Deck 19: Planning for Widows

Question 1

Discuss the difference between federal and state estate tax and income tax laws regarding same-sex couples. Assume that the couple lives in a state that recognizes their same-sex marriage.

Answer 1

Same-sex spouses whose states recognize their relationship nevertheless face a number of problems because the federal government treats them as if they are unmarried.
States that recognize same-sex marriage or offer some form of spousal equivalency typically offer same-sex spouses default legal rights and obligations relating to their spouse, including, among other things, the right in default to make medical decisions and inherit property. However, for federal gift, estate or GSTT purposes, same-sex spouses are not permitted to claim the usual federal marital deduction available to married couples.
A number of Category 1, Category 2, and Category 3 states require same-sex spouses to file their state income tax returns as a married couple (using "married filing jointly" or "married filing separately" as their status). At the same time, same-sex spouses do not have these options on the federal level and must file federal income tax returns as unmarried individuals. The concept of being state married and federally single has created more confusion in income tax filing than in any other area concerning couples. For example, the IRS has required all community property income of same-sex spouse to be split 50/50 for income tax purposes.

Question 2

Natalie, a divorced, single parent, is struggling with cash flows; however, she feels guilty about not saving for her young daughter's future education. She suggests that all retirement savings be diverted there. What advice might you offer?

Answer 2

It is important that Natalie do not postpone all savings in lieu of her daughter's future education. First of all, there are many sources of financial aid out there for families with low income. Even without that aid, the daughter will be able to take out tax-deductible student loans or engage in work study at the university. Moreover, the daughter will be better off in the long-term knowing that her mother has some retirement assets. There are no tax-deductible loans for retirement.

Question 3

Describe the four categories of state law regarding same-sex couples.

Answer 3

Most states fall into one of the following four categories.
Category 1: States that Recognize Same-Sex Marriage.
A handful of states recognize same-sex marriage, whether performed in that state or in another state that permits same-sex marriage. These states legally treat same-sex spouses the same as opposite-sex spouses, but federal law does not recognize them as "married" and hence treats the same-sex spouses as unmarried.
Category 2: States that Recognize Valid Out of State Same-Sex Marriages.
Several states that do not recognize same-sex marriages performed in their states nevertheless do recognize same-sex marriages performed in other states as valid. These states typically treat same-sex spouses the same as opposite-sex spouses for all purposes under state law, but federal law does not recognize the marriage and treats the same-sex spouses as unmarried.
Category 3: States that Offer Some Form of Spousal Equivalency.
A number of states do not recognize same-sex marriage, but permit same-sex couples to register as domestic partners or enter into civil unions. Some of these states treat same-sex spouses the same as opposite-sex spouse for all purposes under state law while others offer more limited rights (typically affecting default rules for medical decision-making and inheritance). Regardless of any state rights offered to same-sex spouse in these states, federal law does not recognize the relationship and treats the couple as unmarried.
Category 4: States that Do Not Offer Any Legal Recognition for Same-Sex Couples.
Most states do not recognize the status of same-sex spouses even if they have validly married in a state that permits same-sex marriage. Same-sex spouses in these states are treated for purposes of both state and federal law as unmarried partners and legal strangers.

Question 4

Question 5. Because the Will can be contested by blood relatives, all of the following estate-planning techniques are recommended by the author for unmarried couples, except for:

A) Bypass trust
B) Beneficiary designation
C) Irrevocable living trust
D) Joint ownership

Question 5

What does a cohabitation agreement drafted by an attorney achieve?

A) It describes the responsibilities and rights of each partner
B) It describes the rental agreement for the apartment the partners will share
C) It describes the details of the adoption child
D) None of these are correct

Question 6

Question 4. Alex and Rachel are an unmarried couple. Which of the following estate planning documents are particularly important for this unmarried couple because of their legal status as single?

A) Durable power of attorney
B) Homestead agreement
C) Advanced medical directive
D) A and C
E) B and C

Question 7

Your client, a single mother, was awarded alimony and child support. She asks you to explain if she can rely on that child support throughout the rest of her lifetime. What advice would you offer?

Question 8

What are some of the issues that a planner needs to consider should a state-recognized, same-sex couple divorce?

Question 9

What does the author mean by the statement that unmarried couples need to plan in order to "avoid the default?"

Question 10

Susan and Jake, both of whom are divorced, have committed to a long-time relationship. Although they are buying a house together, neither is interested in marriage. Why might Susan's financial planner suggest to her that the couple draft a cohabitation agreement?

Question 11

Question 2. Which of the following income tax questions regarding unmarried couples with a dependent child were discussed by the author?

A) Who will use income tax deductions?
B) Who will claim the child as the dependent?
C) Who will claim the IRA contribution?
D) A and B
E) B and C

Question 12

The single parent often faces several financial challenges. What are some of these issues described by the author?

Question 13

Wills can be contested in court by the decedent's family. What are some of the suggestions to unmarried couples provided by the chapter's author concerning how to bypass the probate process?

Question 14

Which of the following statements regarding unmarried couples is incorrect?

A) Transferring assets to the partner may result in a gift tax consequence
B) The unlimited marital deduction is not available for estate tax purposes
C) The couple can file jointly for state income tax filing, but not for federal
D) $14,000 2016 can be given to the other person without consequence

Question 15

Discuss the tax planning questions for unmarried couples that were presented by the chapter's author.

Question 16

Your client is a single parent. In reviewing the current will, you notice that the deceased spouse is still named as guardian for the child. Why is it critical to have a new will written in which a new guardian is named?

Question 17

Jason was recently married to his long-time partner, Adam. This is the first year that the couple is filing income taxes together. He asks you to complete a joint account for them. What do you need to explain to him concerning federal and state income tax filings?

Question 18

Madeline and Paula are partners who live in a state that does not recognize same-sex marriages. In Paula's will she leaves everything to Madeline. Why might this estate tax planning be not enough?

Question 19

Discuss the legal and estate tax consequences of an unmarried couple commingling assets in a joint account?

Question 20

Dorothy recently went through a painful divorce. She is the custodian of two young children. Cash flows are tight, and Dorothy wishes to cash in the whole life policy for its cash value. She would like to use that money to buy a new car. Why does this constitute a poor planning idea?

Question 21

Question 9. Which of the following planning issues are of particular importance for the single parent?

A) Accumulate a meaningful emergency fund sum
B) Maintain life insurance
C) Save for retirement
D) Insure against disability
E) All of these issues are important to the single parent

Question 22

Your clients same-sex marriage were married in their state of residency. Which of the following best describes their position in respect to income taxes?

A) State married/federally married
B) State married/federally single
C) State single/federally single
D) State single/federally married

Question 23

Question 8. All of the following statements regarding estate planning for the same-sex couple are correct, except for:

A) Each partner can use their unified credit
B) Prior transfers to the other partner, in excess of the annual gift tax exclusion, will be considered a lifetime gift
C) Either partner can use a QTIP as an estate planning strategy
D) Each partner cannot claim the unlimited marital deduction

Question 24

Question 6. State law concerning same-sex marriages is rapidly changing. Which of the following is not one of the four current categories described by the chapter's author?

A) States that do not recognize same-sex marriages
B) States that offer some sort of spousal equivalency
C) States that recognize valid federal same-sex marriages
D) States that recognize valid out-of-state marriages
E) States that recognize same-sex marriages

Question 25

Question 10. All of the following are acceptable tax-planning strategies for the single parent, except for:

A) Claim exclusion from alternative minimum tax
B) File as head of household
C) Claim an dependent exemption
D) Claim a child care credit