Man Without an Heir? Kulzer & DiPadova, P.A. Attorneys Haddonfield New Jersey

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Estate Planning after the Domestic Partnership Act (P.L. 2003, c. 246)

By Glenn A. Henkel, JD, LLM, CPA

INTRODUCTION

The process of estate planning is the exercise of arranging one’s affairs so that the “estate” – the assets one owns – are properly managed during a testator’s life and distributed after death in a fashion which minimizes aggravation and expense. The process is not only complicated by the nature of the clients’ estate and by their wishes, but also by lifetime legal obligations imposed, as well as by the tax law. Traditional estate planning involves the creation of a Last Will and Testament, a General Durable Power of Attorney and an Advance Directive for Health Care. Moreover, the process would be incomplete without a review of the titling of assets which make up the estate. In sum, the planning of the estate forces individuals to focus on the consequences of incapacity or death. The objective of a planning process is to minimize uncertainty.

The enactment of the Domestic Partnership Act in New Jersey will assist clients in the estate planning process because it will codify rights and responsibilities of the parties. Unfortunately, there may be circumstances when the act will create additional confusion and possibly even tax problems. This article will review some of the new issues for the estate planner to consider. Since the Act is so new (it takes effect July 12, 2004), many issues may not have even been considered! I am sure that this is not a comprehensive list of issues; however, planning in the future will not only involve questions for the domestic partners (hereafter DP) themselves, but also for their loved ones (such as parents) who could leave assets to a domestic partner.

THE NEWDOMESTIC PARTNERSHIP ACT

On January 12, 2004, Governor McGreevey signed the New Jersey Domestic Partnership Act – landmark legislation to acknowledge and legally recognize the significant relationships within our diverse society. P.L. 2003 Ch. 246 (Codified as N.J.S.A. 26:8A-1, et seq .) According to Census records, 9.1% of the 60 million households in the United States were made up of unmarried couples. [1] These statistics could be low, as many unmarried couples (both same-sex and opposite-sex) may not report their status as unmarried partners because of the possible stigma that could be attached. It has also been reported that about 160,000 gay and lesbian couples are raising children in the U.S. [2] Nevertheless, New Jersey is one of the first states to recognize this “new class” of citizens.

The statute requires that if persons choose to live as domestic partners, they must file an Affidavit of Domestic Partnership with the “local registrar”[3]and meet the following test:

(a) Share a common residence and otherwise “jointly responsible for each other’s welfare” and

(i) Have a joint deed, mortgage or lease; or

(ii) Have a joint bank account; or

(iii) Designation of partner as primary beneficiary of Will; or

(iv) Designation of beneficiary in retirement asset of life insurance policy; or

(v) Jointly owned car;

(b) Agreement that they are jointly responsible for “basic living expenses” during relationship;

(d) No relation (4 ^th degree of Consanguinity);

(e) Same sex or different sex and both over age 62;

(f) Chosen to share lives in “committed relationship of mutual caring”;

(g) Must be over age 18.

The “Affidavit of Domestic Partnership” will be a public proclamation of the obligations imposed mutually upon the parties. It is unclear whether this will be a part of public record, like deeds, or private, like certain birth or death records.

MARITAL RIGHTS

The obvious object of the Domestic Partnership Act is to recognize a significant personal relationship, akin to a spousal relationship. Accordingly, some discussion of the estate planning implications of marriage is necessary in order to understand the ramification of DP. In the late 1970’s, the State of New Jersey repealed the common law concepts of dower and curtesy.[4] In its place, New Jersey has three regimes for determining spousal right in an estate. Of course, property will first pass to a surviving joint tenant by operation of law; and second by contractual beneficiary designation. Therefore, these rules apply to the assets left afterwards. Thus lifetime actions (even inadvertent) may effect beneficiary issues.

The first situation is for “intestacy.” If a spouse passes away without a Will (i.e., passes away “intestate”), the most common occurrence is where there are “common” or mutual children. In this case, the spouse is entitled to the first $50,000 of an estate and one-half of the excess over $50,000.[5] See N.J.S.A. 3B:5-3. This rule only applied to “probate” assets – assets that do not pass by contract or by operation of law. Of course, this assumes that the children “common” to the marriage (or surviving parents) would take the balance of the estate. If the children are not “common” (i.e., not children of the surviving spouse), the surviving spouse would take one-half of the estate. See N.J.S.A. 3B:5-3d.

