sum can be taken in lieu of a joint and survivor annuity, and before the plan account can be used as security for a loan.
4. In a divorce, a spouse's pension benefits are often part of the property settlement. When there are pension benefits involved, courts often use a qualified domestic relations order (QDRO) to handle those benefits. Without a QDRO, taxes for the benefits fall on the spouse who earned the benefits even though the other spouse receives the benefits.

     This case will also have an effect on employer-provided health plan benefits. The employee can exclude from income any amounts received from his employer as reimbursement for medical care expenses as long as the medical expenses represent care provided to the employee, the employee's spouse, or dependents. This ruling will expand the employee's right to exclude from income expenses paid for care provided to the same-sex spouse. The same is true for spousal entitlement to health plan coverage under the COBRA continuation rules. 

     While many details of the ruling remain unclear, it is important that we as planners understand the consequences of this decision in order to best serve both our business and individual clients. 

Alan Ferrara

SCotUS Decides an Important Estate Planning Case (and Overrules DOMA)

     Last week, the United States Supreme Court issued its decision in the case of US v. Windsor. This case, more commonly known as the Defense of Marriage Act (DOMA) case, has received much press coverage. This past week by 5-4 decision the Supreme Court found Section 3 of DOMA violated the Equal Protection Clause of the Fifth Amendment. Somewhat less well known, but equally important, is the estate planning relevance of Windsor.

     At its heart, Windsor was a suit brought by a taxpayer to collect a refund on Federal Estate Taxes. Edie Windsor and Thea Spyer were legally married in Canada in 2007, following an over forty year committed relationship while living in New York City. When Spyer died in 2009 she left her entire estate to Windsor. Since DOMA prevented same-sex married couples from receiving a wide range of Federal government benefits, the estate did not qualify for the unlimited marital deduction available to married couples. As a result, Windsor, as personal representative of the estate paid over $363,000 in Federal Estate Taxes. Windsor then sued for a refund and a declaration that Section 3 of DOMA violates the Constitution.

     While the Windsor decision has far-reaching consequences regarding many different types of federal benefits available to married spouses, with respect to estate planning legally married same-sex couples are now entitled to the following tax benefits:

• the right to file a joint Federal Income Tax return;
• the opportunity to obtain tax-free employer health coverage for the same-sex spouse;
• the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of Federal Gift Tax;
• the opportunity for the estate of the first spouse to die to receive a marital deduction for amounts transferred to the surviving spouse;
• the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;
• the opportunity to consent to make “split” gifts; and
• the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA using the more favorable spousal rules.

     All of these benefits are subject to Federal law and therefore are applicable to legally married couples in all 50 states, whether or not that state recognizes same-sex marriage. This means that clients legally married in any of the 13 states that currently recognize same-sex marriage may take advantage of these benefits no matter their state of residence. For financial planners and other estate planning professionals this change in the law will have a substantial effect on planning for any client that falls into this category.

     Any action regarding estate planning should only be undertaken following consultation with an experienced professional. If you have questions or concerns involving a specific situation, please contact us directly and will be happy to assist you.

Matt Ferrara