Estate Planning for New Jersey Civil Unions and Non-Traditional Families
PRESENTATION SLIDES
Estate Planning for New Jersey Civil Unions & Non-traditional Families Defense of Marriage Act (DOMA) ••1 U.S.C. 7 -- In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite sex who is a husband or a wife. ••28 U.S.C. 1738C -- No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship. Defense of Marriage Act (DOMA) The law has two effects: 1. No state (or other political subdivision within the United States) is required to treat a relationship between persons of the same sex as a marriage, even if the relationship is considered a marriage in another state. 2. The Federal Government may not treat same-sex relationships as marriages for any purpose, even if concluded or recognized by one of the states. New Jersey Domestic Partnership Act ••The New Jersey Legislature enacted the Domestic Partnership Act, P.L.2003, c. 246, on January 12, 2004, which came into effect on July 10, 2004. ••The law made domestic partnerships available to all same-sex couples, as well as to different-sex couples aged 62 and older. ••The Domestic Partnership Act provided limited healthcare, inheritance, property rights and other rights and obligations but fell far short of all of rights and obligations afforded to married couples Lewis v. Harris ••On October 25, 2006, the Supreme Court of New Jersey unanimously ruled in Lewis v. Harris that the "unequal dispensation of rights and benefits to committed same-sex partners can no longer be tolerated under our State Constitution." ••With the Lewis v. Harris decision, the Court directed the legislature to amend New Jersey's laws to grant same-sex couples all of the same rights, benefits and responsibilities as heterosexual couples. New Jersey Civil Union Act ••On December 14, 2006, the New Jersey Legislature passed a bill providing for civil unions, which was signed into law by Governor Corzine on December 21, 2006. ••The Civil Union Act became effective on February 19, 2007. ••The law expands the rights provided by the Domestic Partnership Act and establishes the same legal rights and financial benefits currently available to married heterosexual couples to same-sex couples who comply with the procedures set forth in the law. Rights of Civil Union Partners ••All rights accorded to heterosexual married couples ••Where statute is not specific, equate all spousal rights with rights of civil union partners ••Statute specifically calls for the application of any laws referencing "spouses" to "partners in civil union" Inheritance Rights ••Right to intestate inheritance ••Right to Elective Share protection ••Right to serve as Administrator Tax Rights ••Exempt from NJ Inheritance Tax (Class A beneficiary) ••Exempt from NJ Estate Tax ••File Joint NJ 1040 ••Claim partner as dependent ••No attribution of NJ income for insurance benefits Formation of Civil Union ••18 years old (or if minor, consent of parents) ••Obtain license in town where residing or where ceremony to held if not a NJ resident ••Civil Union dissolves pre-existing Domestic Partnership to same partner GST Issues ••Generation Assignments (IRC §2651) •-Spouse assigned to the same generation as the transferor •-Spouse's child and grandchild are assigned to the same generation as a child and grandchild of the transferor •-Non-related individuals are assigned to the 2nd generation if there is greater than 37 ½ year age difference •-A transfer to a civil union spouse could result in a GST tax (May-December relationships) •-A transfer to a step-child in a civil union could result in a GST tax Grantor Retained Income Trust (GRIT) ••Chapter 14's special valuation rules only apply to "members of the family" ••Don't apply to transfers between civil union spouses since, under DOMA, they are not spouses ••The grantor of a GRIT is permitted to retain an interest in the accounting income from the trust for a fixed term of years, not merely an annuity or unitrust amount. ••At the conclusion of the GRIT term, the assets remaining in the GRIT are distributed to the beneficiary. ••Works very well in high interest environment, but not so well in low interest environment. GRIT Illustration Peter (age 50) establishes a GRIT funded with $1,000,000, with a remainder interest in his civil union spouse, James, when the 7520 rate is 7.2%, and reserves the income interest for 15 years. Assume that the trust grows at an after tax rate of 7%. Value of the gift = $303,400 (the retained income interest is valued at $696,600). The trust, after 15 years, will be valued at $2,760,000, and will be excluded from the Peter's estate. Other Advantages of Inapplicability of Chapter 14 ••Section 2703 provides that certain restrictive agreements will not be considered in valuing corporate or partnership interests for estate and gift tax purposes. ••Section 2704 of the Code treats the lapse of certain rights, such as voting and liquidation rights, as a gift by, or includible in the gross estate of, the owner of the lapsed right. ••Civil union spouses may be able to enter into a business agreement that will freeze the value of preferred interests, pay out income to the preferred partner/member and deflect future growth to the other class of interests, typically the poorer partner, and/or that partner's children. Pre-Civil Union Agreements IRC §2053 -- Claims Against the Estate ••The value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts . . . for claims against the estate . . . as are allowable by the laws of the jurisdiction, whether within or without the United States under which the estate is being administered. 