A second regime would apply if the Will of the testator spouse was executed before the marriage took place. In this case, the spouse takes the intestate share and the Will controls disposition of the balance. See N.J.S.A. 3B:5-15b.

A third regime occurs where a decedent spouse does not provide for the survivor. In this case, the surviving spouse is entitled to the “elective share.” See N.J.S.A. 3B:8-1, et seq . This is usually one-third of the “augmented estate.” Unlike the first and second regime which applies to “probate” assets – things not passing by operation of law as joint tenants or by contractual beneficiary designation – the “augmented estate” is a far broader concept and will include non-probate assets and other assets transferred. See N.J.S.A. 3B:8-3.

Domestic Partners are entitled to NONE of these rights. There is no right to property in intestacy. There is no right under a Will – whether the Will is pre-marital or post-marital. Thus, for estate planning purposes, the domestic partner is in a far different position than spouse. Certainly, a domestic partner can provide for the surviving domestic partner by Will, but the law provides no rights to the partner. However, this is where the problem begins. A recent decision of the New Jersey Supreme Court has reshaped rights of unmarried persons in a way that the statute could not.

CONTRACT RIGHTS

Sopko v. Roccamonte, 174 N.J. 381 (2002) is a New Jersey Supreme Court case that has considerably changed estate planning in New Jersey. Whether the concepts will be applied to domestic partners remains to be seen; however, it establishes principles that must be considered. Arthur Roccamonte and Mary Sopko lived together for over 30 years. Arthur was married at death – however, not to Mary! Arthur had remained married to the mother of his children, even though he had convinced Mary to leave her husband in the 1960’s and they lived together in a “domestic” relationship for many years. At death, Arthur died “intestate.” Thus, his estate passed to family (spouse and children). In a nutshell, the court allowed a palimony claim against the estate because of his promises that he would “take care of her.” The Court found that this contractual burden that Mr. Roccamonte had imposed upon himself survived his death. Finally, the Court found that jurisdiction for the estate claim rested in the Family Court – not the Probate Court.

How does the Roccamonte case apply to a domestic partner? In Roccamonte, the Court relied on oral testimony (principally from an interested party – Mary Sopko) of oral promises of the decedent. In a domestic partnership, the parties make a written sworn statement that they are in a “committed relationship of mutual caring.” Further, this is published for the world to see in the affidavit of domestic partnership. Thus, unlike self-serving testimony of an interested party, there is written evidence. Added to this written evidence there is likely to be a substantial body of oral and written evidence about the commitments made to each other in and during the relationship. There is also likely to be substantial commingling of assets and obligations (such as mortgages) which will add additional confusion. If claims are made against an estate of a predeceasing DP, the open question is whether the debt will be a deduction (for tax purposes) against the estate. The rule of I.R.C. §2053(a)(3) allows a deduction for “claims” against the estate if they are “allowable” under the laws of the jurisdiction in which the estate is administered. A claim is not deductible if it is the result of collusion. See Rev. Rule 83-54. Will the payment of the claim be income to the recipient? These are questions that have been raised since Sopko.

Will obligations of a “spouse” be translated to a non-spouse domestic partner? Another question will relate to obligations imposed upon a spouse. Under Jersey Shore Medical Center v. Estate of Baum, 84 N.J. 137 (1980), the New Jersey Supreme Court established the “doctrine of necessaries” which permits a creditor to recover from a spouse of a debtor for a debt incurred for the “necessaries” provided. This happens where the debtor spouse did not have financial resources to pay for “necessaries” and the spouse does have adequate resources. In the event that a domestic partnership is entered into and one domestic partner publicly agrees in his/her Affidavit of Domestic Partnership to be committed for basic living expenses, will the “doctrine of necessaries” be extended to the domestic partner? Certainly individuals (particularly elderly individuals) should be mindful of the potential obligation. In Jersey Shore, the medical bills incurred during the marriage (before death) were charged against the surviving spouse. Even if one DP has died (ending the partnership), can costs incurred during the partnership for “basic expenses” be claimed as a debt to the survivor?

The rights of a spouse can be modified by contract. See N.J.S.A. 3B:8-10 (waiver of elective share). See also N.J.S.A. 37:2-31- The Uniform Premarital Agreement Act. Similarly, rights of prospective domestic partners should be eligible to be modified by contract. See Section 6e of the Act. A careful planner would be wise to follow the “Uniform Premarital Agreement Act” in drafting. However, “premarital agreement” is by obligation an agreement in “contemplation of marriage.” See N.J.S.A. 37:2-32. Will this body of case law apply to domestic partners? As to the death of an unmarried partner, the Sopko case implies that contractual rights can be altered for unmarried individuals.

