Recently, on a panel at a Chicago Bar Association’s Trust Committee meeting, I discussed tax and estate planning issues in light of the U.S. Supreme Court case, U.S. v. Windsor and the new federal agency rules on same-sex married couples. This article is Part 1 of a 4-part series from that discussion.
Before Windsor, preparing estate plans for same-sex couples was often complex, especially if the couples were married, in a Civil Union, Registered Domestic Partners, or long-time partners in a substantially similar relationship when compared to opposite-sex married couples. The so-called Defense of Marriage Act (DOMA) compounded the complexity by prohibiting federal agencies from recognizing the couples and spurring states to create mini-DOMAs. The disparate treatment forced same-sex couples with sizable estates to literally give away large portions of their assets, either in the form of charitable donations or tax payments. However, even couples with very modest estates were required to have powers of attorney and related directives prepared with painstaking creativity. Finally, when most couples, despite their estate’s size, asked why their planning was so complex, they listened to how their families were “different” and warnings, such as “though a valid legal document, don’t use this in Texas,” or “don’t have an accident in Will County.”
Generally, creating a joint will for same-sex couples, even those lawfully married, was and still is a risky undertaking because the relationship was not federally recognized and is not recognized by a majority of states. Even in states such as Illinois where Civil Union couples have the same benefits of as opposite-sex married couples, including testamentary benefit, some counties are nonetheless hostile. Thus, a surviving partner presenting a joint will in a probate court of such a county might face an uphill battle.
Setting the issue of joint wills aside, but considering will provisions, the unequal treatment of same-sex couples required careful tailoring of what could be boilerplate provisions in wills for opposite-sex married couples. The tailoring and special provisions include:
- Family Article;
- A statement of intent;
- Definitions providing expansive and inclusive meanings for “child,” “partner,” Civil Union, Registered Domestic partner, spouse, next of kin, and marriage;
- Prospective guardianship and successor guardianship language;
- A no-contest provision;
- A pour-over provision;
- A definitive choice of law statement;
- A notary seal, though notarizing a will is not required in Illinois; and more.
I mentioned the pour-over provision because even if the family is of modest means, contentious behavior from another family member would warrant a trust also be prepared as a second line of defense for fighting contention. This is not the case for married opposite-sex couples because the opposite-sex surviving spouse would, at least initially, have the law squarely on his or her side as a second line of defense. If a same-sex couple of modest means could not afford a trust, and some could not, then they would try to plan for transferring all assets by operation of law and hope that a family member with a small estate affidavit didn’t show up to claim for the forgotten bank account.
For the sake of example, let’s say a trust was prepared. One positive sliver for practitioners and our clients was that we didn’t have to worry about the reciprocal trust doctrine or unlimited marital deduction (IRC 2056) issues. But that was just the point: Because of the unfair treatment by the government, our clients could not take advantage of the unlimited marital deduction, federal QTIP elections, gift-splitting, or portability. So provisions had to be drafted carefully to work-around this lack of spousal gifting benefits.
Additional provisions and mechanisms for trusts included:
- Expressly prohibiting a contentious family member from acting in a fiduciary capacity
- Providing the trustee and successor trustee with HIPAA rights;
- Providing the trustee with authority to take reasonable steps to ensure transfer of retirement assets to the same-sex spouse or partner result in the least adverse tax implications for the surviving spouse or partner;
- Using life insurance trusts; and
- Thoughtfully and diligently considering the “common disaster” provision.
As mentioned earlier, other directives, agreements, and documents were and still are critical. These instruments include HIPAA release forms; a hospital visitation authorization form; reciprocal powers of attorney with 2 disinterested witnesses per instrument and with each instrument notarized but with a warning about describing the relationship depending on the county (imagine – having to hide your relationship in case of a medical emergency in order to ensure your spouse’s medical treatment!); reciprocal living wills; and reciprocal Illinois Mental Health Treatment Declarations. Many colleagues might say that possessing all of these documents would be redundant, and they would be correct…with respect to opposite-sex married couples. However, for same-sex married couples possessing all of these documents is evidence that strongly supports the commitment between the 2 individuals and, thus, their testamentary intent.
Thankfully, Windsor and the subsequent flurry of guidance from government agencies took a bite out of DOMA; and stay tuned for Part 2 of this series, which will cover that guidance.
One nation with justice and liberty for all…