Category Archives: Financial Planning

Now That You are Legally Married, Is it Still Important to Have a Will?

15 Sunday Jun 2014

Posted by in Estate Planning, Financial Planning, Marriage

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The short answer is yes.

The long answer is that for many years, LGBT folks have been told how important it is to have a will because we had none of the legal protections of marriage or registered domestic partnership, and the state laws of intestacy (inheritance without a will) left same sex partners high and dry. This lack of any formal legal status in Washington prior to 2007 coupled with a higher likelihood of family members disapproving of an LGBT person’s choice of partner resulted in heart wrenching scenarios. A gay man whose partner died in the 1980’s recently shared with me that right after his partner’s funeral, his partner’s family arrived with a moving van and emptied their house of anything that he could not produce a receipt for, and without a will in place there was nothing he could do about it.

Is having a will any less important now that same-sex couples can be legally married? In essence a will is your set of instructions about who should get your property when you die, and it is often part of a larger overall estate plan which might also include non-probate assets such as life insurance policies, retirement accounts, or trusts. Today, if you are legally married or partnered and you die without a will or other estate plan in place, your surviving spouse or partner will not be as badly off as before. However without a will, the State of Washington still might not distribute your property in a way that either of you would have wanted. It is not as simple as your spouse getting everything. Exactly how your property will be distributed will depend on who all your surviving legal family members are.
Here are the basic intestacy rules:

  • If you have a spouse or registered domestic partner and
    • You have children: When you die, your spouse or partner will get your share of your community property, with the result that all of what you owned together now belongs to him or her. (For more discussion of what constitutes community and separate property, see my last post: http://equality365.com/2014/05/how-does-legality-of-marriage-change-things/ .) In addition, your spouse or partner will get half of your separate property, with the other half getting divided amongst your children.
    • You do not have children (or do not have a legal parent relationship to the children in your life): Besides receiving your share of community property, your spouse or partner will get three quarters of your separate property, and the remaining quarter will go your surviving parent(s). If there is no parent, the remaining quarter goes to your surviving sibling(s). If there is no sibling, all of your separate property goes to your spouse or partner.
  • If you do not have a legal spouse or registered domestic partner and
    • You have children: All of your property will be divided amongst your children.
    • You do not have children (or do not have a legal parenting relationship to the children in your life): All of your property will go to your surviving parent(s). If there is no parent, all will go to your surviving sibling(s), then to grandparents, then aunts/uncles, in that order.
  • You are in a long-term committed relationship but do not have a legal status together.
    • The rules under #2 apply. When it comes to intestacy, the law does not recognize the family roles and relationships that members of the LGBT community have claimed and created in all the years before legal recognition of those relationships became available. Without a will or some other non-probate beneficiary designation naming your partner, he or she will get nothing.

How this might work is best illustrated by an example. Let’s say you are married without children and your primary asset is your house which you bought before you got married. Under community property law, the house would be presumed to be your separate property. Applying the rules of intestacy outlined above, your spouse would receive three quarters of the house, and the remaining quarter might go to your mother or brother, depending on who is alive. This could become complicated for your surviving spouse!

Drafting a will is one of those tasks that almost everyone finds a way to avoid and put off for another day. Especially if you are in reasonably good health, there is almost always something else to take care of that seems more urgent and pressing. Most of us do not like to dwell on it, but one certainty in life is that none of us know what tomorrow may bring, and sometimes what tomorrow brings does not give us the chance to go back and take care of after the fact. The good news is you can create greater peace of mind for both you and your loved ones now by taking care of your estate plan now. You can do this by consulting with an estate planning attorney, and you can also learn more here.
Disclaimer: This information is for educational purposes only and is not a substitute for competent legal advice from a licensed, professional attorney regarding your specific situation.
Eleanor Doermann is an attorney providing estate and life planning services for all ages and stages of life, as well as public benefits advocacy. As a long-time member of the Seattle LGBT community, she has a special interest in and passion for educating individuals and couples about the ramifications of post-DOMA marriage equality laws. Eleanor came to the practice of law after a 25-year-career as a physical therapist and opened Pathway Law, PC in south King County in 2013. Learn more at www.pathwaylaw.net, www.facebook.com/pathwaylaw, or by calling 206-499-3289.

