Alternative Life Style

ALTERNATIVE LIFESTYLE ESTATE PLANNING CONCEPTS

As an estate planning attorney, I meet with numerous clients, each having his or her own unique set of problems and objectives. This area of law is steeped in tradition and primarily deals with married couples and single clients attempting to avoid unnecessary taxation, to avoid problems in asset management in the event of incapacity, as well as probate delays. There are endless articles and books on these traditional married couple and single client issues. However, in my practice, I have increasingly come in contact with same sex couples living together as a family unit, who have failed to do any “proper” estate planning. In most cases, such couples will have all bank accounts, real estate and investments titled in joint tenancy. Likewise, most life insurance will be owned by the insured. These homespun “estate planning techniques” parallel those utilized by many traditional married couples. However, for same sex couples there is not a great deal of literature, either in the popular press or in legal publications addressing the issue of, for lack of a better term, “alternative lifestyle estate planning”. The purpose of this article is to briefly address certain major issues applicable to same sex couples, as well as opposite sex couples living outside of what the law recognizes as a traditional marriage.

Most clients will be surprised that traditional estate planning concepts can be effectively applied in alternative lifestyle relationships to achieve personal, as well as tax planning benefits. The first issue for such couples to address is: “How are assets titled?” Please understand asset titling not only determines what you can do with your estate, but also what is subject to federal estate taxation. While titling assets as “joint tenancy with right of survivorship” may avoid probate at the death of the first joint tenant/partner, the assets are totally subject to probate in the surviving partner’s date of death. Likewise, joint tenancy may trigger unnecessary federal estate taxation at both partners’ deaths. This is because the Internal Revenue Code requires the total value of all joint assets to be included in the predeceased joint owner’s/partner’s estate, unless the survivor can prove monetary contribution. Therefore, the burden of proof falls on the surviving joint tenant to prove by documentation all monetary contribution. In addition, at the surviving partner’s death, the total value of all assets now titled in that partner’s name will be includable in the estate and again subject to federal estate taxation. Please recall in 1999 there is a $650,000 “Unified Credit/Exemption Equivalent” applied against any federal estate taxation. In other words, if an estate does not exceed that dollar amount (i.e. $650,000), no federal estate tax is due. However, when calculating the value of assets subject to federal estate taxation most clients fail to realize the face amount of all life insurance on and owned by a decedent, as well as all retirement benefits are included in this amount.

Please compare the following federal estate tax savings achieved by effective asset titling in combination with Trust planning for a same sex couple:

The above chart illustrates the simple fact that for same sex couples with an estate of $1,300,000 or less, the federal estate tax is “voluntary”. However, most couples continue to incur this unnecessary tax burden because they have not obtained proper legal advice.

What then is the “proper legal advice” for this same sex couple federal estate tax dilemma? The beginning step, as a general rule is to sever most joint tenancy assets. Clients may wish to divide various investments and make them each partner’s “separate property”, or create a “tenancy in common” ownership. A tenant in common is not the same as a joint tenant. Tenant in common interests need not be equal. In addition, at date of death only the deceased partner’s fractional interest is includable in the estate for federal estate tax purposes. Therefore, the amount of assets subject to taxation at the death of the predeceased partner may be cut in half. If that amount is under $650,000 in 1999, no federal estate tax return must be filed and no tax is due.

However, the severing of asset titling is only a part of the solution. The next step is for each partner to establish a personal estate plan including, among other documents, a Revocable Living Trust with a tax savings “Sub-Trust” or “Partner’s Exemption Trust”. Rather than leaving all assets including life insurance outright to a partner, such investments may be retitled or beneficiary designations made payable to The Revocable Living Trust. Each partner is his or her own Trustee. However, at the predeceased partner’s date of death, the surviving partner becomes the Successor Trustee and primary beneficiary of the late partner’s Trust (i.e. now “Partner’s Exemption Trust”). If this “Partner’s Exemption Trust” is properly drafted, the surviving partner may possess the following maximum rights as a lifetime beneficiary without causing the Trust’s asset to be subject to federal estate taxation in the surviving partner’s estate:

1. The right to all annual income,

2. The right to additional principal based on an IRS “ascertainable standard”.This standard includes distributions for “health, education, support and maintenance”, and

3. The right to give the assets to anyone during the surviving partner’s lifetime, to the exclusion of the surviving partner, his or her creditors, or the creditors of the estate.

The Diagram illustrates the above concept.