DP “BENEFIT” – TAX SAVINGS?

The primary estate planning advantage to domestic partners is in the inclusion of a “domestic partner” as a “Class A” beneficiary for New Jersey inheritance tax purposes. “Class A” beneficiaries are subject to New Jersey inheritance tax at a rate of zero (0%) percent. This effectively eliminates the inheritance tax obligation. Other “Class A” beneficiaries include spouse, children and grandchildren (but not step-grandchildren). See N.J.S.A. 54:34-2(a). While this represents a significant benefit to some people, it will not affect individuals with estates over $675,000 in value, under the New Jersey estate tax. See N.J.S.A. 54:38-1. The elimination of the New Jersey inheritance tax will save 15% (the tax imposed on Class D – unrelated – beneficiaries). As described below, this may result in greater confusion for some people.

Making an individual a domestic partner – free from inheritance tax – does not make that individual a “spouse” for federal tax purposes. The term “spouse” appears in 177 Internal Revenue Code sections and 440 Treasury Regulation sections; however, neither the Code nor the Regulations define the phrase “surviving spouse.” The term “surviving spouse” denotes a legal status that arises as a “spouse” under state law. See I.R.S. Revenue Ruling 76-155. Thus, when engaged in estate planning, domestic partners must be mindful of the limitations imposed upon property transfers by the Internal Revenue Code. Certainly, federal preemption would override any questions of spousal rights under the New Jersey state law.

Recall that under federal estate law, property can be transferred between individuals at a rate of $11,000 per year. See I.R.C. §2503. However, unlimited additional amounts can be gifted to a spouse without tax under the gift tax marital deduction of I.R.C. §2523. Domestic partners must transfer property between them in order to create a domestic partnership relationship. See N.J.S.A. 26:8A-4(b). To the extent that a transfer is made that is in excess of the $11,000 gift tax annual exclusion amount of Section 2503, taxable gifts have been made which must be reported on a federal gift tax return. Further, cross-gifts (“I’ll put my house ½ in your name and you put your house ½ in my name”) could give rise to sale or exchange treatment under I.R.C. §1001, thus resulting in taxable income. As a result, domestic partners must be mindful that inter-relationship transfers should only be made sparingly. It is unlikely that DP’s will consult counsel prior to property transfers (stocks, bonds or realty). It is also likely that many DP’s will begin moving assets between them in a way that some spouses have transferred property. This may make estate planning quite complex, as there may be a need to “undo” some previously made “inadvertent” gifts.

At death, a domestic partner will receive no benefits under the federal estate tax law. With the increased exemption amount (the exemption for transfers at death under the Internal Revenue Code is now $1.5 million, see I.R.C. §2010), this may not be a concern for some partners; however, the New Jersey estate tax exemption is substantially less. The New Jersey estate tax (N.J.S.A. 54:38-1, et seq .) allows for an exemption of $675,000. This law imposes a tax on the estate of a decedent under the federal estate tax structure as if an individual died in 2001. As a consequence, the limitations from both the loss of the “federal estate tax marital deduction” limitation and the $675,000 property value limitation will be imposed. Thus, while a DP enjoys the same treatment as a spouse under the NJ Inheritance tax, the DP does not receive preferential treatment for purposes of the NJ Estate tax. Domestic partners must be mindful of these limitations.

As has been publicized in the press, the Commonwealth of Massachusetts Supreme Court decision of Goodridge v. Dept. of Public Health, SJC -08860 (November 18, 2003) held that “barring an individual from the protections, benefits, and obligations of the civil marriage solely because that person would marry a person of the same sex violates the Massachusetts Constitution”. Thus, a same sex couple can marry in Massachusetts. What happens to these couples for federal tax purposes? The federal Defense of Marriage Act (1 U.S.C. Section 7) defines the word “marriage” as a legal union between a man and woman and a “spouse” means only a person of the opposite sex. Thus, no federal tax benefits should be provided to same sex couples. It is possible that decision similar to the Massachusetts decision will be adopted in NJ if or when the case of Lewis v. Harris, 2003 WL 23191114 (N.J. Super. L. Nov 05, 2003 an unpublished decision NO. MER-L-15-03) reaches the Supreme Court (See Burlington County Times “Gay- rights advocates: NJ could follow Mass.” May 24, 2004) However, unless the Defense of Marriage Act is declared unconstitutional, do not expect additional federal tax benefits can be achieved. Domestic partners cannot file joint federal income tax returns.

