Same-Sex Spouses Estate Planning Considerations

In a perfect world I would only have to discuss estate planning for married people and unmarried people.  But alas we live in the imperfect United States and I have to discuss estate planning for opposite-sex married people, same-sex married people, and single people.  I resent having to break down married spouses into two categories because one category is not given the full benefits (and burdens) of being married.

In 1967 the United States Supreme Court ruled that the Commonwealth of Virginia's anti-miscegenation violated Due-Process and Equal Protection and stated in its ruling for Loving v. Virginia

Marriage is one of the "basic civil rights of man," fundamental to our very existence and survival.... To deny this fundamental freedom on so unsupportable a basis as the racial classifications embodied in these statutes, classifications so directly subversive of the principle of equality at the heart of the Fourteenth Amendment, is surely to deprive all the State's citizens of liberty without due process of law. The Fourteenth Amendment requires that the freedom of choice to marry not be restricted by invidious racial discrimination. Under our Constitution, the freedom to marry, or not marry, a person of another race resides with the individual and cannot be infringed by the State.

But until this basic civil right is given to all married couples,  I have to address estate planning for same-sex couples separately. 
Same-sex married couples in New York may receive the statutory protections afforded opposite-sex couples when it comes to intestate inheritance (while in New York or another state that recognizes their marriage) but they do not receive the same protections when it comes to Federal Estate Tax issues. Regardless of where the couple is domiciled, they cannot take the marital deduction on a Federal Estate Tax Return, which could cost thousands (if not millions) of dollars. 

Then there is also the issue of gift tax.  Between opposite-sex spouses there is no limit on annual gifting between spouses (this is sometimes used as an estate planning tool), but because the Federal government doesn't recognize same-sex spouses, the annual exclusion amounts apply and amounts in excess will use up your life time exclusion amount.   

If a couple married in New York later moves to a state that does not recognize their marriage it will be imperative for them to have a Last Will and Testament, otherwise the surviving spouse could inherit nothing as the decedent will be deemed to have been single/unmarried. 
If the couple has children, the non-biological parent could lose custody if they have not formally adopted the child or appointed a guardian in a Will. 

An issue that also needs to be discussed is divorce.  If a same-sex couple executes Wills leaving their estate to the surviving spouse, what will happen if the couple later moves to a state where there marriage is not recognized and then they divorce?  Divorce automatically revokes a Will that leaves property to the now ex-spouse, but if the state in which the person dies never recognized the marriage to begin with, will confusion ensue as to whether the dispositions under that Will are still valid?  (I would suspect that the laws of the state in which the Will was validly executed would control its validity at the time of the testator's death, but that does not mean that confusion and delay would not ensue). 

The number of issues that arises when constructing an estate plan for same-sex couples is dizzying.

Do You Love Your Kid(s)?

If the answer to the question in the title of this blog post is "yes", then why haven't you prepared a Will?

Dying of natural causes at an old age is something that everyone assumes will happen. Dying an untimely death when you are in the prime of your life and have minor children is something that no one thinks will happen, but sadly it happens every day.

Parents of minor children need to think about this unpleasant scenario and make decisions about who will care for their minor children.

There are two documents that parents can use to designate a guardian: Standby Guardian and a Last Will and Testament.

A Standby Guardian designation is a document that is effective for an initial 60 days when the parents dies or become physically or mentally incapable of caring for the children.

A Last Will and Testament can permanently appoint a person or persons as the custodial guardian and/or the trustee for the minor child’s assets.

Every parent should have both of these documents in place and discuss them with the chosen guardian and/or trustee whether they would be willing to take on the responsibility.

All parents, married, divorced, or single, owe it to their children to appoint a guardian for care and custody in the event of an untimely death. I always encourage parents who are married and raising a child or children together, designate a guardian in case of an unlikely, but always possible, simultaneous death of both parents.

Planning is even more important for single or divorced parents.

I recently had a conversation with a divorced dad who told me that he did not need to appoint a guardian for his children because his ex-wife had already taken care of that. I said to him: “but what if she dies before you?”  In that scenario, if the ex-husband/dad died and then the ex-wife/mom died, the ex-wife’s guardian designation would be effective.  However, if they die in reverse order, the ex-husband/dad would have died without effectively designating a guardian for his children and while the court might look to the ex-wife’s guardian designation for guidance, there is no guarantee the court will follow it, or that the document will even be available for the court to review, or that the person/people designated on that form are who the ex-husband/dad would have chosen for the care and custody of his children.

This scenario is why all separated or divorced parents should take the time to have a Standby Guardian appointed and execute a Last Will and Testament designating a person(s) for the permanent care and custody of their children in the event that both parents die.

Another scenario in which it is crucial to have a guardian designated for minor children is when one parent is not involved in the minor’s life and the custodial parent is remarried. The custodial parent’s spouse (i.e.: “the step-parent”), would not have an automatic right to custody of the minor child if the custodial parent dies (unless the step-parent legally adopted the child).