2053(a)(3) ••If the claim is based on an agreement, it is deductible only to the extent it is bona fide and for adequate and full consideration in money or money's worth. 2053(c)(1)(A) IRC §2053 -- Claims Against the Estate ••An estate tax deduction was allowed for a claim against the estate for insurance payable to the woman with whom decedent was living at his death. U.S. District Court (Minn.) held an agreement between the decedent and his insurance beneficiary to share their assets was supported by full and adequate consideration. It allowed a section 2053 deduction for the over $100,000 of insurance proceeds received by the beneficiary. Carlson v. U.S., 54 A.F.T.R.2d 84-6451 ••No deduction is allowable for commuted value of widow's right to receive from decedent's estate $12,000 yearly for life under prenuptial agreement in which she agreed to grant decedent life estate in her home and furnishings if he survived her. Est. of Morse v. Comm., 46 AFTR 2d 80-6182 (625 F. 2d 133), (CA6). Protections on Dissolution ••Rights to equitable distribution ••Rights to alimony ••Rights to receive child support ••Rights to separate maintenance ••Rights to divorce from bed & board Tax Treatment of Alimony in a Civil Union Dissolution ••Alimony is not deductible by payor under I.R.C. § 215(a) ••Is it income to payee spouse? See I.R.C. §§ 61 and 71 - probably income to payee, but see Gould v. Gould, 245 U.S. 151 (1917) and Rev. Rul. 67-221, 1967-2 C.B. 63. ••Not a gift - not given with detached and disinterested generosity. See Commissioner v. Duberstein, 363 U.S. 278 (1960). ••DOMA prohibits the use of a QDRO with respect to civil union spouses Tax Treatment of Property Division in a Civil Union Dissolution ••I.R.C. § 1041 - no gain or loss on transfers incident to divorce. ••DOMA prohibits the application of Section 1041 with respect to transfers between civil union couples. ••See U.S. v. Davis, 370 U.S. 65 (1962), decided before enactment of Section 1041 - Transferor must recognize built-in gain and transferee takes stepped up basis. ••Davis - also held that no income to payee as considered in exchange for surrender of marital rights (consider implications to prenup situation). PRESENTATION NOTES: Estate Planning for New Jersey Civil Unions & Non-traditional Families Defense of Marriage Act (DOMA) ••1 U.S.C. 7 -- In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite sex who is a husband or a wife. ••28 U.S.C. 1738C -- No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship. Defense of Marriage Act (DOMA) The law has two effects: 1. No state (or other political subdivision within the United States) is required to treat a relationship between persons of the same sex as a marriage, even if the relationship is considered a marriage in another state. 2. The Federal Government may not treat same-sex relationships as marriages for any purpose, even if concluded or recognized by one of the states. New Jersey Domestic Partnership Act ••The New Jersey Legislature enacted the Domestic Partnership Act, P.L.2003, c. 246, on January 12, 2004, which came into effect on July 10, 2004. ••The law made domestic partnerships available to all same-sex couples, as well as to different-sex couples aged 62 and older. ••The Domestic Partnership Act provided limited healthcare, inheritance, property rights and other rights and obligations but fell far short of all of rights and obligations afforded to married couples Lewis v. Harris ••On October 25, 2006, the Supreme Court of New Jersey unanimously ruled in Lewis v. Harris that the "unequal dispensation of rights and benefits to committed same-sex partners can no longer be tolerated under our State Constitution." ••With the Lewis v. Harris decision, the Court directed the legislature to amend New Jersey's laws to grant same-sex couples all of the same rights, benefits and responsibilities as heterosexual couples. New Jersey Civil Union Act ••On December 14, 2006, the New Jersey Legislature passed a bill providing for civil unions, which was signed into law by Governor Corzine on December 21, 2006. ••The Civil Union Act became effective on February 19, 2007. ••The law expands the rights provided by the Domestic Partnership Act and establishes the same legal rights and financial benefits currently available to married heterosexual couples to same-sex couples who comply with the procedures set forth in the law. Rights of Civil Union Partners ••All rights accorded to heterosexual married couples ••Where statute is not specific, equate all spousal rights with rights of civil union partners ••Statute specifically calls for the application of any laws referencing "spouses" to "partners in civil union" Inheritance Rights ••Right to intestate inheritance ••Right to Elective Share protection ••Right to serve as Administrator Tax Rights ••Exempt from NJ Inheritance Tax (Class A beneficiary) ••Exempt from NJ Estate Tax ••File Joint NJ 1040 ••Claim partner as dependent ••No attribution of NJ income for insurance benefits Formation of Civil Union ••18 years old (or if minor, consent of parents) ••Obtain license