Estate planning for a gay couple requires that the attorney consider several issues. One of the most important issues is the legal status of the couple. Is the couple a registered domestic partnership? Is the couple legally married? Or is the couple neither a domestic partnership nor a married couple?
Since 2004, New Jersey has recognized domestic partnerships. New Jersey’s domestic partnership act pre-dates the United States Supreme Court decision that compelled states to recognize gay marriages. New Jersey’s domestic partnership act was, at the time, in part, New Jersey compromise on the concept of gay marriage.
The Act permits gay couples who meet certain criteria (for instance, share a common residence, agree to be responsible for each other’s basic living expenses) to register as a domestic partnership. There are benefits and disadvantages to being involved in a domestic partnership. A registered New Jersey domestic partnership may or may not be legally recognized in another state.
If a gay couple is married, then they are treated the same as any other marriage. A valid New Jersey marriage will be recognized in all other states.
If a gay couple is neither a registered domestic partnership nor a legal marriage, then they are unrelated. This is true whether they have lived together for fifty years or one year. There is no common law marriage in New Jersey for straight couples so there is no common law marriage in New Jersey for gay couples.
From an estate planning perspective, one major benefit to being a registered domestic partnership or a legal marriage is that a surviving domestic partner/spouse does not need to pay New Jersey Inheritance Tax on assets he receives from his deceased domestic partner/spouse. For instance, assume that Mr. Smith and Mr. Jones are a couple. Mr. Smith and Mr. Jones live together in a house that they jointly own. They share some bank accounts, but many assets (such as IRAs and 401ks) are only in either Mr. Smith’s or Mr. Jones’s name. With the house, bank accounts, and retirement accounts, Mr. Smith and Mr. Jones have a total estate of $1,000,000.
New Jersey effectively repealed its estate tax in 2018. Prior to January 2018, New Jersey assessed an estate tax if the gross value of the estate were in excess of $675,000. The $675,000 figure was fairly low, so a lot of estate in New Jersey were potentially subject to the estate tax. After January 1, 2018, whether a couple is gay or straight, there will not be any New Jersey estate tax assessed against the estate.
The current credit against the federal estate tax is $12,920,000. When I ask couples whether their estate exceeds $13,000,000, universally, I get a laugh out of the couple followed by an “I wish.” Since most people do not own assets in excess of $13,000,000, most people (gay or straight) do not have to worry about federal estate tax. But assuming that you have reason to be concerned about the federal estate tax, there is an unlimited marital deduction against the estate tax, which is available to gay or straight married couples, for all assets that the deceased spouse leaves to the surviving spouse. So, if Mr. Smith leaves his entire estate to Mr. Jones—his married, surviving spouse—there will not be a federal estate tax assessed no matter the value of the estate.
While New Jersey has effectively repealed its estate tax, the state still has an inheritance tax. The New Jersey Inheritance Tax is assessed based, primarily, on the relationship of the decedent to the beneficiary. If Mr. Smith dies and leaves his entire estate—say $600,000 worth of assets, which includes one-half the value of the home that Mr. Smith and Mr. Jones shared—and if Mr. Smith and Mr. Jones were neither a registered domestic partnership nor a legally married couple, then Mr. Jones will have to pay inheritance tax on the assets he receives from Mr. Smith’s estate as a non-relative, including the value of half their house. The rate of tax would be 15%, so on a $600,000 estate, Mr. Jones would pay $90,000 in tax.
If Mr. Smith and Mr. Jones were a registered domestic partnership or legally married, then Mr. Jones would not pay any inheritance tax on the assets he inherits from Mr. Smith.