When planning the estates of same sex couples, planners have traditionally been creative in arranging trusts to minimize tax consequences. If the estate is large enough to warrant the planning, testamentary Charitable Remainder Trust are one popular means to obtain some estate tax savings. Irrevocable life insurance trusts and other tax advantaged plans can be useful. However, there is often the need for additional care and diligence toward titling of co-owned assets than in traditional couples.

The Domestic Partnership Act does allow for a secondary income tax benefit under the New Jersey Gross Income Tax Act. N.J.S.A. 54A:3-1(b)(1) allows a “personal exemption” for an individual’s domestic partner. This rule will only be permitted in the event that the domestic partner claimed does not file a separate income tax return on his/her own behalf. Even if the partner claiming the benefit were in the highest bracket, this would allow for a tax savings of about $55 per year. However, in practice, it does not seem likely that many domestic partners will utilize this effort as both domestic partners may be employed; thus, both DP’s may be required to file returns independently anyway.

Query: if previously one partner provided all of the support for the other partner, was a dependency deduction available? If so, does the new $1,000 personal exemption for a domestic partner reduce the tax benefits from the $1,500 dependency deduction?

Some tax practitioners have wondered whether there is an opportunity to file Form 1065 for “domestic partners” in the same manner as traditional business partnerships. We believe the answer is “no”… A domestic partnership is not a traditional “partnership” in the sense of a business partnership. If one wage earning domestic partner assigned his/her wage income to the partnership, the assignment would violate the prohibition against assignment under the “assignment of income” doctrine. The wage income would be reattributed to the earner for tax purposes. If the assets generating the income are investments and domestic partners did not contribute equally to the “partnership”, there could be serious gift tax implications to the transfer of the business partnership interests between the domestic partners.

Moreover, another tax benefit which could have been permitted is for a transfer under the realty transfer tax. If one domestic partner transfers property to another, would it be exempt from realty transfer tax as a “transfer for less than $100”? This could be a problem, particularly if the property is mortgaged. The assumption of debt would constitute “consideration” for realty transfer tax. Furthermore, as to mortgaged property, does a transfer trigger a “due on sale” under the provisions of a mortgage which prohibit property transfer? The federal law 17 USC §1701j-3(d)(1)-(9) prohibits a bank from exercising a “due on sale” on many inter-family estate planning transfers (e.g., wife, parents, child, etc.), but not between domestic partners. Does federal pre-emption prohibit New Jersey from effecting this rule? See also Land Development Corp. v. Reider & Sons, 151 N.J. Super. 502 (App. Div. 1977), requires impairment of security to accelerate mortgage; Columbia Savings and Loan v. Easterlin, 466 A.2d 968 (Ch. Div. 1983); but see Poydan, Inc. v. Kiriaki, Inc., 139 N.J. Super. 365 (App. Div. 1976).

NEWFAMILY PLANNING ISSUES

One of the biggest areas of concern in planning for domestic partners is the same issue which arises for married couples with “non-common” children (second marriages, etc.). Certainly, many domestic partners will raise common children; however, a majority may not. When estate planning for “couples” that do not share common heirs, it is customary for one member to leave assets in Trust for the survivor with the remainder to his/her heirs. This is a common planning mechanism, as it allows for providing for a surviving spouse/partner while preserving the rights of remainder heirs. Obviously, this should be a planning technique to be considered by domestic partners.

If domestic partners adopt a child, one would presume that both domestic partners would be treated as “parents” for purposes of inheritance rights. Would this same rule apply if only one DP adopted the child? See N.J.S.A. 2A:22-3 regarding rights of inheritance in adoption and N.J.S.A. 3B:5-9. Careful drafting would involve the scrivener being specific in the description of the heir (ie do not rely on “to my child”) in case there is a defect in the adoption or in case the partner failed to fully adopt the child for some reason.

