Estate planning tips for same-sex couples

Learn how same-sex couples can manage financial decisions for wills, trusts, and gifting.

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Keys takeaways

  • If you die without a will, your state may not recognize your partner as your natural heir. Make sure you have an estate plan in place.
  • Your spouse may be the default beneficiary for your 401(k) plans, even if other individuals were named as beneficiaries prior to marriage. However, this does not apply to IRAs, so review your beneficiary designations regularly.
  • Same-sex married couples can gift or pass an unlimited amount of assets or property to each other without needing to use any gift or estate tax exemptions.

Should You Say "I Do"?

Married life isn't for everyone, but its estate planning benefits can't be denied. Consider these important financial topics as you weigh the pros and cons of marriage vs. civil unions.

Mortgage
Marriage: A surviving spouse whose name is not on the title/mortgage will not be asked to repay the outstanding mortgage in the case one spouse dies.2 
Civil unions: Unless both partners are named on the title and mortgage, the surviving spouse who is not named on the title/mortgage may be required to pay off the mortgage or get approval to refinance.

Social Security
Marriage: A spouse with a low benefit is able to "step up" to his or her spouse’s higher benefit at the time of that person's death. Spouses have other options to maximize Social Security (though fewer than in the past).
Civil unions: Each partner can only collect the benefit based on his or her salary history.

Estate taxes
Marriage: Spouses who are U.S. citizens can pass all assets to the surviving spouse at death tax free. Estate taxes will then only be owed at the time of the second spouse's death.
Civil unions: Estates larger than $11.2 million will be taxed, even if they are inherited by a domestic partner.

Gifts
Married: Because gifts of over $15,000 are subject to the gift tax, spouses are able to "split" their gifts so they stay under the threshold amount. Married couples have a gift tax limit of $28,000.
Civil unions: There is no gift splitting allowed.

Retirement accounts
Married: When a spouse dies, a surviving spouse is able to combine a deceased spouse's IRA with his or her own through a rollover. All the funds are then subject to the surviving spouse's required minimum distribution (RMD) schedule. RMDs are based on the surviving spouse's life expectancy.
Civil unions: Domestic partners can be beneficiaries of their partner's IRAs, but they must transfer them to an inherited IRA, so they don't have to take a lump sum and pay tax immediately. They can take distributions over their life expectancy.

Medical expenses
Married: A surviving spouse is responsible for paying a deceased spouse's medical expenses.
Civil unions: There is no financial responsibility to pay the medical bills of a partner.


Tip: Read Viewpoints on Fidelity.com: Four things to talk with your partner about now

In 2015, in the Obergefell v. Hodges decision, the U. S. Supreme Court upheld the right of same-sex couples to marry in all 50 states, bringing marriage equality to lesbian, gay, bisexual; and transgender (LGBT) couples no matter where they live. Since then, same-sex married couples have had access to all the estate planning tools that heterosexual spouses have been taking advantage of for years. They no longer have to go to creative lengths—and pay estate planning experts well versed in work-around strategies—to achieve similar results that heterosexual families enjoy.

The bad news? Estate planning is still something that few families spend enough time thinking about, much less enacting. But estate planning is vital, especially when there are children and sizable assets involved. What's more, estate planning is not a "one-and-done" task. It's something you must revisit periodically, especially if there are significant changes in your life.

"It's like buying a car," explains Terri Lyders, estate planning specialist with Fidelity. "The car you buy today makes sense for what you can afford and where you're driving it. Five years later, technology advances and your lifestyle has changed. Maybe it's time to get a new car."

Here are 3 estate planning issues all married couples need to address:

1. A will is the backbone of your estate plan, but it's just the beginning

Nearly two thirds of Americans die without a will.1 That's a big mistake. Without a will, you may have little say in how your assets are divided or who the guardians of your minor children will be. If you die "intestate" (without a will), property that does not otherwise have a beneficiary designation or embedded pass-through due to titling (e.g., assets titled "Joint with Rights of Survivorship") will be distributed according to the intestate succession laws of your state, which may not necessarily align with your wishes.

"If you have any assets that are subject to probate, the state will decide for you who they are distributed to. And that may not match what you would want," says Lyders.

That's particularly important for couples who aren't married, since intestate succession laws do not recognize partners as natural heirs.

"In most states, property would pass to parents, siblings, nieces, or nephews," Lyders explains. "In most cases, the state is not going to name your unmarried partner as a beneficiary of your estate."

But a will may help you avoid all those issues. Generally speaking, a will directs the executor of the decedent's estate to distribute the decedent's assets to the beneficiaries designated in the will.

While a will is an important first step, you may need to do more. Consider these steps:

  • Trusts: Putting assets into a trust can help heirs avoid probate, a time-consuming and costly process in some states.
  • Beneficiary designations: Unless specific people are designated as the beneficiaries of life insurance, retirement accounts, and bank accounts, the recipients of these assets will be decided by a probate court. Review the beneficiary designations of your life insurance, annuities, and retirement accounts (and, in some cases, bank and brokerage accounts) to make sure that you have actually named beneficiaries and that they reflect your current wishes.
  • Titling: Ensure that the titling of your assets is coordinated with your will. This is especially important if you are unmarried and have a personal residence that you wish for your partner to continue living in after your death, or if you have non-beneficiary designated assets that you want to leave to a partner.

