2015 Year-End Planning for Lesbian, Gay, Bisexual and Transgender (LGTB) Taxpayers
By Janis Cowhey, Co-Leader - Modern Family & LGBT Services Practice Group

With the US Supreme Court’s historic June ruling in Obergefell v Hodges, establishing same-sex marriage as a legal right in all 50 states, 2015 is a banner year for LGBT taxpayers. Whether or not you decide to get married, be sure to consult your tax advisor about the changing legal and tax landscape. Following are some recent developments and planning tips for couples (married or not) and singles.

Couples considering marriage, including those that have been together for many years and/or are already cohabitating, need to understand and plan for the tax, legal and financial impact of marriage.

  • Prenuptial agreements are important and should take into consideration any existing cohabitation agreements executed before marriage. Determine how you will categorize assets acquired prior to marriage that are in one person’s name.
  • Recognize losses from any depreciated assets, and keep the assets in the family by selling them to the other partner before getting married.
  • Once married, couples may want the protection afforded by re-titling real estate assets from tenants in common or joint tenancy to tenants by the entirety, which is only available to married couples. Tenants by the entirety provides survivorship rights as well as additional creditor protection.
  • Advise your employers of your marriage and review W-2’s closely. Employers may still erroneously be including the cost of a same-sex spouse’s health insurance in employee income.
  • Adoption tax credits are not available when adopting a spouse’s children. Couples may want to complete adoption before marrying.
  • Medical expenses for assisted reproduction may be deductible.
  • Once married you may be responsible for your spouse’s medical bills. You may disqualify your spouse from receiving Medicaid benefits.
  • Many countries do not recognize same-sex marriage, and many U.S. states have not yet culturally adapted to same-sex marriage. Carry important legal documents on your smartphone or a flash drive to avoid challenges to your legal right to act on behalf of your spouse or your children, should the need arise. Important documents include powers of attorney, healthcare proxies and living wills.

Tax and estate planning is paramount for same-sex couples. Here are ten vitally important issues to consider.

  1. Getting married – Analyze the impact of marriage from a financial perspective, as well as a social perspective. Many LGBT couples have been together for years and may have already planned for the possible inequity of not being married. Review any existing plans and consider alternatives. For example, compare the advantages and benefits of estate planning vs. the loss of Medicaid, or using your spouse’s social security earnings option instead of your own.
  2. Review estate plans – Make sure your estate plans are up to date and take advantage of planning opportunities, whether or not you are married. For example, you may have had wills prepared before your marriage was recognized. They may be unnecessarily complicated or may not properly reflect your wishes under current law. The unlimited marital deduction is just one example of the tax advantages available to married couples.
  3. Review ancillary documents – Do your living wills, powers of attorney and health care proxies reflect your current wishes? Are the agents named your contemporaries or younger? Have you designated alternates? Many LGBT couples may have older documents that name family members instead of a spouse or partner.
  4. Review “back-up plan” – Are your alternative plans for retirement or long-term care still valid? Do you have long-term care insurance? Do you have enough saved for retirement? If you are married, and your planning was done before your marriage was recognized, it may no longer be appropriate.
  5. Review life insurance policies – Consider whether your life insurance policies are sufficient and/or appropriate for purposes of supporting your survivors or paying estate taxes, whether or not you are married. Would “second-to-die” life insurance be more appropriate? Many LGBT couples took out significant life insurance policies to cover the estate taxes they would have incurred if their marriage was not recognized. You may choose to reduce the amount of coverage, but be careful – you may not be able to increase your coverage later, or only be able to do so at a significant increase in cost.
  6. Review beneficiary designations for life insurance, retirement accounts, etc. – Many LGBT couples may have outdated beneficiary designations that name family members instead of their spouse or partner. Don’t forget to also review contingent beneficiaries.
  7. Review ownership of assets – Consider re-titling assets from individual to joint with right of survivorship or vice versa. For real estate, as mentioned above, consider re-titling to tenants by the entirety, which is exclusive for married couples. Since your marriage will now be recognized, you may need to undo some of the complicated planning you did previously.
  8. Review charitable giving – There are numerous ways to make your charitable giving beneficial to both you and the charitable organization, such as charitable remainder trusts and charitable lead trusts. These vehicles may reduce estate taxes for LGBT couples who choose not to marry and thus cannot avail themselves of the unlimited marital deduction for estate and gift tax purposes.
  9. Consider establishing a trust – A trust can be a useful alternative to a will for LGBT couples. Wills require the next of kin to be notified and are a matter of public record.
  10. Consider amending previously filed income, gift and estate returns – If you live or lived in a state that did not recognize your marriage, you may be able to amend past-year income tax returns filed under “single” status. You may also be able to amend gift or estate tax returns to make use of the unlimited marital deduction.

On August 20, 2015, the Social Security Administration (SSA) agreed to retroactively apply the Obergefell decision to pending social security spousal benefits claims. This decision means that same-sex married couples who live or lived in states that did not recognize same-sex marriage prior to Obergefell are now eligible for full Social Security benefits. The new policy will apply to all previously filed claims that are still pending in litigation or in the administrative process.

In a two-to-one decision, a three-judge panel of the Court of Appeals for the Ninth Circuit ruled that Federal income tax home mortgage interest deduction limitations apply individually to each unmarried co-owner of a qualified residence, and not to the residence itself. This August ruling means that each co-owner is entitled to a maximum $1.1 million indebtedness limitation for mortgage and home equity interest on his or her Federal income tax return. This decision reverses a Tax Court ruling that the limitation applied on a per-residence basis and allows individuals in the Ninth Circuit who own property together (business partners, siblings, unmarried couples, etc.) to essentially double their mortgage interest deduction when the indebtedness is equal to or in excess of $2.2 million.