Even in the circumstance that domestic partners have “common” adopted children, an estate planning practitioner must be mindful of expressing who the intended heirs to the estate would be. The drafting issues may go far beyond the domestic partners themselves, but also to other family members. Clearly, additional care should be taken for family’s with known domestic partners. Usually in estate planning, spouses of children and grandchildren (in-laws) are not included in the disposition of the estate, but if spouses (e.g., “out-laws”) are to be Trust beneficiaries, also consider whether DP’s should be included. This would include descriptions for intended beneficiaries of Trust funds as well as for Trusts in which a “Power of Appointment” is granted to a family member. Suppose the parent of the domestic partner (or grandparent) wishes to allow property to be held in Trust for descendents. Should a domestic partner or children of a domestic partner be permitted beneficiaries by the affirmative action (i.e., Exercise of Special Power of Appointment) of the bloodline descendent?

MEDICAL ISSUES

One of the most notable modifications in New Jersey law concerning domestic partners is the ability of a domestic partner to speak for health care decisions on behalf of his/her domestic partner. Certainly, New Jersey law always allowed an individual to execute an Advance Directive for Health Care (under N.J.S.A. 26:2H-56), naming a domestic partner (whether recognized as DP or not) as spokesperson. However, the new rules will modify the definition of “immediate family” to include a domestic partner, as well as the domestic partner parent or adult child (already included were a parent, child, spouse, brother, sister, cousin, aunt, uncle, etc.). Some hospitals would exclude the health care agent from seeing a patient unless the health care agent was also a member of the “immediate family”. Obviously, this would prevent a partner (not a “DP”) from assisting in health care decisions and this problem may now be rectified for DPs. Query: Suppose a same sex couple (or over age 62 opposite sex couple) choose not the register as DPs~ what will the law provide? Can the non “domestic” partner be granted any rights/powers?

Other concerns about health care treatment for domestic partners will be more problematic. As indicated above, will the Jersey Shore Medical Center v. Estate of Baum case be applied to a domestic partner? Will a domestic partner relationship create obligations or duties under federal Medicaid law? Spouses are subject to obligations in excess of the domestic partnership relationship; however, will aggrieved creditors seek to impose obligations on domestic partners due to the public nature of the Affidavit of Domestic Partnership filed by the parties? Many of these questions remain to be asked.

One of the differences in the New Jersey Domestic Partnership Act is that it not only applies to a same-sex couple, but also to opposite-sex couples that are over age 62. It appeared that an advantage to DP’s under the Domestic Partnership Act is to allow for medical benefits under insurance plans. Since many older Americans are permitted the benefits of Medicare as their primary insurance carrier, it is questionable as to why individuals over age 62 would register as domestic partners for the added medical benefits (and social security surviving spouse benefits) since they would not be permitted Medicare benefits. A surviving domestic partner cannot receive Medicare because of federal law preemption. Will an elderly couple choose to act as domestic partners to obtain inheritance tax benefits even where additional obligations may be imposed and no medical insurance benefits would be obtained? The answer to this question remains unclear.

CONCLUSION

The enactment of the Domestic Partnership Act is certainly welcome relief under statutory law. However, estate planning is, and has always been, an extremely personal matter and creates issues for the clients which may vary widely, depending on their goals and objectives. While the tax benefits afforded to the domestic partner should not be dismissed, they do not, and cannot, serve as complete and total protection in all circumstances. “Cookie cutter” estate planning (i.e., one size fits all) will not work. Clients must continue to be mindful of the estate planning issues – both federal and state – which confront them and should take special care to ensure that their estate passes to their heirs with the least amount of aggravation and expense.

[1] Berall, “Recent Developments in Statutes and Cases Affecting the Non Traditional Family in the U.S. and Canada” as cited in Steve Leimberg’s Employee Benefits and Retirement Planning email newsletter message #232, March 16, 2004, www.leimbergservices.com.

[2]Id.

[3] In New Jersey, there is no commonly accepted “local registrar.” The author assumes the afffidavit will be filed with the County Clerk.

[4] The common law spousal rights in the estate were originally adopted into the New Jersey Constitution in 1946. When the Uniform Probate Code concepts discussed below were being considered in New Jersey in the 1970’s, a Constitutional Amendment was needed to eliminate dower and curtesy. Thus, the final effective date that the rights of dower and curtesy was for property acquired after May 28, 1980.

[5] Pending legislation in New Jersey (S 708) would increase the share of the surviving spouse to $100% of the estate and otherwise modify intestacy rules of N.J.S.A. 3B:5-3.

Glenn A. Henkel, Esquire is an attorney practicing with Kulzer & DiPadova, P.A., based in Haddonfield, New Jersey and is the Past Chair of the New Jersey State Bar Association Real Property, Probate and Trust Law Section and is Past President of the Estate and Financial Planning Council of Southern New Jersey.

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