Now that You’re Married: Know the Top 6 Financial Issues Affecting Your Same Sex Marriage

KILBOURN ASSOCIATES
IMMEDIATE RELEASE

NAPLES, FL – (January 15, 2015) – Estate tax expert and Disinherit the IRS author E. Michael Kilbourn today outlined a series of estate planning and tax issues that same sex married couples need to understand in order to take advantage of options that were not previously available.

According to Kilbourn, “Now that same sex couples are able to legally marry in many states including most recently, Florida, there are a number of great opportunities to maximize the effectiveness of their estate plans while at the same time reducing their tax obligations.”

  1. Unlimited Marital Deduction – In a typical will arrangement, everything passes from one spouse to the other. For couples with a high net worth this avoids any estate tax at the death of the first spouse because of the unlimited marital deduction (no tax on assets left to your U.S. citizen spouse). However, at the surviving spouse’s death, the assets owned by the surviving spouse (including the property inherited from the first spouse to die) is taxed after the estate tax exemption is applied. In 2015, the exemption is $5.43 million.
  1. Asset Portability – Today, under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Law), widows and widowers can add any unused exemption of the spouse who died most recently to their own. This portability provision of the law is not automatic. The executor handling the estate of the spouse who died will need to transfer the unused exemption to the survivor, who can use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing an estate tax return when the first spouse dies—even if no tax is owed. In 2015, the combined exemption of both spouses is $10.86 million.
  1. Annual Gift Tax Exemption – In addition to the lifetime gift tax exemption, discussed above, anyone can give another person up to $14,000 per year without gift tax. For married couples, the gift tax is doubled to $28,000 per recipient, if the spouse agrees to “split” the gifts.
  1. Trust Planning – When properly structured, a trust can provide an additional level of safety by adding another level of protection for spouses not available through the use of the portability provision. For example, the spousal estate reduction trust (SERT) allows one spouse to make gifts to an irrevocable trust and name the other spouse as the trustee and income beneficiary along with family members.  That way, assets gifted to the trust are removed from the couple’s taxable estate, but available to the trustee/beneficiary/spouse, if needed (for health, education, maintenance and support).

Another example of how a trust could benefit a married couple is the qualified terminal interest property (QTIP) trust.  This is a trust set up during the life of both spouses that passes assets to the surviving spouse to access for that spouses lifetime needs, but at the death of that spouse the assets pass to beneficiaries named in the trust.  This ensures the estate plan stays on track and does not change at the death of the first spouse to die.  Properly structured, the QPRT qualifies for the unlimited marital deduction and, thus, the assets are not exposed to taxes until the second death.

The benefit of any properly structured irrevocable trust is that it protects the assets in the trust from creditors, predators and divorce.  And, in certain designs, the assets can pass to multiple generations without exposure to estate taxes at each generation.  This is often referred to “generation skipping,” but it should be called “IRS skipping,” as the trust can be designed so it skips no one, as with the SERT, described above.

  1. Retirement Plans – Same sex married couples also have new opportunities for retirement planning. For example, Qualified Retirement Plans (QRP) benefits and IRA assets represent an increasing portion of the accumulated wealth of many Americans. It’s essential to have a plan before reaching age 70 1/2 in order to preserve your wealth. The rules are different once a same sex couple marries, according to Kilbourn.  For example, at age 70 1/2 an IRA owner must start taking required minimum distributions (RMDs).  Taking only the minimum required distributions can allow the IRA to last significantly longer.  Married spouses can use the Uniform Table for RMDs rather than the Single Life Expectancy Table. The Uniform table is based on two lives and something called “recalculation” which is considered the most favorable table, as it requires the absolute minimum distributions.  Upon death of the IRA owner, if a spouse is the named beneficiary, that spouse can roll the deceased spouse’s IRA into that spouse’s own IRA and use Uniform Table, based on that spouse’s age and recalculation, even though the calculations are based on two lives.  Thus, the remaining spouse can stretch out the IRA for the longest possible time.
  1. Income Tax Planning – On Aug. 29, 2013 the U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage. Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit. In addition to deductions, exemptions, credits, etc. filing jointly can, in some cases produce a combined income that receives better tax treatment when couples earn vastly different incomes.

Disinherit the IRS: Don’t Die Until You’ve Read This Book, 2014 Edition is Mike Kilbourn’s new 344-page soft-cover book. It serves as a guide for sophisticated estate planning and reveals new tactics to help Americans avoid excessive taxation plus the simple, legal ways to avoid so-called “death taxes” and the steps individuals must take to protect their children, grandchildren and future heirs from predators, claims from lawsuits and divorce. The book includes a history of estate taxes and over 60 charts, graphs, illustrations and tables, as well as helpful resources like case studies and comprehensive depictions of many complex wealth preservation concepts and tools. Available for purchase through major booksellers and at http://www.disinherittheirs.com, Disinherit the IRS is published by Brendan Kelly Publishing, Inc.

Kilbourn Associates is located in Naples, Florida. Additional information is available at http://www.disinherittheirs.com.