Estate Planning and Tax Issues for the LGBT Community

With the tax season upon us, and many newly married LGBT couples filing taxes together for the first time, I thought that the Sacramento Bee's article called "Estate and tax issues complicated for gay, lesbian couples," might be something you want to take a look at before filling your taxes this year. The article doesn't just apply to married couples, it also has tips for Domestic Partner's, as well as information about Estate Planning. So if any of those subjects are something you may be interested in, check out the article below.


Personal Finance: Estate and tax issues complicated for gay, lesbian couples
by Claudia Buck

When it comes to love and money, it's never all hearts and flowers. And for same-sex couples, the financial issues are especially complex.

With the state Supreme Court taking up legal arguments next month on the validity of California's Proposition 8, same-sex couples are eyeing the outcome's ramifications on money and marriage.

Regardless of how the court's ruling affects the right of gay and lesbian couples to wed in California, financial experts say couples should be paying close attention to such issues as tax planning, health care, inheritance and child guardianship.

"The estate planning and legal issues are still going to be there. And they're the same as with any married couple, only far more complicated for same-gender couples," said Penny Brown, an estate planning attorney at McDonough Holland & Allen in Sacramento.

Here are some of the financial issues that same-sex couples need to consider:


To register or not?

Gay and lesbian couples may face a big debate on whether to sign up as registered domestic partners (RDP) with the California secretary of state's office.

Some choose not to for philosophical reasons. Others want the spousal rights that being registered can provide, including health benefits, hospital visitation privileges and other marriage rights covered under California's family laws. Without being registered, same-sex couples aren't entitled to many of those same rights.

Since 2000, more than 52,000 couples, mostly same-sex, have registered with the secretary of state's office by filing a notarized document and paying a $33 fee.

An Aerojet employee who asked that her name be withheld for workplace privacy reasons, said she and her partner of 28 years wrestled with the decision. Two years ago, they decided to sign an RDP agreement to "strengthen the legitimacy of our will and clearly give our relationship some legal standing as spouses."

Brown, the estate attorney, says same-sex couples need to consider financial, legal and emotional factors when contemplating an RDP. Is it necessary for employer benefits or property tax reasons? Does one partner have excessive debt that could become a shared responsibility? Are there privacy concerns?

Although names of domestic partners are not available online, the list is a public record available through the secretary of state's office.

Instead of an RDP, Brown said, some couples elect to draw up a private partnership agreement, similar to a marriage prenuptial agreement, that spells out how property, assets, parenting and other issues will be handled if one partner dies or the relationship dissolves.


Estate planning

Trudy Nearn, an estate planning attorney who works with gay and lesbian couples, said couples who don't set up an estate plan can leave their partners destitute, even with an RDP.

"If there is no will or trust, a partner's assets will go through probate and pass to the family – siblings, parents, etc. – but not the partner. If you're not registered or don't have a good estate plan, you could be left out in the cold financially."

Under federal law, same-sex couples are not entitled to spousal Social Security and other benefits if one partner retires or dies. That's why it's imperative that couples do separate retirement planning, said financial adviser Harper. She recommends, for instance, putting a pension benefit into a self-directed IRA so it can be left to a partner's named beneficiary.

The need for retirement planning is especially important in same-gender households where one partner works and one stays home with children. In some cases, it can be advantageous to have larger life insurance policies on the working spouse, said Harper.


Tax planning

Due to differences between state and federal tax laws, same-sex couples have more complicated tax-filing requirements.

Under 2007 changes to California's tax code, all same-sex couples who are RDPs must file their state income taxes jointly instead of separately. However, the IRS does not recognize same-sex marriages or domestic partnerships, so couples must file their federal taxes separately, as individuals.

That means same-sex couples file three income tax forms instead of two.

Having an RDP can provide distinct tax advantages, especially for same-sex couples with large income disparities, said Guy Crouch, a Sacramento CPA who specializes in tax advice for gay and lesbian couples.

For instance, if two partners own a home together, but one partner earns 80 percent of the income and the other 20 percent, federal law requires that their tax deductions for property taxes and mortgage interest be apportioned according to income.

But in California, as domestic partners, they would file a joint tax return and the deductions could be taken equally. A joint return also can generate tax savings, just as it typically does for married couples.

For same-gender couples, sorting through the various legal, financial and tax issues can be daunting but is essential. What you don't want to happen, notes financial adviser Harper, is to "disinherit the people you love because you didn't file the correct paperwork."

To ensure that your hearts and finances are in sync, seek out the expertise of a financial planner, tax attorney or CPA.



Penny Brown and Rebecca Harper, managing partner of Harper-Davis Financial in Sacramento, will host a free seminar on legal and estate planning issues for same-sex couples Thursday at the Crocker Art Museum. The event is full, but the museum has a waiting list. For more details, call (916) 808-7843.