As a gay couple in the capital region, deciding how to handle your money depends on where you live — and it's not always as cut-and-dry as you think.
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JOE KAPP - NICHOLAS BURKHOLDER
Friday, March 28, 2008
Regardless of your political affiliation, one debate that usually inflames passions in the Washington Metro Area is whether it’s best to live in D.C, Virginia or Maryland.
The question becomes more important if you are a same-sex couple. For example, let’s say you’ve saved $1 million in your retirement account, which you planned to leave to your partner at death. In which jurisdiction would the taxes be the lowest on your estate: D.C., Virginia or Maryland? If you said D.C., you’d be wrong. Maryland? No, guess again. The answer is Virginia. Yep, that’s right, the anti-gay Commonwealth.
While the law at the federal level for gay couples is quite clear — marriage only exists between a man and a woman — when it comes to a discussion of estate taxes, whether you reside in D.C., Virginia or Maryland can have a significant impact on the taxes your estate will pay if you are leaving money to a partner.
“How could it be? Doesn’t D.C. allow us to register as domestic partners,” you might be wondering. This is true and registering does provide a significant number of benefits, including some assets automatically flowing to your partner.
But D.C. also has a $1 million estate tax threshold, which still applies to registered domestic partners, while your married buddy at work gets a free pass. Incidentally, the D.C. estate tax kicks in at a lower level than the federal estate tax, which in 2008 starts at $2 million.
MARYLAND HAS TO be better, you might assume. Wrong again. At the moment, Maryland has a 10 percent inheritance tax on assets that are left to non-spousal, non-family members. However, there is legislation pending in Annapolis that would allow domestic partners to avoid this tax, so stay tuned.
Plus, the state also has an estate tax (with a $1 million exclusion) that, combined with the inheritance tax, determines the total death tax liability. If your inheritance tax ends up being greater than the state tax, you get off lucky and don’t need to pay the estate tax. But if the inheritance tax is lower, you have to make up the difference up to the state tax amount.
But don’t pack your bags yet and move across the Potomac to Virginia. Even though the state estate tax you would pay in the example above is zero, Virginia still has Code Section 20-45.3, popularly known as the Virginia Affirmation of Marriage Act, which reads that a “civil union, partnership contract or other arrangement between persons of the same sex purporting to bestow the privileges or obligations of marriage is prohibited. Any such civil union, partnership contract or other arrangement entered into by persons of the same sex in another state or jurisdiction shall be void in all respects in Virginia and any contractual rights created thereby shall be void and unenforceable.”
In 2006, this language was added to the Virginia Constitution by voters, even though it’s clear as mud.
Therefore, even though Virginia repealed its state estate tax, the Affirmation of Marriage Act could still affect the type of estate planning documents you put together and your ability to make the decisions in them stick.
“Although D.C. law is very good for us and Maryland law is neutral, it’s figuring out how to protect Virginia couples that keeps me up at night,” says area estate planning attorney Lawrence S. Jacobs.
Because assets that have beneficiary designations, like life insurance policies, 401(k)s, IRAs or other retirement accounts automatically flow to the chosen beneficiary, you probably can avoid any issues with the Affirmation of Marriage Act in Virginia. However, the law only dates from 2004 and is untested.
In D.C., Maryland and Virginia, to ensure that assets flow to the family you choose, review all accounts including banking, brokerage and retirement accounts to ensure that there are current beneficiary designations. Change banking and investment accounts to have a “Payable on Death” or “Transfer on Death” designation to avoid the probate process and possible contests from hostile family members.
If you live in Maryland, ensuring equal assets between partners is a good way to reduce the tax. While you may not be able to eliminate the inheritance tax completely, life insurance may be a good option to replace assets that are lost due to this tax.
In D.C., to reduce or eliminate the estate tax, consider shifting assets to your partner to reduce the size of your estate to less than $1 million. Use caution and consult your tax or financial adviser, because gifts of more than $12,000 per person per year could trigger federal gift tax liability.
(Something to note: Shifting assets to a partner in this case means that the person doing the shifting loses all control and ownership of the assets. This could get ugly if the couple breaks up.)
Finally, if you are living in D.C., consider registering as domestic partners with the city’s health department. This registration provides significant rights not afforded to gay couples in most other states. It’s important, however, to understand the advantages and disadvantages of registering, so be sure to work with a qualified professional who can help you decide if it makes sense for you and your partner to register.
This article is for information only and is not financial, legal or tax advice. Readers should obtain advice specific to their situation before making any financial, legal or tax decisions.
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