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Estate planning for families with LGBTQ+ loved ones

Key takeaways

  • Involve LGBTQ+ family members in estate planning by having frank conversations.
  • LGBTQ+ married partners have the same rights as other married spouses, including retirement account inheritance, estate tax marital deduction, and portability of federal estate tax exclusion.
  • Additional estate planning may be necessary for unmarried LGBTQ+ partners and family.
  • Be mindful of accurate beneficiary naming in wills and other estate documents.

June marks the beginning of summer. It’s also Pride Month, which means a celebration of LGBTQ+ people and their families.

And while you’re hoisting the rainbow flag with your loved ones, it’s important to consider your estate plan and the impact it can have on LGBTQ+ family members.

Thanks to marriage equality legislation in recent years, estate planning is generally easier for married LGBTQ+ couples. However, if a family has an unmarried LGBTQ+ couple in its estate plan, there may be additional considerations related to contested wills and a patchwork of ever-changing state laws that might affect tax status, inheritance rights, and custody of children.

Here’s what you can do to set the course for a smooth transfer of wealth.

Start with a conversation

When considering LGBTQ+ family members as you create your estate documents and plan a wealth transfer, clear communication is critical. “Having a family conversation might be the support beam needed for all estate plans,” says David Peterson, head of wealth planning at Fidelity. “Where to start is really going to be unique to family dynamics.”

Peterson notes that conversations can be tricky from all sides. Generation 1, the benefactors, may have a hard time addressing sexual orientation and nontraditional partnerships in generation 2, the beneficiaries. He adds not all LGBTQ+ people may feel comfortable having these conversations with elders either, as some may even feel rejected by their families for their sexual orientation.

“If there is a mismatch in understanding, it needs to be resolved,” Peterson says. “Express what your priorities are.”

The typical estate plan includes naming beneficiaries for your financial accounts and creating necessary documents. These include a will, which names an executor who will carry out the provisions of the will and identifies the beneficiaries of an estate and guardians for any minor children. It also includes planning for incapacity by creating a durable financial power of attorney and a health care proxy.

Find out more about estate planning in Viewpoints: 5 steps to create an estate plan.

Once you have these things in place, you can move on to the next phase of planning with your LGBTQ+ loved ones in mind.

Estate-planning considerations for married LGBTQ+ partners

When putting your estate plan together, remember that married LGBTQ+ spouses are entitled to the same financial and legal benefits as any other married couple. For example, they can enjoy the spousal rights of Social Security benefits, retirement account inheritance, and estate-tax exclusions granted to all married people.

  • Social Security. Spouses are guaranteed Social Security spousal and survivor benefits, which also apply in the event of a divorce after at least 10 years of marriage.
  • Health insurance. Generally, spouses are covered under employee-sponsored health benefits.
  • Inherited IRAs. Under the SECURE 2.0 Act, spouses are permitted to inherit an IRA from their partner and continue to stretch the IRA over the life expectancy of the surviving spouse. (An unmarried partner is not considered an eligible designated beneficiary and will need to liquidate the IRA within 10 years of the IRA owner’s death.)
  • Military benefits. Same-sex spouses of military members are eligible for a wide range of military benefits, including pension survivor benefits, health care, and housing.
  • Estate tax. A married person can leave an unlimited amount of their assets to a legally recognized US citizen spouse at death without triggering federal estate taxes. In addition, a surviving spouse may also be able to take advantage of portability, which means combining both spouses’ federal estate-tax exclusion.

The legal rights afforded married couples may make it more difficult for adversarial family members to successfully challenge the provisions of wills, although probate is a public process and wills, in particular, can be contested, Peterson says. That’s why LGBTQ+ couples and their families should make sure asset titling and beneficiary designations are accurate and properly identify partners if that is their wish.

Individually owned assets will transfer to the named beneficiaries, if any, upon the account owner’s passing.

Jointly owned assets and accounts generally pass to the surviving joint owner upon one joint owner’s death. And assets owned as tenants in common rely on the probate process to transfer the interest of one deceased tenant. In other words, the interest does not pass by beneficiary designation or joint ownership.

Read more in Viewpoints: Financial planning tips for LGBTQ+ couples.

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Estate planning with unmarried LGBTQ+ partners in mind

Families with unmarried LGBTQ+ couples may need additional estate-planning contingencies, as most of the legal and financial benefits that apply to married spouses generally do not extend to unmarried partners. State laws affecting rights of LGBTQ+ people can also vary and are frequently changing. Additionally, wills could be contested. “Unsupportive family members may want to challenge a family member’s will and estate plan if they do not recognize the validity of a relationship,” says Peterson. “An extra layer of planning may be necessary.” The extra preparation may involve structuring your estate to minimize, and possibly eliminate entirely, assets passing through your will; for example, through a trust instead. (Read more about trusts below.)

One of the most complex issues surrounds children of unmarried couples, as state laws differ considerably when it comes to parenting rights. When one biological parent dies in a married couple, the surviving biological parent is legally considered the next of kin and assumes custody. But many states don’t allow for joint parent adoption without marriage. So in a relationship where one individual is the biological parent, or adopts the child, and the other isn’t and can’t adopt, extra planning is required to ensure the child remains with the surviving partner, if that is the couple’s goal.

Taking into account gender identity is also important and may require greater specificity in naming beneficiaries, Peterson says. Wills could use language that acknowledges chosen gender, or that addresses anything that could cause confusion when it comes time to distribute your estate. If, for example, someone has changed their name through a court petition, update estate documents to account for the change. Typically, wills and other legal documents are strictly interpreted. Any potential confusion related to the identity or gender of a beneficiary, for example, could be exploited by a disapproving interested party to challenge the bequest. For this reason, it is critical that documents and references to individuals are up to date and use the beneficiary’s or fiduciary’s legal name.

Consider a trust

Finally, there may be a greater need for privacy when creating your estate plan with an LGBTQ+ loved one in mind. Trusts can help here by avoiding the probate process, which is public.

You might consider creating a revocable living trust, which will provide privacy rather than having partners go through the public process of probate. In some states people you may not wish to be notified of your death may be required to be by law, says Peterson.

A revocable trust can be amended or revoked at any time during your lifetime. It allows the person who created the trust (the grantor) full access and control of trust assets during their lifetime. Upon their death, the trust becomes irrevocable and includes instructions about how trust assets should be managed and distributed. Revocable trusts are often paired with a will that directs all probate assets to pass into the trust (commonly known as a pour-over will) for management and ultimate distribution to beneficiaries. After creating a trust, you should request that your attorney provide you with guidance on how to “fund” your revocable trust. A funding letter from your attorney will direct you on which assets should be titled in the name of the trust and which assets should remain owned individually.

As always, make sure to consult a financial advisor and legal professional who can help you draft your estate plan. Having conversations early in the process of creating your estate plan can bring your family closer together and can help ensure your wishes will be honored with respect to LGBTQ+ family members and their spouses or partners.

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

The views expressed are as of the date indicated and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

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