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IRS Will Recognize All Legal Same-Sex Marriages – Regardless of State of Residence

29 Thursday Aug 2013

Posted by in Financial Planning, Marriage, RDP Tax Returns, Taxes

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The IRS announced today that all legal same-sex marriages will be recognized for Federal Tax purposes.  The looming question about whether the IRS would use the state of domicile or the state of celebration to define “legal marriage” has been answered.  They have chosen the state of celebration which means IRS marriage recognition will be based on where the marriage license came from, not where you live.  This isn’t surprising since it makes the most sense for all parties and lessens the burden to both taxpayers and the IRS. Additionally, it ensures consistent federal taxation to all same-sex married couples (SSMCs)

If you are a SSMC, you are now able, and required, to file as Married Filing Joint (MFJ) or Married Filing Separately (MFS) for tax year 2013. The IRS is also allowing, but not requiring, SSMCs to amend prior year returns to MFJ/MFS.[i]  The change in tax status will have varying impacts on taxpayers.  Those couples in which one spouse earns a majority of the income will likely see a benefit while those couples in which both spouses are high earners may see an increase in tax.

For tax purposes, you will be treated as married for the entire year regardless of what date you were married.   Here are some of the things that should be considered in your tax planning:

W-2 Withholdings

Now that you can file MFJ, adjustments to your W-2 withholding for federal income tax may be needed. Whether and how to adjust your withholding will depend on your particular tax situation. You can use the IRS withholding tables to estimate what your withholding should be as a MFJ taxpayer.  Comparing these amounts with your year-to-date withholding from your pay-stub will help you to determine what withholding is needed for the rest of the year.  Wage withholding is only one piece to the puzzle, though. Talk to your tax preparer to plan for your overall tax picture.

Employer Provided Health and Other Benefits Covering Your Spouse

Before the DOMA decision, and today’s IRS announcement, certain employer-provided benefits covering same-sex spouses have been included in taxable income.  Thankfully, this is no longer a correct treatment of these benefits.  If this situation applies to you, a conversation with your employer may be warranted.  Find out if and when they will stop withholding tax on these benefits.  Make sure to ask them whether you can take advantage of any available benefits immediately or if you’ll have to wait until the next open enrollment period.

IRA Contributions

Now that same-sex spouses are actually considered spouses by the IRS you may be newly eligible to make tax-deductible contributions to a Traditional IRA.  Late last year I posted about your prior inability to do this.  If you have no earned income (taxable compensation) and have thus been ineligible to contribute, you can now use your spouse’s earned income to qualify you for this benefit.  There are other applicable restrictions, however.  Here is a link to more information on Traditional IRA contributions.

Amended Returns

Those couples who will benefit from filing as MFJ should consider amending their prior open-year returns.  An “open-year” return is a return for a year that has not yet passed the  three-year statute of limitations for amending. The three years begins on the date the return was filed.  For most taxpayers this means that 2010 will be as far back as you can go. Luckily, those who will not benefit from MFJ status are not required to amend prior year returns at all.

[i] If you have a legal marriage and your 2012 return is still on extension, you can file MFJ/MFS for tax year 2012.

How the U.S. Department of Education’s Decision to Recognize Same-Sex Parents Affects Your Ability to Pay for College

19 Sunday May 2013

Posted by in College Education, Financial Planning, Taxes, Washington

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In late April of this year the U.S. Department of Education announced that they will begin recognizing same-sex parent households in the Free Application for Federal Student Aid (FAFSA) application process. The application will still fail to include a same-sex or registered domestic partner marital status, but instead will use “unmarried parents living together.” The new forms will also use gender neutral language such as Parent 1 and Parent 2 instead of mother and father.

In some ways this feels like an accomplishment in recognition and equality, and it is; but, yet again, it is bitter-sweet. We can add this to the list of situations where DOMA’s existence requires an institution to create workarounds in order to function as intended.  Just as the IRS has had to do with certain tax returns, the Department of Education has had to modify its processes in order to acknowledge same-sex couple households without actually being able to recognize same-sex relationships.  Regardless, it is still progress towards equal rights, and, with those rights come responsibilities.

Beginning with the 2014-2015 FAFSA application cycle, income information from both parents will be collected.  In the past, students who have same-sex parents have only reported the income of one parent. Now that the income of both parents will be included, many students will suddenly find themselves eligible for less aid, and in some cases altogether ineligible.

Luckily, if you anticipate your child to be eligible for less funding than you originally planned for, there are other tools available to help you. Some of the most commonly used are the various tax advantaged college savings plans.  Generally, these plans allow for tax-free earnings on your contributions as well as tax-free withdrawals if funds are used for qualified education expenses.

There are two types of college savings plans; 529 Plans and Coverdell Education Savings Accounts.

529 Plans

529 plans are state sponsored plans. This means that the attributes of each 529 plan are unique; each state does it their own way.

