Contents

Planning for Non-traditional Families

A slight majority of American households consist of opposite-sex spouses. That means that almost half of American households consist of other arrangements, including but not limited to:

  • Single (divorced or never married)
  • Single with children (divorced or never married)
  • Same sex couple (with or without children)
  • Unmarried opposite-sex couple (with or without children)
  • Traditional family (with dependent elderly parents or dependent adult children)

The planning needs of these households involve substantial issues not confronting historically traditional households. Examples of rights extended to legally married opposite-sex spouses (see Defense of Marriage Act below) that are not extended to other cohabitation relationships (e.g., gay or straight unmarried couples) include:

  • Ability to make decisions for an incapacitated spouse,
  • Ability to own assets as tenancy by the entirety,
  • Ability to take advantage of the federal Family and Medical Leave Act to care for a sick partner,
  • Ability to take a dependency exemption for federal tax purposes (but unmarried partner can qualify as an actual dependent if he or she passes the IRS dependency test),
  • Availability of employer-offered tax-free fringe benefits to spouse including access to HSAs and FSAs for non-participant spouse. However, the following are exceptions to this rule:
  • An unmarried partner can qualify if the other partner qualifies as an actual dependent (otherwise the FMV of cost of coverage is taxable to the employee with the domestic partner).
  • In California or Massachusetts a same-sex domestic partner, a person in a civil union or in a same-sex marriage may obtain favorable tax treatment for employer-paid health benefits, regardless of “marital” status.
  • Choice of filing status including filing a joint income tax return,
  • Community and quasi-community property,
  • Dower and curtsey (a state law that provides that when a married person dies the surviving spouse receives the legal right to use any real estate they owned during their lives – varies by state),
  • Gift splitting with non-donor spouse and use of non-donor spouse’s applicable exclusion for federal gift tax purposes,
  • Intestate succession preference over others (varies by state),
  • Parental rights, support obligations, and the ability of a step-parent to adopt the spouse's child,
  • Precedence in being appointed as an administrator of an intestate spouse's estate and as financial and health care guardian of an incapacitated spouse,
  • Protection of spousal communication (i.e., spouses cannot be forced to testify against each other in a court of law),
  • Right to elect against the decedent spouse’s estate (varies by state),
  • Right to roll over a deceased spouse’s IRA or qualified plan into the surviving spouse’s IRA (but beneficiary IRA* rollovers are allowed to non-spouse beneficiaries),
  • Right to sue for loss of consortium, emotional distress for injuries to the other spouse, and wrongful death,
  • Unlimited federal estate and gift tax marital deduction.

(*) A beneficiary IRA IRA is inherited from someone other than spouse. If a traditional IRA is inherited from anyone other than the beneficiary's deceased spouse, the beneficiary cannot treat the inherited IRA as his or her own. This means no contributions can be made to the IRA and no amounts can be rolled into or out of the inherited IRA. However, a trustee-to-trustee transfer is allowed as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary. The beneficiary must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

Defense of Marriage Act (DOMA) - 1996

What about those states (e.g., Massachusetts) or cities (e.g., San Francisco) that legally recognize domestic partnerships, civil unions, or same-sex marriages? The federal government does not legally sanction any marriage other than a marriage between a male and a female that is recognized by state law. Based on the 1996 Defense of Marriage Act (DOMA), the IRS and Tax Court did not recognize same-sex marriages, civil unions, or domestic partnerships recognized by some states. However, the June 26, 2013 Supreme Court decision invalidated a key provision of the 1996 Defense of Marriage Act. A state may legally recognize a marriage between two same-sex partners, but as a result of the recent Supreme Court decision the federal government must recognize all legal marriages between two same-sex partners. Thorough and rigorous financial planning is still needed with clients in non-traditional relationships.

Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

(IR-2013-72, Aug. 29, 2013)

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement. For information on filing an amended return, see Tax Topic 308, Amended Returns, or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code.

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.

FAQs for Same-Sex Couples and Certain Domestic Partners

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses).

Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law

The following questions and answers provide information to individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions, or other similar formal relationships that are not marriages under state law. These individuals are not considered as married or spouses for federal tax purposes.

Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions

Additional information on these issues may be found in Revenue Ruling 2013-17 and news release IR-2013-72, Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples.

Planning for Non-traditional Relationships

A domestic partnership agreement details how a couple should handle the assets each person acquired before the relationship began and subsequently brought into the relationship as well as assets brought into the relationship after it began. A special or general springing durable power of attorney allows one partner to manage the other partner’s assets and affairs to the extent granted in the power of attorney. Executing this document requires a very trusting and trustworthy relationship. A durable health care power of attorney allows a partner to make “informed consent” decisions for the incapacitated partner.

If ownership rights of a surviving partner are important, it may be convenient and practical to title assets as joint tenants with rights of survivorship (JTWROS) because there is no danger of the asset going to someone other than the surviving tenant upon the first tenant’s death. However, there are three issues that may not be obvious with a JTWROS solution:

  • When the first tenant dies 100% of the asset will be attributed to the decedent’s estate unless the surviving tenant can prove consideration.
  • Prior to either tenant dying, one tenant could terminate the tenancy by selling the asset without the other partner’s knowledge or consent which could cause a derivative problem: the partner that sells the asset may have created a taxable, completed gift to the partner that originally paid for the asset.
  • A portion of the JTWROS asset could be subject to either tenant’s creditors.

One solution to these problems would be to own the asset as Tenants in Common wherein each tenant owns a portion of the asset as an undivided interest in the entire asset (e.g., 50/50, 30/70, etc.). Each tenant’s undivided interest in the property is protected from the other tenant’s actions or creditors and each tenant can bequeath their interest by Will to anyone else (kids from a previous relationship, etc.).

Note: Tenancy by the Entirety is not available for unmarried partners but it is available for same-sex married couples.

A will can be contested when an unmarried partner dies. When the probate court sides with the blood-relatives of the dead partner, the relatives inherit what the surviving partner should have inherited. Dying intestate (i.e., without a will) virtually guarantees that the family of the decedent will inherit all the separately owned assets. A better alternative is to create a living trust that becomes irrevocable at death. Make sure that the appropriate assets are then titled to the trust.

A living will is an important document for all.

Another area that needs careful attention is the proper completion of beneficiary forms. Beneficiary designations override a will. If a beneficiary designation names someone other than the account owner intended, the asset will go to the wrong person. Also, a blank beneficiary designation means the asset will be paid to the decedent’s estate and likely go to family members rather than the intended partner.


Bookstore: Books on financial planning for special circumstances


Also see:

Divorce

Disability

Terminal illness

Job change and job loss

Dependents with special needs

Monetary windfalls