Tip: Consult an estate planning attorney who can draft a will that takes into account all your goals, and walks you through other steps you may want to take, to help ensure that your wishes are carried out after your death. Read Viewpoints on Fidelity.com: How to find an estate planning attorney

2. Revisit and update all your legal forms

While married couples enjoy some important benefits, you must still be proactive. Not all rights and privileges transfer to spouses automatically, same-sex or heterosexual.

Take medical decisions, for example. It's not a given that spouses can make medical decisions on behalf of their spouses. "People may not know that spouses don't have an exclusive legal right to make medical decisions for a spouse unless that person has been appointed," Lyders explains.

A spouse is, by law, simply part of a broader class of "family members" who all have equal standing. While a medical provider may give a spouse priority in relation to other family members, such as a parent, any family member can challenge a spouse's decision as not being in the best interest of the patient.

And in some states, spouses may encounter resistance when trying to make medical decisions on behalf of a spouse of the same sex.

Take, for example, the landmark case of Lisa Marie Pond and Janice Langbehn. The two women and their children were in Florida on vacation in 2007 when Pond suffered an aneurysm. She was rushed to a local hospital, but Langbehn was prevented from staying with her or receiving updates.

Langbehn had the necessary legal documents proving that Pond had granted her the right to be present. Still, it took hours for hospital staff to review them and allow her visitation, during which time Pond was dying.

Since 2011, federal law has required nearly all hospitals to allow visitation for same-sex couples. Even so, estate planning experts still recommend the full menu of documents (see Tip below) in case same-sex couples are confronted by a challenge to their right to be with each other throughout a health crisis, and to make medical decisions on each other's behalf.

There are other areas where marriage doesn't automatically confer rights—for example retirement accounts. You must take care to transfer them properly as you intend. Under federal law, a spouse is the automatic beneficiary of a 401(k) account, unless he or she waives that right. However, a 401(k) account opened prior to marriage or during a prior marriage may reflect an outdated beneficiary designation or may lack the spousal waiver necessary to allow the original beneficiary to stand. When the account owner dies, the assets could be distributed to the named beneficiary, rather than the surviving spouse.

"Your brokerage firm doesn't know that you have a new spouse," says Fidelity estate planning specialist Nathaniel Arnett. "After you die, your new spouse might have to go to court and fight the outdated beneficiary designation."

The spousal beneficiary rule does not apply to other types of retirement assets, such as IRAs and annuities. Therefore, it's important to review all your beneficiary designations for all retirement plans.

Tip: A trusted source should be chosen to execute power of attorney responsibilities for both medical and financial decisions, producing documents that are generally "durable," to remain in effect if a spouse becomes incapacitated. To learn more about how legal and financial professionals can support your estate planning efforts, read Viewpoints on Fidelity.com: Five steps to create an estate plan

In addition, a living will spells out a person's wishes for medical care in the event that he or she becomes incapacitated. This way, heirs aren't left guessing about what type of care their loved one wants when he or she is not able to make those decisions, such as stopping life-sustaining treatments.

3. Unlimited marital exemption and portability

Two years before the Obergefell decision, the Supreme Court gave married same-sex couples the ability to pass assets from a deceased spouse to a surviving spouse without incurring federal estate taxes, when the Court invalidated Section 3 of the Defense of Marriage Act in the case of United States v. Windsor.

That's a big cost savings for high-net-worth couples, since the estate federal tax rate is currently 40%. When one spouse dies (provided both spouses are U.S. citizens), his or her assets pass to the surviving spouse tax free due to the unlimited marital deduction. Only when the second spouse dies will estate tax be owed on any amounts over the federal exclusion amount passing to non-charitable beneficiaries, which in 2018 with the tax law changes is set at $11.2 million per person and $22.4 million per couple (the exclusion goes up each year to reflect annual inflation adjustments). Under current law, some states may have a separate estate tax and that might be applied to amounts well below the federal thresholds.

Same-sex couples also benefit from the annual gift tax exclusion. Every taxpayer is allowed to gift $15,000 a year to any individual. Any amounts over the $15,000 exclusion amount must be reported to the Internal Revenue Service (IRS). These excess amounts go toward the lifetime total that can be gifted without facing gift taxes. In 2018, the lifetime limit is $11.2 million, the same as the estate tax exclusion amount.

But married spouses can gift each other an unlimited amount of assets or property without ever incurring the federal estate and gift tax. This only applies to U.S. citizens.

Married spouses are also allowed "portability." If one spouse dies, whatever portion of his or her $11.2 million exclusion that was not used may pass to the surviving spouse, increasing the portion of the estate that isn’t subject to federal estate tax.

"In the past, same-sex couples didn't have that option," notes Arnett. "But married spouses get to roll over the unused portion of their spouse's lifetime federal exclusion amount."

Say one spouse dies, having used $2 million of his or her exclusion. The surviving spouse can roll over the remainder, in this case $9.2 million, and pass $20.4 million on to his or her heirs tax free.

Tip: Portability isn't a given. Surviving spouses must elect it by filing Form 706 with the IRS, depending on whether an estate tax return was otherwise required to be filed. Read Viewpoints on Fidelity.com: Understanding current federal estate and gift tax rules

Now that the LGBT community has full marriage equality, members can take advantage of the same sophisticated estate planning tools to protect their spouses and their families. To make the most of your estate plan, speak with an experienced estate planning attorney who is well versed with the estate planning challenges faced by the LGBT community.

Next steps to consider

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