Articles Posted in Estate Planning

With the recent launch of the President’s health insurance marketplaces across the country, the Affordable Care Act has taken on a much more tangible character. Over 36 states are participating in the federally run internet exchange, while New York is one of a dozen of states running separate markets with its own operating system. The New York exchange is known as the “New York State of Health.” In just a few months, the Affordable Care Act (ACA) will come into full effect. While parts of the law are already in place, 2014 will bring in a whole new set of changes, including dozens of tax provisions that can be difficult to understand.

With this in mind it is important to understand if and how the Affordable Care Act may affect your estate planning. Some of the provisions may have a relatively uncomplicated impact on your future. For example, nonmedical withdraws from health savings accounts will be taxed at 20%. Additionally, using pre-tax flexible spending accounts on nonprescription medications will be prohibited.

Other parts of the ACA’s provisions, though, are exceedingly complex. Careful planning and advice will be necessary to ensure that you can reduce your overall tax liability. One of the largest effects to your estate comes from the investment income surtax of 3.8%, which applies to the lesser of the investment income or the amount that income exceeds over the threshold. The threshold is $200,000 of Adjusted Gross Income (“AGI”) for unmarried filers or heads of household, $250,000 AGI for married filing joint, $125,000 AGI for married filing separate filers, and $12,000 AGI for trusts and estates. Further, there is an additional Medicare Earnings Tax on earnings above $200,000 for unmarried filers, $250,000 for married filing joint, and $125,000 for married filing separate filers. There is little that people can do to avoid these taxes, which will go up .9% from the existing rate to 2.35%. That is, except if you decide to earn less money!

Earlier this year, the Supreme Court’s Decision in Windsor v. U.S. allowed same-sex couples to receive the same federal benefits as other married couples. This has had enormous implications for estate planning for same-sex couples, as was previously covered generally here, and more specifically here for retirement issues, and here for recent IRS guidance. However, there are still many challenges and uncertainties facing same-sex couples since the ruling.

One area providing significant confusion is how divorce will affect same-sex couples. Although same-sex marriage is available in 13 states and the District of Columbia, couples that establish residences outside of those states may not be able to obtain a divorce. In states like Virginia that do not recognize same-sex marriage, gay couples cannot get a divorce (In essence, because the state does not recognize the that the couple’s marriage ever happened, it has no power to grant them a divorce). Moreover, if the couple does not have a legal residence in a state that does allow for same-sex divorce, they may not be able to obtain a divorce there either.

Even if the couple can obtain a same-sex divorce in their state, courts are often unsure how to handle a same-sex divorce. Take the case of Margaret Weing, a New York rabbi who got divorced earlier this year. Although she had only been married to her partner since 2008, she had lived with her partner in a registered domestic partnership since 1996. Weing and her partner had raised children together, merged their finances, and made each other beneficiaries of each other’s pensions and life insurance policies. They had also made each other executors and health insurance proxies, and had given each other power of attorney. Yet, when the New York court heard their case, the court would only divide assets accumulated starting from when the couple married in 2008.