Washington’s 529 plan, the Washington State Guaranteed Education Tuition (GET) Program is a pre-paid tuition plan.  This plan allows contributors to pay for tomorrow’s tuition at today’s price. In a climate where college education costs are rising dramatically, this plan becomes quite attractive.

Contributions to WA’s GET program are in the form of “unit” purchases.  One hundred units is equal to one year of resident undergraduate tuition at WA’s most expensive institutions, currently either UW or WSU.  The value of your units will always be the current value, meaning, if you buy 100 units in one year, and five years later the cost of tuition has risen, your 100 units are still worth one year of tuition at current prices.

Coverdell Education Savings Accounts (Coverdell ESAs)

Coverdell ESAs are tax favored savings accounts. The contributions are not deductible; however, the earnings are tax-free. Unlike 529 plans, Coverdell’s have contribution limits, both in amounts that can be contributed and in eligibility to contribute at all. Contributions to Coverdell’s are limited to $2,000 per student per year.[i]  One benefit the Coverdell offers that 529 plans do not is the ability to use the funds for K-12 education. The tax-free and penalty-free withdrawals are not limited to post-secondary education as they are with 529 plans.

In addition to college savings plans, the IRS offers various deductions and credits to taxpayers who are paying for higher education.  It is possible to receive benefit from financial aid, college savings plans and deductions/credits in the same year, but they are not independent of one another.  Coordinating your education benefits is a critical piece of college planning. For example, funds you have set aside in a savings plan may affect a student’s eligibility for aid. Or, a taxpayer may or may not be able to exclude scholarships from their income and claim an education credit in the same year. Education assistance benefits from an employer will also have an effect.

No matter what your personal situation is, and whether or not the Department of Education’s announcement affects you, maximizing your education benefits can make a significant difference in your ability to pay for college. Start planning now!

[i] This amount begins to phase out based on the contributor’s Modified Adjusted Gross Income.

Estate Planning for the LGBT Community – Why You Really Need to Do it

23 Wednesday Jan 2013

Posted by in Estate Planning, Financial Planning

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I have the privilege of practicing law in Washington State, which, as you are no doubt aware, recently joined the ranks of States recognizing gay marriage. I cannot overstate how proud everyone that worked to achieve this goal is, and rightly so, but this change in law has had an interesting side effect. I am now asked, on a near daily basis: “Now that gay marriage is legal, why should gay couples be any more concerned with estate planning than straight couples?” 

My response to this is that, first off, straight couples should be far more concerned with estate planning than they generally seem to be, and second, as important as Washington legalizing gay marriage is, it really hasn’t changed anything for practical purposes. Before Washington legalized gay marriage it was among the ‘everything but marriage’ States, which meant that gay couples in domestic partnerships could already take advantage of all the benefits that straight married couples could, as far as Washington was concerned. The real source of many of the problems that gay couples faced was, and remains, the federal government.

No matter what State they may reside in, and no matter what stance that State takes towards gay marriage, the federal government still considers gay couples to be legal strangers, that is, unless they take steps to circumvent that default status. The obvious problem that this causes has to do with your taxes, but there are others that many people fail to consider. For example, imagine that a married gay couple live in Washington State without an estate plan in place. One of them used to live in Texas, and still owns a fair bit of property there.  Imagine a terrible accident occurs, and the individual who owns property in Texas dies. If they had been a straight couple, the surviving spouse would automatically inherit either half or all of the property in Texas, depending on when it was purchased and a few other factors.  As a gay couple, the surviving spouse would have no right to the property in Texas at all, and instead that property would automatically pass to the deceased spouse’s surviving relatives, regardless of what their wishes had been.

This scenario happens unfortunately frequently, because most States that do not allow gay marriage also do not recognize gay marriages from other States. This problem has also resulted in several high profile instances, in which, a married gay couple were visiting a State that does not recognize gay marriages, one of them became injured or ill, and the other was refused hospital visitation rights, or the rights to make healthcare decisions for their disabled spouse.

When I tell people about these sorts of situations I often hear “Well, what can you do if a State won’t recognize your marriage?” The answer to that is “A lot.” Even States that do not recognize gay marriage do recognize community property agreements and powers of attorney, and these, along with a few other important legal instruments will guarantee that both you and your spouse are protected, even if your marriage isn’t.

Hopefully the Defense of Marriage Act will soon be recognized as the inherently unequal and bigoted piece of legislation that it is, but until that happens a good estate and disability plan is the gay couple’s best defense against outdated laws.