Friday, December 14, 2012

Without marriage equality, same-sex couples sometimes face a labyrinth of complex tax laws

It’s been a long time since I’ve read much of the details on who same-sex couples manipulate their finances to work around discriminatory tax and estate laws.  There have, over the years, existed a number of law practices that specialized in these problems.  I remember reading about all of this on a flight back in 2006.
Personally, over the years, I didn’t consider the issue as important in a prospective practical sense. I always believed that if I started a relationship, both myself and the other person would remain economically “self-sufficient”.  That’s the case today with a lot of heterosexual couples (too many, some “natural family” propronents claims).  Of course, the main question is “What if …”, say, there is at least a tragic accident.  I also would tend to see the base exemption (probably $3.5 million for 2012, depending on what Congress does  -- it might even go back to $1 million even in 2013) as generous enough.

But there are complicated questions.  They can occur with securities that have appreciated, real estate, and closely held businesses.  In individual situations, these have the potential to be very damaging.
There is a good reference from Williams Institute at the UCLA Law School that makes for good reading on the topic, here. It's called "Federal Tax Disadvantages for Same-Sex Couples" by Michael Steinberger of the Williams Institute, 2009. 

There are a lot of “mouthful “  buzzwords here, such as “EGTRRA” (the Economic Growth and Tax Reconciliation Act of 2001, and “QFOBI”  (Qualified Family-Owned Business Interest).   There are a lot of important specific observations, starting with the fact that the full surviving legal spouse exemption for married couples didn’t start until 1981 (Ronald Reagan).   There are “stepped-up basis” considerations in dealing with inherited securities that sometimes could hit same-sex surviving partners hard.  There are rules involving family farms or ranches and participation in closely-held family business.  UCLA points out that children of surviving same-sex spouses can lose out when “inheriting” closely held businesses and wind up having to sell them, often to established corporations (based on earnings-related valuations) to pay taxes.  The rules are very complicated and change from year-to-year (far too much for generalize blogs to follow), so couples need professional legal and tax advice on these matters.  It can also matter if you live in a community property state.

UCLA points out that federal recognition of same-sex marriage would not have a quantitatively noticeable effect on revenue, even given the dire nature of the federal “Fiscal Cliff” and debt ceiling negotiations.   The effect could increase, however, if estate and indirect inheritance taxes are tightened for everyone in the future, an idea that some people on the political Left want.

The article also lists the 23 states that have some estate (before payout) and/or inheritance taxes. 
Michael Gray from Santa Clara University and Patricia Cain from Iowa discuss the issue on Gray’s “Financial Insider” column.

Note the mention of the requirement for a gift tax return to the IRS for gifts over $13000.  I haven't heard this. 

It’s worth saying that in practice, wills from same-sex couples have sometimes been challenged by blood family members. 

And even people not in relationships are indirectly affected by marriages of others, because they are often called upon to sacrifice or support them (relatives or children) -- the "family slave" problem.  

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