Normally, when a person dies, her assets get passed to her spouse and children, even when she doesn't have a will. It's the natural progression of things. But what happens if you can't marry your partner?
Estate planning creates a special challenge for gay and lesbian couples. The federal government doesn't recognize gay marriages and civil unions, so the couples have to get creative to avoid a serious obstacle to inheritance. But one solution could be construed as no solution at all, because it is fraught with complications.
When it comes to inheritance, spouses and children have the advantage. Maryland, for example, charges an inheritance tax of 10% on property passing to people other than a child, spouse, parent, grandparent or sibling.
Another problem? If there's no recognized spouse or child to inherit, everything could go to probate, a process that drags your will or your assets through the court system after you die to make sure that all of your debts are paid and all of your assets are accounted for. Probate comes with a time lag as well as administrative costs for legal advertising, appraisal fees and so on.
To protect their assets, some gay and lesbian couples resort to the last remaining way they can choose to be recognized as family by the court system. It's not the most ethical or the most honest way of representing themselves, but some believe it's the only way.
They adopt each other as if they were parent and child. But here are three reasons that's a bad idea.
1. Adopting your spouse comes with a bundle of complications. For starters, it might be considered sexual abuse by some courts.
"The court sees that the adoption is taking place, and it's based on a child-parent situation," said financial adviser Tony Aguilar, founder of Texas-based Amiti Advising.
"When they find out they're having sexual relations, in most states that's incest. So that's why a lot of the big courts won't pass it. They say, 'If we allow this, then we're allowing incest to take place, and we can't allow that in the court system: We can't allow this agreement to go through,'" Aguilar said.
2. Another problem is that, unlike getting a marriage annulled or divorced, you really can't undo an adoption. That makes it "perilous," according to Matthew MacLean, partner at global law firm Pillsbury Winthrop Shaw Pittman LLP.
"I say it's perilous because it might not address the problem you're trying to address, and secondly, unlike writing a will or even getting married, adoption is very close to irreversible if one or both of the partners changes their minds later," MacLean said.
If you do change your minds later, you're kind of admitting to falsifying your relationship for financial benefit -- something that's not looked upon too kindly by the courts. In fact, it could even be considered lying under oath.
"The court is going to ask 'Why?' and if you say 'We're no longer together,' then, in the court's eyes, since it was based on a parent-child relationship, you were committing perjury at the time. That's a huge issue," Aguilar said.
If you're adopting for the sake of trust money established by another relative, sometimes the trust has stipulations.
"It might exclude adult adopteds, which some trusts do, or include only children of the blood," said David Keyko, also a partner at Pillsbury. "You can actually then have accomplished absolutely nothing."
3. Another problem? You might go through all the trouble of adoption, but if you don't follow the fine print to the letter of the law in the state in which you adopt, you might not be eligible anyway.
Each state has its own law regarding the issue. Some states carry an age gap stipulation: You can only adopt someone 20 years younger than yourself, for example. Other states, like Maine, have no age gap, but insist that at least one of you must be a state resident.
"You have to make sure you're entitled to be adopted in the state so third parties can't say it wasn't properly accomplished. … This is still something that can be challenged in a lot of states and might be challenged in a lot of circumstances," Keyko said.
Because it's rare, sometimes it breaks new ground in the courts. That means it's not iron-clad protection from the surviving relatives, especially if there's a lot of money involved, which tends to bring out the family's claws and fangs.
Partner adoption caused a trust-fund brawl in 2005 when Olive Watson, daughter of Thomas Watson Jr., the son of the founder of IBM, sought a way to give her long-term partner financial security. She eventually adopted Patricia Spado, who had given up her career to become the housewife of the couple.
Shortly after the adoption, the two parted ways, and Spado suddenly became eligible to inherit money from a trust given to grandchildren of the IBM fortune. It caused an uproar amongst the relatives, who tried to annul the adoption, claiming fraud. Some argued Spado hadn't lived in Maine long enough, since she had only summered there. After years in court, it was decided the trustees failed to establish sufficient facts to support their claim, and Spado won her case in 2009.
Lesson learned: You can spend years in legal and financial purgatory. "In the meantime, (while fighting the court battle), the person is unclear about their income and their finances. If this goes on, then they're now paying attorney fees on top of everything else," Keyko said.
The Investing Answer: To avoid probate, according to Aguilar, Keyko and MacLean, same-sex couples can:
- Hold property in your joint names (that wouldn't pass through probate; it‘s automatic.)
- If you have $100,000 or more, consider creating a trust for liquid assets and for passing all the property.
- Have a prenuptial-style agreement or contract, naming procedures to divide assets in case of a split (or death). You can use anything as a trigger; it's not necessarily tied to divorce.
- Have a financial planner plan for both partners as individuals in case of loss or split.
- Find out if you can bring your same-sex partner onto your company's health insurance and retirement accounts.
- Create a retirement savings goal
- Design an investment plan to reach it.
- Get a professional money manager to continually monitor and rebalance your portfolio
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