A Trust To Hold your IRA or 401k For Your Partner

Qualified plan are one of the largest, if not the largest, asset many people own.  Qualified plans include a variety of programs designed to help you plan for you retirement; 401k, IRA, SEP, TIAA-CREF, 403b and Roth are all examples. 

Thanks to DOMA's demise, if you are married to your partner you can leave your qualified plan to your same-sex spouse without forcing recognition of income or estate taxes.  If you are not married, though, your Partner's options are limited to liquidating the plan and paying any deferred income taxes or electing to "stretch" the plan over your partner's projected life span, which defers the income tax recognition.  If your Partner elects to stretch, he or she must begin taking portions out beginning the year following your death and pay income tax on what is removed. 

Each choice results in your Partner owning the qualified plan.  As owner, the surviving Partner selects to whom the remaining money goes at his or her death after paying further inheritance and estate taxes.  Further, during your Partner's lifetime the qualified plan is exposed to creditors.

For all or some of these reasons, one Partner may wish to leave a large qualified plan to help care for a Partner, but may also wish to retain the right to name who receives any money remaining at the surviving Partner’s death, provide protection from the Partner's creditors and to avoid inheritance and estate taxes at the surviving Partner's death.  

A Trust is a great solution for these cases.  At our firm, for simplicity we call these trusts, "IRA Trusts", even if they hold other qualified plans such as 401k or TIAA-CREF accounts.   Since 2006 congress has mandated that every qualified plan must allow you the use of an IRA Trust.  The IRA owner names the IRA Trust as beneficiary, but during his lifetime he continues to own the IRA as he always has.  Nothing happens until the IRA owners dies.   

For example, Joe in Philadelphia formed an IRA Trust for his Partner, Bob and at Bob's death the trust says any remaining money passes to Joe's niece (lets call it the "Bob IRA Trust").  Joe then names the Bob IRA Trust as beneficiary of his IRA.  During his lifetime Joe owns and controls the IRA as he always had.  At Joe’s death, because he named the Bob IRA Trust as beneficiary, the IRA pours into the Bob IRA Trust.  The Trustee, who could be Bob, then elects to “stretch” the IRA over Bob’s lifespan.  This defers income tax recognition so the IRA funds can be invested for Bob's retirement.  The Bob IRA Trust owns the IRA so the IRA funds are sheltered from Bob's creditors.  Later, at Bob's death, the remaining IRA funds pass to Joe's niece free of Joe's creditors' claims and without paying inheritance or estate taxes. 

 

These trusts have many uses.  You can find more information at my website (klenklaw.com) or feel free to contact me with any questions you may have.

If Your Partner Dies, Can You Survive Financially?

Talking about money is hard.  Talking about money and death is even harder.   Worse yet, if you are in a long-term relationship with someone, is avoiding the conversation until it is to late.  Take a deep breath and start the conversation, as it will protect you both.  Here are some discussion starters, pick one to break the ice and the rest will follow. 

• No matter how high or low, you both have a standard of living to which you are accustomed.  If your partner should die, will you be able to maintain that lifestyle?  Are you willing or able to live with less?   
• Is your partner leaving you money and if so, how much and are there strings attached? 
• Inheritances might come outright or in a protective trust.  Either have advantages and disadvantages.  Is there an advantage to you if the money you receive is sheltered from future creditors?  
• Are you leaving a 401k, which means you will pay income tax when taking the money out later in life, or is it a tax-free inheritance, like life insurance?  The total amount in a 401k might sound adequate to care for your partner, but will it still be enough after you calculate the income taxes due as you take the money out?
•  Can you afford to maintain the house on your own income and the inheritance, or will the house have to be sold?  The same calculation must be done for that shore house in Atlantic County, the Pike County Pocono cabin or that time share in Mexico.  
•  Will you still have health insurance, or does that benefit die with your partner?  

