Laws May Cause Issues for Owners In Civil Unions

When civil unions became legal for same-sex couples in New Jersey last year, the lesbian, gay, bisexual and transgender community celebrated a hard-won victory. But conflicting laws for LGBT partners at the state and federal levels have some business owners who live with same-sex partners worried about how the conflict may affect their estate planning.

Kimberlee Williams and Tamara Fleming-Cooper are co-owners of Newark-based marketing firm Femworks LLC and are both in civil unions. If both owners were to die and their respective partners were each to receive half the business, it would become “difficult on the federal level to transfer our assets to them without an estate tax being paid,” says Williams.


Femworks, which has five part-time employees besides the owners, specializes in reaching African Americans in the LGBT community.


Neither Williams nor Fleming-Cooper have children, but both want to have everything figured out before they do because their business makes up a large portion of their personal assets.


Each member of a civil union must file separate federal tax returns because federal law doesn’t recognize civil unions. Williams says there is a burden on small business owners because of the time spent on all the paperwork.


Stephen Hyland, a Westmont attorney who specializes in LGBT couples law, says that under federal law one member of a civil union who gives the other more than $12,000 in one year as a gift will eat into a $1 million lifetime gift-tax exclusion.


“Let’s say a business owner [in New Jersey] in a same-sex civil union and his partner buy a house and the business owner puts down the entire down payment,” he says. “Later in the same year, the business owner gives his partner a $50,000 stake in the company. The business owner would have given his partner a reportable gift of half the down payment plus the $50,000 investment minus the $12,000 annual gift exclusion.”


Hyland notes that the $1 million lifetime federal gift-tax exclusion counts toward the federal estate-tax exemption, a tax levied upon death that is currently capped at $2 million but scheduled to jump to $3.5 million next year.


“So if I used up $500,000 of my gift-tax exclusion, I’ve really reduced the amount of my estate I can leave tax-free to $1.5 million” under the current cap.


Meanwhile, members of a traditional marriage can gift each other unlimited amounts of money without being federally taxed, and can take federal-tax deductions on all assets left to each after death, says Hyland. But gay and lesbian couples don’t have that right, notes Hyland.


For state taxes such as the inheritance-transfer tax and the estate tax, same-sex partners in civil unions get the same exemptions as married couples, he says.


In New Jersey, an estate in excess of $675,000 is subject to the state’s estate tax, however civil-union couples and married couples pay no tax on assets they leave to their spouse. Same-sex couples in domestic partnerships are exempt from the state’s inheritance-transfer tax but not from the estate tax.


“What it comes down to is that anytime an [LBGT] business owner is doing something that would be non-taxable federally if he were married, it has tax implications either as a gift or income,” Hyland says. “Unfortunately, that’s the effect of the federal law.”


Stephanie Canas Hunnell, a lawyer in Belmar, says same-sex partners in civil unions should create what is called a dummy form with the state when filing their federal estate taxes because the federal government doesn’t recognize same-sex unions.

“One form is a real form filed with the federal government to pay taxes, as if the estate was being left to a stranger,” she adds.


“The other is a dummy form filled out as if the estate was being left to a spouse. You would use dummy form in New Jersey to get the same tax benefits as a married couple,” says Canas Hunnell.


“Because the federal government doesn’t recognize same-sex marriages or civil unions as having the same rights and responsibilities as opposite-sex married couples, they’re not going to give any [tax] benefits,” she says. “So you’re not any kind of relation according to the [federal] government and you’re going to pay a higher tax.”


Both Hunnell and Hyland advise LGBT business owners in New Jersey to assemble a team comprised of a lawyer, an accountant and a financial adviser who are familiar with the laws surrounding same-sex couples.