in town where residing or where ceremony to held if not a NJ resident ••Civil Union dissolves pre-existing Domestic Partnership to same partner GST Issues ••Generation Assignments (IRC §2651) •-Spouse assigned to the same generation as the transferor •-Spouse's child and grandchild are assigned to the same generation as a child and grandchild of the transferor •-Non-related individuals are assigned to the 2nd generation if there is greater than 37 ½ year age difference •-A transfer to a civil union spouse could result in a GST tax (May-December relationships) •-A transfer to a step-child in a civil union could result in a GST tax Grantor Retained Income Trust (GRIT) ••Chapter 14's special valuation rules only apply to "members of the family" ••Don't apply to transfers between civil union spouses since, under DOMA, they are not spouses ••The grantor of a GRIT is permitted to retain an interest in the accounting income from the trust for a fixed term of years, not merely an annuity or unitrust amount. ••At the conclusion of the GRIT term, the assets remaining in the GRIT are distributed to the beneficiary. ••Works very well in high interest environment, but not so well in low interest environment. GRIT Illustration Peter (age 50) establishes a GRIT funded with $1,000,000, with a remainder interest in his civil union spouse, James, when the 7520 rate is 7.2%, and reserves the income interest for 15 years. Assume that the trust grows at an after tax rate of 7%. Value of the gift = $303,400 (the retained income interest is valued at $696,600). The trust, after 15 years, will be valued at $2,760,000, and will be excluded from the Peter's estate. Other Advantages of Inapplicability of Chapter 14 ••Section 2703 provides that certain restrictive agreements will not be considered in valuing corporate or partnership interests for estate and gift tax purposes. ••Section 2704 of the Code treats the lapse of certain rights, such as voting and liquidation rights, as a gift by, or includible in the gross estate of, the owner of the lapsed right. ••Civil union spouses may be able to enter into a business agreement that will freeze the value of preferred interests, pay out income to the preferred partner/member and deflect future growth to the other class of interests, typically the poorer partner, and/or that partner's children. Pre-Civil Union Agreements IRC §2053 -- Claims Against the Estate ••The value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts . . . for claims against the estate . . . as are allowable by the laws of the jurisdiction, whether within or without the United States under which the estate is being administered. 2053(a)(3) ••If the claim is based on an agreement, it is deductible only to the extent it is bona fide and for adequate and full consideration in money or money's worth. 2053(c)(1)(A) IRC §2053 -- Claims Against the Estate ••An estate tax deduction was allowed for a claim against the estate for insurance payable to the woman with whom decedent was living at his death. U.S. District Court (Minn.) held an agreement between the decedent and his insurance beneficiary to share their assets was supported by full and adequate consideration. It allowed a section 2053 deduction for the over $100,000 of insurance proceeds received by the beneficiary. Carlson v. U.S., 54 A.F.T.R.2d 84-6451 ••No deduction is allowable for commuted value of widow's right to receive from decedent's estate $12,000 yearly for life under prenuptial agreement in which she agreed to grant decedent life estate in her home and furnishings if he survived her. Est. of Morse v. Comm., 46 AFTR 2d 80-6182 (625 F. 2d 133), (CA6). Protections on Dissolution ••Rights to equitable distribution ••Rights to alimony ••Rights to receive child support ••Rights to separate maintenance ••Rights to divorce from bed & board Tax Treatment of Alimony in a Civil Union Dissolution ••Alimony is not deductible by payor under I.R.C. § 215(a) ••Is it income to payee spouse? See I.R.C. §§ 61 and 71 - probably income to payee, but see Gould v. Gould, 245 U.S. 151 (1917) and Rev. Rul. 67-221, 1967-2 C.B. 63. ••Not a gift - not given with detached and disinterested generosity. See Commissioner v. Duberstein, 363 U.S. 278 (1960). ••DOMA prohibits the use of a QDRO with respect to civil union spouses Tax Treatment of Property Division in a Civil Union Dissolution ••I.R.C. § 1041 - no gain or loss on transfers incident to divorce. ••DOMA prohibits the application of Section 1041 with respect to transfers between civil union couples. ••See U.S. v. Davis, 370 U.S. 65 (1962), decided before enactment of Section 1041 - Transferor must recognize built-in gain and transferee takes stepped up basis. ••Davis - also held that no income to payee as considered in exchange for surrender of marital rights (consider implications to prenup situation).
Einhorn, Harris, Ascher, Barbarito & Frost, P.C., in Denville, New Jersey, represents clients facing criminal defense, family law, personal injury and other legal issues throughout North Jersey, including communities such as Morristown, Parsippany, Newark, West Orange and Livingston. Our office is conveniently located near I-80 and I-287. Bergen County • Essex County • Hunterdon County • Middlesex County • Morris County • Passaic County • Somerset County • Sussex County • Union County • Warren County |