Lots of questions…and there are more.  Meeting with a good financial planner and your estate planning attorney is a good idea.  Run through the questions, make plans for your future.  If your partner or you should die unexpectedly there will be many things to worry about, try to reduce the stress and anxiety with a little planning now.  (for more on estate planning,  go Klenklaw.com).

Estate and Asset Protection Planning for Same Sex Couples after DOMA

In case you have not heard….the U.S. Supreme Court recently struck down the Federal Defense of Marriage Act (DOMA). This results in married same-sex couples now having the same legal rights as heterosexual married couples under Federal Law. What does this mean for estate and asset protection planning for LGBT couples?

First, to qualify for benefits you need be married. We shall see if the regulations that are finalized recognize a New Jersey Civil Union as a marriage or not. Same-sex married couples will now be able to:

• Claim the marital deduction for gift and estate tax planning;
• QPRT (Qualified Personal Resident Trust) planning for the surviving same-sex spouse and children becomes an interesting option;
• Spouses named as beneficiaries on qualified plans (IRAs, 401ks, Roths, 403bs, etc.) will have the option to roll the plan into a “Spousal IRA” deferring income taxes;
• The surviving spouse can elect portability of the deceased spouse’s unused estate tax exclusion;
• Calculating the basis of the surviving spouse’s jointly held property becomes much more simple;
• Formation of non-reciprocal irrevocable trusts for asset protection and estate tax planning becomes more manageable;
• Now same-sex couples can gift split for gift tax purposes;
• The surviving spouse will have access to Social Security, Medicare ad Medicaid benefits that once only applied to heterosexual married couples; and
• There will be more! It will be fascinating to watch the changes that will be taking place over the next year.

Voluntarily Stopping Eating and Drinking: V.S.E.D.

Sometimes, after a long struggle with illness and with full knowledge that death is certain and the future holds nothing but suffering, a person will decide to voluntarily stop eating and drinking (VSED), which hastens the inevitable end. In theory, your right to make decisions about your body is sacrosanct. However, in practice legal and family issues can conspire to block your stated desires. I have placed a full article about this subject on my website, but wanted to emphasize an important LGBT aspect to this issue. Should you ever decide to VSED, expect there to be a response from your family. It is important that you have completed a valid Medical Power of Attorney* naming a person who is aware of your desired plan and is possessed with a personality to stand up to the pressures, and perhaps legal actions, that your family might bring.

* Sometimes called a Living Will, Health Care Directive or Advanced Directive.

IRA Designations for Minors, A potential trap.

Do not fill out those IRA designations without some thought! If you are a single parent of a minor child and name your child as the beneficiary of your qualified plan (IRA, 401k, 403B, etc), at your death the financial institution managing your plan will likely require the child's financial guardian to execute certain elections that pertain to qualified plans. This means incurring an unnecessary expense in petitioning the court to appoint a financial guardian (or "Guardian of the Estate"), which could be a bank or an individual that you would not have selected. Instead, form an IRA Trust...an option that every qualified plan must give you since 2006. This way you select the person or bank that manages your child's IRA and, as a bonus, the IRA is protected from your child's creditors, spouse, and you get to select the age your child gains control over the funds.

Pennsylvania Inheritance Tax

If I have a Philadelphia County registered same-sex relationship can I
avoid the Pennsylvania Inheritance Tax?

No. Unlike the Commonwealth of Pennsylvania of which Philadelphia is
part, Philadelphia has recognized domestic partnership status and
allows partners to register formally as domestic partners. Philadelphia
then recognizes the couple as married for tax issues such as real
estate transfer taxes. Unfortunately, the Pennsylvania Inheritance
Tax is a Commonwealth Tax, not a Philadelphia Tax, so Philadelphia's
recognition has no effect on the Inheritance Tax. This means that
instead of paying the 0% married couple inheritance tax rate a registered Philadelphia domestic partner will pay the 15% rate of inheritance tax between unrelated persons.

Civil Union in One State, Divorce in Another...

If I have entered into a New Jersey civil union with my partner, but
now we are Pennsylvania residents, can we get a Pennsylvania divorce?

