Wealth of Knowledge - Spring 2014 - Let’s Get It Right the First Time: Avoiding Conflicts with Trusts Established to Benefit Same-Sex Couples
March 25, 2014
Many same-sex couples living in states that recognize their marriage believe that, after "Windsor," their marriages are now no different than any opposite-sex marriage. This is simply not true. Until all 50 states recognize same-sex marriages, there are many issues that need to be carefully considered in trust and estate planning.
Consider the following situation highlighted at the Heckerling Institute on Estate Planning:
Steven and Bill are a same-sex couple married and living in California (a recognition state). Steven's mother, a Florida resident, passed away several years ago. There is a GST-exempt trust set up by Steven's grandmother that would pay out in trust to Steven and his two sisters upon their mother's death. This trust is a Florida Trust (non-recognition state).
If the trustee is directed to pay income and principal to Steven, his spouse and his dependents, but the trust failed to clearly define "spouse" and "dependent," will Bill be considered a "spouse" and entitled to payments? What if Steven is not the biological father of the children they are raising? It could be that Bill is the biological father of the children and that Steven assumed his parental rights under a California law presumption that any child born during a marriage is a child of both spouses. Will they be excluded as beneficiaries under Florida law? To avoid this potential problem, we need to be sure our client trust documents have clearly defined terms. Spouse and marriage must clearly include same-sex spouses, domestic partners, civil unions, etc. The trust must also make clear that the laws of the state in which the beneficiaries are domiciled is not relevant in defining spouse and marriage, thereby allowing the beneficiary to move to a non-recognition state without issue. The following is sample language that should cover any marriage, domestic partnership, etc.:
Two people have entered into a "marriage" and are "married" if they are living together, ignoring any absences for reasons other than marital discord, and (1) they are legally married in any jurisdiction or (2) the relationship is registered as a domestic partnership or has similar legal status under the laws of any jurisdiction, regardless of whether such marriage or registration would be recognized by the couple's state of domicile or any other jurisdiction; provided, however, that an individual shall not be treated as married if such individual or his or her spouse has filed an action seeking as its relief a legal separation, an annulment, or a dissolution or termination of the marriage, domestic partnership or other similar relationship.
Children/descendants must include non-biological children born to a person's domestic partner or same-sex spouse during the marriage. The following wording should insure this:
A person born to parents who were married to each other at any time during the child's gestation shall be considered the child of both parents.
In order to insure that non-biological children are treated as full dependents in all jurisdictions, same-sex couples need to consider a formal adoption whenever possible. Even in states like California, where there is a statutory presumption that a child born during a marriage is a child of a marriage, the situation may cause problems in states where the same-sex marriage is not recognized. Formal adoptions, however, are judgments that must be given full faith and credit under the Constitution in every state of the nation. Thus, every state must recognize the adoption even if they do not recognize the marriage.
We also need to think about existing documents where the language used does not come to our attention until there is a problem. (Steven's sisters are suing for a bigger share since they do not believe his family qualifies.) It is possible that, in our case, the grandmother was very aware of her grandson's same-sex marriage but never asked about it by attorney. The trust could be so old that the possibility that her grandson would ever be allowed to marry may never have crossed the mind of attorney or donor. If a trust is ambiguous as to what the definition of spouse and descendant was meant to be, the courts will look to donor intent. Was the donor aware and accepting of the beneficiary's same-sex relationship? Did the donor have a good relationship with the spouse? Did the donor treat all grandchildren the same? Courts have used proof of visits to the same-sex family, equal gifts of cash or other property to all children and grandchildren, and witnesses who knew the donor and will attest to the person's acceptance of all relationships. If still unclear, state law may step in and define family under "public policy" in the state the proceeding is brought. If the public policy in the governing state is an interpretation that is restricted to usually include spouse to only mean opposite-sex spouse, the courts may narrowly define the trust that way. If the case is heard in Florida, the courts may take a much narrower view of the definitions in question and a spouse will only mean an opposite-sex spouse.
It is possible that a court will change the terms of a trust if it can be proven through clear and convincing evidence (as described above) what the settlor's intentions was and that we have a "mistake of fact or law," in either expression or inducement. A mistake of expression can be argued in our example in that the grandmother would most certainly have wanted Bill to be treated the same as her daughters' husbands and that their children were no different than other grandchildren. Or it can be argued that there was a mistake of inducement. This occurs when a trust accurately reflects what the settlor intended to be included or excluded but this intention was a mistake of law. Stephen's grandmother may never have even considered that her grandson would be allowed to marry so she saw no reason to separately define Bill or the children. It was not that long ago that this was not even a possibility in the eyes of most U.S. courts.
It is important we are aware of the family situation of all our same-sex couples and inheritances they are expecting or currently benefitting from and we make them aware of possible problems in the language to hopefully avoid a lot of family problems down the road. We should be looking at documents prepared before the overturn of DOMA to assure that the settlor's wishes will be met and that no family conflicts will occur. The more we can do during the lifetime of the parties involved in the trust, the easier it will be to ensure everyone is treated as intended.
Wealth of Knowledge - Spring 2014