Same-sex marriages are not recognized by most states and the federal government. The Defense of Marriage Act (DOMA) for all federal purposes defines "marriage" as a legal union between a man and a woman as husband and wife, and "spouse" as a person of the opposite sex who is a husband or wife. This law further mandates that all federal agencies not recognize same-sex marriages and civil unions; and additionally provides that no state is required to recognize another state's laws as to same-sex marriage. The reach of this law is substantial. For example, domestic partners are not entitled to federal benefits extended to married couples relating to income taxes, gift taxes, estate taxes, Social Security entitlements, IRAs, and retirement plans under ERISA. (Interestingly, a Private Letter Ruling has stated that the medical and dental benefits for a dependant domestic partner are not included in an employee's income.) A majority of states have enacted their own DOMAs denying recognition to same-sex marriages. The U.S. Constitution requires each state to give "full faith and credit" to the laws of the other states, except when it would violate the state's strongly held public policy. Same-sex marriages fall within the exception.
Vermont was the first state to recognize same-sex marriage by legislation. The Massachusetts Supreme Court ruled in 2004 that under the state constitution two individuals of the same sex have a right to the protections, benefits, and obligations conferred by civil marriage. In 2008 the Connecticut Supreme Court ruled that denying gays the right to marry was against the equality and liberty rules in the Connecticut Constitution. Iowa then became the fourth state to recognize same-sex marriage when the Supreme Court of Iowa held that civil unions would violate the equal protection clause of the Iowa Constitution. New Hampshire recognized same-sex marriage effective January 1, 2010. California voters approved Proposition 8 eliminating the right of same-sex couples to marry.
California, Maine, Washington, Oregon, Nevada, and the District of Columbia have enacted legislation recognizing domestic partnerships with varying rights granted to partners. New Jersey provides for civil unions that extend to same-sex couples many of the benefits and protections afforded heterosexual married couples. Other states and employers provide survivor and health care benefits to domestic partners, including same-sex couples (see News/Publications at www.lambdalegal.org). Differences between state separate and community property laws only add further complexity.
Despite this complex and evolving legal environment and the unique issues facing domestic partners, both same sex and opposite sex, there are effective techniques that domestic partners can use in planning their financial affairs and estate plans. As with a marriage, every domestic partnership or other non-marital relationship will sooner or later end with either separation or death.
Domestic partnership agreement. It is generally acknowledged that individuals can contract for most anything, provided it is legal and not against public policy. Domestice partnership agreements, also called cohabitation agreements, are similar to premarital (antenuptial) agreements in that they provide for a division of income, expenses, and assets, as well as provisions relating to termination of the relationship.
Wills. Domestic partners generally have no right to take under state intestacy laws (but California allows a surviving domestic partner to inherit a portion of the estate when a partner dies intestate). See pages 118-125. A will, or will substitute, assuring that property passes to a domestic partner should cover issues relating to qualification of a survivor to take under the will (e.g., defining the beneficiary as "that person living with me at my death," and disqualify a survivor from taking in case of "separation due to domestic disharmony"). It is also important to define exactly those children or other heirs that are to take under the will (e.g., children born or adopted prior to or after the domestic partnership agreement).
Revocable living trusts. As a will substitute, the living trust is particularly attractive to domestic partners, as it avoids probate and reduces the chances of a successful will challenge by the decedent's relatives (see page 34). However, unlike the exemption trust will on page 28, a "marital trust" will not shield assets from the estate tax (i.e., the federal unlimited marital deduction is not available).
Gifts. Present interest gifts of $13,000 (in 2010) and gifts that use the $1,000,000 (in 2010) gift tax applicable exclusion amount are both effective with domestic partners (see pages 56, 58, and 434). However, under federal law, split-gifts are available only to a married man and woman (see page 54).
Life insurance. It is generally required that an individual who is issued a life insurance contract on another person's life has an insurable interest (see page 447). In most states, domestic partners can avoid insurable interest problems by having the policy initially issued to the insured, and then later transferring the policy by gift to the other partner. An irrevocable life insurance trust offers many advantages to domestic partners (see page 62).
Joint tenancy. Although the simplicity of joint ownership is attractive, the following should be considered: (1) federal law includes the entire value in the first decedent's estate, unless the survivor can prove contributions; (2) the account is subject to the creditors of both partners; and (3) to pass the asset at death, the title must include the words "rights of survivorship."
Other techniques that should be considered include parenting agreements, direct payments for tuition and medical expenses (footnote 4, page 57), and financial and health care durable powers of attorney (page 411). Because the federal government does not recognize their relationship, same-sex couples may have greater flexibility in utilizing some estate planning techniques (e.g., under federal law, a GRIT can pass assets to a less wealthy "nonfamily" partner at a reduced transfer cost, see page 437).