In limited circumstances when both parties are in complete agreement
Pennsylvania courts have dissolved same-sex marriages and civil unions
but when there is not complete agreement the parties are not allowed
to use Pennsylvania courts. To get your divorce you have to return to
New Jersey, or whatever state created your same-sex marriage, civil
union or domestic partnership, become a resident then file for divorce
or dissolution. This is a changing area of the law, so don’t be surprised if in 2012 or sometime soon after this answer changes.

Gifting Assets to Trusts as LGBT Estate Planning

Joe of Bucks County has a partner to whom he would like to leave a certain amount of money at his death, but if Partner dies before using the assets Joe would like the money to be used for his Niece. A typical Will gives the money directly to Partner subject to a 15% inheritance tax and the money is available to Partner’s creditors and Partner may leave the money to whomever he wishes, ignoring Joe’s wishes. Lets say Partner respects Joe’s wish, dies a resident of Philadelphia, and in his Will gives the remaining assets to Niece; a second 15% Inheritance Tax occurs.

One Answer: Lawyer could form an Irrevocable Trust into which Joe transfers the assets so that at his death the assets are not his…they are trust’s. Partner can have access to this trust during Joe’s lifetime, or only after Joe’s death, whatever Joe wishes. At Joe’s death there is no Pennsylvania Inheritance Tax, a 15% savings. Plus, should Partner later have creditors, the assets are safe. Further, the trust can require the remaining assets be used for Niece. Joe’s wishes are respected and the 15% tax is avoided.

Estate Planning, Inheritance Tax and Life Insurance for LGBT couples

Estate planning for the LGBT couple in Pennsylvania is complicated by the fact that no matter how long the couple may have lived with one another or be committed to one another, for Inheritance Tax purposes they are considered non-relatives. This means that transfers at death from one person to another are taxed at the highest possible rate; 15%.

One exception to this tax is life insurance. The Pennsylvania Inheritance Tax rate on life insurance passing from on LGBT person to another at death is 0%. Every LGBT estate plan should then carefully examine the assets available to the couple and see if the existing life insurance, or life insurance purchased as part of the plan, can reduce the Inheritance Tax due.

For example, if one partner wishes to leave another partner $100,000 in cash, the surviving partner will only receive $85,000 after the 15% inheritance tax. On the other hand, if the partner left $100,000 from a life insurance policy, the surviving partner receives the entire $100,000. With a small amount of planning, the surviving partner in this example ends up with an additional $15,000.

The Federal Estate Tax

Pets: remembering ALL your loved ones

Let's face it, we live in a world in which our dogs and cats (and many other varieties of four-legged and non-legged friends) are a part of our family. This certainly is no less true for LGBT persons. The obvious question that comes to mind then is "What would happen to my beloved Vizsla or Ocicat or mutt Rotty-Pitt-Pinscher mix if I die?"

While we may treat our pets as if they are our children, Pennsylvania does not recognize them as such. However, Pennsylvania does allow a person to include clauses in his or her estate planning documents for the continued care of pets. Pennsylvania law allows people to make formal arrangements for the care of pets through a Will, and also allows for the creation of a trust for the care of pets.

Peter Klenk, Esquire and Jeanna Lam, Esquire explain the different things one should take into consideration when thinking about the future care of pets in their article "Including Your Pets in Your Estate Plan." You may find the piece helpful when thinking about your more-furry members of the family.

Retirement Planning

A study released earlier this year by the American Society on Aging and the MetLife Mature Market Institute reveals that of the 1,200 LGBT baby boomers surveyed, only 21% of them agree that they are "on track" for saving for retirement. And as Todd Henneman writes in his August article for Workforce Management, retirement planning presents a unique set of challenges for LGBT individuals and couples. One notable challenge that is unique to gay and lesbian couples are the inability for surviving partners to receive Social Security survivor benefits, even if they had been in a state-recognized legal relationship, as the federal government only provides such benefits to opposite-sex couples.

