Unique estate planning issues are experienced by same-sex married couples. After considerable internal deliberation among our firm's five (5) estate-planning lawyers, we believe we have found a default solution. The solution involves preparing up to five (5) separate trusts to facilitate compliance with both federal and California law.
Background
Many same-sex couples who had been together for an extended period of time took the opportunity to marry their partner during the brief five-month window in 2008 when, prior to the passage of Proposition 8, same-sex marriage was legal under California law. Thus, unlike the overwhelming majority of opposite-sex marriage couples, many same-sex marriages in California occurred later in the individuals’ lives. These marriages have been deemed valid under California law, but remain invalid under federal law and the Defense of Marriage Act. As a result, the treatment of the community property of same-sex married couples is treated differently under federal law and California law.
This blawg suggests a 5-trust solution for such couples.
Separate (federal)/Separate (state) Trusts: 2 Required
Due to the fact that both spouses often enter into the marriage later in life, they possess greater separate property at the time of the marriage than average opposite-sex couples that married young. When opposite-sex couples with separate property engage our firm to draft an estate plan, we are able to fund a trust with both spouses’ separate property as the income from either is reported by the couple in their jointly-filed tax return. However, same-sex couples are not afforded this luxury and must file separately under federal law. Thus, same-sex couples must segregate this property as it is treated as separate property under both California and federal law, the income of which reportable only by one spouse. Segregation is achieved through the establishment of two “separate” property trusts, each containing the separate property of one spouse.
Separate (federal)/Joint (state) Trusts: 2 Required
Property held in the name of one spouse acquired as a result of the labor of that spouse expended during the marriage is considered community property under California law and separate property of the spouse under federal law. Under California Family Code §§ 1100 and 1102, such property much be managed and controlled by both spouses. However, income derived from this property is considered separate for taxation purposes under federal law (reportable individually), although reportable as community for taxation purposes under California law (thus reportable jointly in a California state tax return). Therefore, two “hybrid” trusts must be established to segregate this property with both spouses as co-trustees of each trust, one containing the community property held in the name of one spouse and the other containing community property held in the name of the other spouse.
Joint (federal)/Joint (state) Trust: 1 Required
Any California community property held in the names of both spouses will be treated as community property under California law and jointly-held property of two individuals under federal law. Thus, a final fifth “community” trust must be established to hold such property.
In conclusion, under this proposed solution, five similar and interrelated trusts are established to accommodate the five different characterizations of property held by same-sex married couples.
