Before the Supreme Court legalized gay marriage in the United States through its 2015 Obergefell v. Hodges decision, same-sex couples were not afforded many rights automatically guaranteed to spouses. Now, estate planning legislation is “gender blind,” opening up financial opportunities previously unavailable to LGBT couples.
Here are five new estate planning considerations for same-sex couples.
The Marital Deduction
Before the legalization of gay marriage, same-sex couples were treated as single for tax purposes. This meant LGBT couples could not exceed the annual gift exclusion of $14,000 to their partner without tax penalties. Now, all married couples can fully take advantage of the unlimited marital deduction allowing a spouse to leave any amount of money to their surviving spouse without federal estate tax penalties.
Portability allows the surviving spouse to use his or her – as well as the exemption of their deceased spouse. In 2017, the individual estate tax exemption is $5.49 million. By using the portability provisions, the surviving spouse’s federal estate tax exemption can be as high as $10.98 million. Keep in mind, portability benefits are not granted by default. To receive the benefits of portability, the surviving spouse must elect portability on the estate tax return within nine months of his or her spouse’s death. Consult with a tax advisor to ensure you follow all protocols for electing portability provisions.
The annual gift exclusion is $14,000 per recipient – meaning an individual can make gifts of up to $14,000 a year to a lone person without the recipient having to file a gift tax return. Married same-sex couples, however, can take advantage of “gift splitting,” a taxation rule allowing spouses to increase their combined maximum gift exclusion to $28,000 without gift tax implications.
IRA Rollover Rights
Surviving spouses listed as beneficiaries can now have assets from their deceased spouse’s retirement account rolled over into their own IRA without having to take a mandatory minimum distribution or lump sum distribution. The surviving spouse can let the account assets grow tax-deferred and wait until 70½ before they are required to start taking Required Mandatory Distributions (RMDs).
Tenancy by the Entirety
Tenancy by the entirety (TBE) is a form of asset ownership only available to married couples that treats both spouses as a single legal entity. Each spouse must consent to any ownership interest changes in the asset. After one spouse dies, the surviving spouse gets full ownership of the asset or property. TBE is not available in every state, so consult with an estate planning specialist to verify whether your state allows TBE.
Because of the Supreme Court’s ruling in favor of the legalization of same-sex marriage, LGBT couples can now provide further financial protection for their spouses. Contact a Fifth Third Bank financial advisor to review your estate plan.