One helpful tool that assists with retirement planning and beyond, is the use of an IRA Trust. Since 2006 all IRAs and 401K programs must allow you to name IRA Trusts as beneficiaries. An IRA Trust allows you to pass qualified plan funds for a person’s benefit (e.g. your partner), defer tax recognition of those funds, while adding a level of asset protection to the IRA or 401K funds given to the beneficiary. Such trusts allow LGBT couples to name their partner as beneficiary of their retirement plans upon the owner's death, while giving them the benefit of asset protection AND deferred tax recognition.

For a PDF copy of the American Society on Aging and the MetLife Mature Market Institute survey, click here.

Estate Planning Involving Children

Many LGBT couples have children whom both partners consider to be their own, but whom only one partner is actually the biological and/or legally recognized parent. In this situation, many partners become concerned about who will have the right to take care of their minor children should the legally recognized parent die. In the end, all decisions surrounding custody are based on the best interests of the child, but partners can provide for an alternate guardian in their Will with clearly stated reasons for believing a specific person (including their surviving partner) would be the appropriate guardian for minor children. While not necessarily binding, Courts will take these wishes into consideration when determining guardianship rights.

Moreover, Pennsylvania allows couples to seek what is called a second-parent adoption. This enables a second parent to adopt a child without the first parent losing their legal rights to custody of that child. LGBT couples with children should speak to an attorney about exploring these options.

Intestate Succession in Pennsylvania

In Pennsylvania, when a person dies without a Will, they are said to have died "intestate" and their property will pass according to the laws of intestacy. Pennsylvania law divides the assets and belongings of a person who dies intestate between the surviving spouse and either the deceased's issue (children, grandchildren, etc.) or the deceased's parents. If there is no surviving spouse, assets will pass to surviving issue, parents, or even more distant relatives.

As there are no legally recognized relationships for same-sex couples in Pennsylvania, gay and lesbian surviving partners typically will inherit nothing (other than assets which they had owned jointly with their partner or of which they were a beneficiary) from a partner who dies without any estate planning documents in place. Because the surviving partner of a same-sex relationship cannot be recognized as a spouse in Pennsylvania, all of the deceased partner's probate assets will pass instead to the deceased partner's children or parents, if any are then living. Assets will even pass to more distantly related persons if the partner dies intestate with no surviving issue or parents instead of passing to the surviving partner.

Gay and lesbian persons can avoid leaving their surviving partner with nothing if they have the right estate planning documents in place. Each person's individual situation varies, and as such, members of the LGBT community should speak with an attorney to be fully advised of their options.

Hospital Visitation Rights

While federal rules are changing to make it easier for LGBT partners to visit one another in the hospital, it remains vitally important that the proper documents be in place to establish visitation rights for the partner of another who is hospitalized. In Pennsylvania, it is possible to identify individuals, including partners, who the hospital must give visitation access. These documents are legally enforceable should a hospital have discriminatory practices.

There are number of documents that can be drafted to ensure that partners can visit each other should one of them be hospitalized. Some of these include Powers of Attorney, Living Wills, and Designation of Agents with visitation rights. Beyond granting your partners the right to visit each other in the hospital, documents such these can contain HIPAA releases, which allow a partner the ability to access and review the medical records of the other. Without the proper language, however, such releases may fail, potentially making it impossible for a partner to make informed decisions on the other's behalf.

For more information on this and other topics, you can visit our firm's website.

Welcome!

While Estate Planning is important for everyone, LGBT couples and individuals should take special care in creating and implementing a plan to ensure that their wishes are followed. Our firm's combined years of experience will help same-sex partners and LGBT individuals understand what is needed to create an effective estate plan.

Our goal for this blog is to establish a forum where members of the Philadelphia and surrounding communities can seek information about the world of Estates & Trusts and how it affects LGBT individuals. We understand that there is a dearth of material available regarding the Estate planning issues that most affect gay and lesbian persons, and hope that the information you find on this website will help to fill that void.