Last December, when President Obama signed the Tax Relief Act of 2010 into law, many wealthy and affluent married couples breathed a sigh of relief. One effect of the law was to raise the federal estate tax exemption to $5 million per person. As always, the first spouse to pass away can pass his or her entire estate to the surviving spouse without paying any estate tax (this is known as the unlimited marital deduction). Plus, the law includes a portability provision that allows married couples to share their estate tax exemptions without additional estate planning.
But what about nontraditional couples? If you and your partner are unmarried – whether you’re heterosexual or in a same-sex relationship – you don’t get the same benefits under the tax code. And, for same-sex couples, this is true whether or not you live in a state that recognizes gay marriage.
With the generous $5 million per person estate tax deduction, this might not seem like a relevant issue at the moment. However, the new estate tax law is only effective for 2011 and 2012. If Congress doesn’t extend the law by the end of 2012, then we could return to a $1 million per person estate tax exemption in 2013. Add up the value of your home, your retirement accounts, your investments, and your life insurance policies, and it’s not too hard to accumulate a taxable estate of more than $1 million.
So, what can nontraditional couples do to minimize the impact of the estate tax, now and in the future? Planning ahead and working with an experienced estate planning attorney are two keys. Your estate planning attorney might recommend a trust, such as a lifetime trust or an Irrevocable Life Insurance Trust, to help minimize estate taxes as well as to reduce the likelihood of estate litigation that might accompany a traditional Will. Depending on how wealthy you are relative to your partner, your attorney might recommend that you take advantage of the $13,000 annual federal gift tax exemption and make tax-free gifts of your property to your partner during your lifetime. This can ensure that your partner is the ultimate owner of this property after your death, and it removes the value of the property from your estate, thus reducing your net worth.
When it comes to estate planning, and tax planning in particular, there’s a variety of options available for nontraditional couples.