If the step-parent is someone who would want to have custody and care for the child, the biological parent of the child should make that designation in a standby guardian designation as well as in his or her Last Will and Testament or alternatively the step-parent should seek to adopt his or her step-child.  Similarly, single unmarried parents need to appoint a guardian for all of these same reasons.

In addition to appointing a guardian, parents can also appoint a trustee to manage any assets that the minor children inherit under the parent’s Last Will and Testament. The guardian and trustee can be the same person, but do not necessarily need to be.

The guardian for the care and custody of your child should be someone that you trust to instill the same moral, spiritual, intellectual, educational, and social values that you are currently teaching your child.  The person who would be best suited to carry out that teaching may or may not be the person who has the best ability to manage assets that the child inherits.

In addition to appointing a guardian and a trustee, I also strongly encourage parents to speak with an insurance professional to ensure that they have sufficient life insurance to provide for the upbringing and education of their children.

This blog was originally posted as a guest blog on

http://health-e-coach.com/wealthy/financial/kids-alright/

Exiting Through Succession Planning

Exiting Through Succession Planning
by Colleen A. Dooley, Esq., The DiFabio Law Firm, P.C.

Succession planning is a specific exit strategy. An exit strategy involves a business owner removing her- or himself from the business regardless of whether the business continues. A succession plan is an exit strategy that involves a business owner transferring the business to a third party to continue as a going concern. There are two options as to who will be the successor that I will discuss in this article:

1. Unrelated third party
2. Related family member

Unrelated Third Party
There are two methods by which a business can be sold to an unrelated third party.

1. Sale of the corporate stock or membership interest
2. Sale of the business assets and activities as a going concern

Both of these scenarios are arms-length transactions that will likely require listing the business for sale with a broker or having sufficient contacts within the industry to independently find a third party buyer. If selling to an unrelated third party is your exit strategy, then your primary goal will be to build the business up to be as attractive as possible for sale.

Related Family Member
There are essentially two methods to transition a business to the next generation in a family:

1. Lifetime gifting of interests in the business; or
2. Devise by Last Will and Testament

This is where it gets complicated. If you’re a small business owner, chances are that your children, or nieces and nephews, grew up around the business, possibly worked at the business as employees, and have a unique familiarity with its operation. Maybe you are a second or third generation owner of the business yourself. But, what if you have a co-owner? Does your business partner want to co-own the business with your children?

Many small business owners choose to transition ownership of the business to the next generation during his or her lifetime. In the situation of a corporation or LLC (and assuming there is only one shareholder or member or a co-owner who is not opposed to the transition) the business owner could make an annual gift of shares or membership interest to the next generation. Depending on the value gifted, an annual Gift Tax Return may or may not need to be filed to track the business owner’s use of his life-time exclusion amount. In the situation of a sole proprietor, gifting of an interest in the company would result in a de facto partnership which would necessitate the involvement of an accountant or attorney not only for Gift Tax reasons, but also to prepare and file an annual partnership tax return.

If a business owner does not want to transition ownership of the business to the next generation during his or her lifetime, the business owner could prepare a Last Will and Testament to give the business to an identified heir.

However, if a business owner is in a partnership or a multiple person corporation or LLC, discussions need to be had with the co-owner about transitioning the business to the next generation and the financial “how” of the heir taking over. What if the other business owner does not want to be business partners with your children? What if the other business owner does not have another generation that is interested in succeeding him or her in the business? How will your heirs be able to afford to buy out those shares? The short answer is that one of the following three buy-sell agreements will need to be used:

1. Cross-Purchase Agreement where the departing/dead business owner’s interest is purchased by the other owners. The business entity itself is not involved in the transaction and the business owners should have life insurance on each other to fund such a buy out.
2. Redemption Agreement where the business purchases the departing/dead business owner’s interest through the use of life insurance proceeds. In this scenario, the business should own a life insurance policy on the shareholders or members.
3. “Wait and See” Agreement where the (1) business has the option to purchase back all or part of the departing/dead business owner’s interest, then (2) if the business cannot or chooses not to make the purchase, then the continuing/surviving business owners have the option to purchase the departing/dead business owner’s interest, and then (3) if the continuing/surviving owners do not want to purchase the shares then the business is typically obligated to purchase the departing/dead owners shares.

As you may gather from some of these questions, when a business is owned by multiple people, transition to the next generation of ownership can become complicated and involve multiple buy-sell agreements and ownership of life insurance policies on each of the shareholders, owned by either the other shareholder(s) or the corporation. Such planning requires the skill of an attorney, to structure the succession plan and estate plan, working with an insurance professional who is familiar with insurance products for succession planning; an accountant to ensure that tax returns are being filed for the appropriate business structure taking into account the life insurance; and a business valuation expert to determine how much the business is worth, which would be helpful in determining the amount of insurance to purchase.

As a business owner you need to have an exit strategy and develop a team of experts to assist you in either selling your business or passing it along to the next generation.

This article was originally submitted by the author as a guest blog for:
http://blog.endorphinadvisors.com/2011/11/03/exiting-through-succession-planning/