The federal government and most states regard Rogoff and Lichter as strangers; they do not benefit from the estate planning advantages the government offers married heterosexual couples. Like many gay couples, they must find alternative ways to achieve their financial and estate planning goals.

"We’ve had to treat the whole estate very gingerly," says Rogoff, who lives in New York City and is a professor at the Yale School of Drama. "It’s crazy. I mean, we’ve finally amassed something that represents security. But it doesn’t feel secure."

Bereft of Benefits
Gay couples need to take extra steps to protect their wealth from state and federal tax collectors, as well as from family members who may contest their wills. They must also navigate a minefield of emotionally charged issues, ranging from family opposition to their relationships to decisions over the need for a domestic partnership agreement, which is similar to a prenuptial agreement.

TOP VIEW: Federal law grants some 1,200 rights to married couples, but same-sex partners enjoy none of these benefits. This circumstance results in a number of significant obstacles that gay individuals who wish to bequeath their assets to their partners must address. In the absence of a marital exemption, the surviving partner becomes subject to estate tax; there are also legal ambiguities that family members of the deceased can exploit to challenge the distribution of assets to the other partner. Careful planning, using iron-clad wills and, where appropriate, trusts, can ensure same-sex couples achieve their estate planning goals.

Wealth managers who work with same-sex couples often resort to unusual strategies to lessen their clients’ tax burden to the greatest extent possible. But while savvy advisors can approximate some of the benefits of marriage through a complicated hodgepodge of legal documents and investment vehicles, it remains impossible to completely replicate the full panoply of marital safeguards enjoyed by straight couples.

Under the 1996 Defense of Marriage Act, the federal government does not extend any statutory legal benefits and protections available to married couples to gay couples, regardless of whether or not the state in which they reside recognizes same-sex unions. "There are something like 1,200 marriage rights granted under federal law," notes Richard C. Milstein, a Miami-based trusts and estate attorney who works with many gay couples. Consider, for example, the "unlimited marital deduction," which allows one spouse to pass an unlimited amount of money to the other without paying federal estate tax. In the case of a gay couple, the surviving partner would face federal taxes of up to 48 percent on estates that exceed $1.5 million.

Although Massachusetts allows same-sex marriages, and several other states have implemented or are considering rule changes that would confer some rights to homosexual couples, the legal weight of same-sex civil unions and marriages is limited. To date, 38 states have followed the federal government’s lead and passed their own laws establishing that they do not recognize same-sex unions from other states. If a gay person living in one of these states dies without a trust or will, a distant relative would be considered the beneficiary of the estate before that person’s partner, regardless of how long the two lived together.

Establishing and then maintaining estate plans that offset these disadvantages take time and effort. "It’s just a nightmare of paperwork and confusion," says Robert Westover, a public affairs executive who lives in Washington, D.C., of his efforts to amend a living trust he set up in 2001 when he was a resident of California. Westover and his partner, Tom Felton, want to incorporate a home they bought in Washington into their trusts. They also want to increase Westover’s ownership in a vacation home they own in Hawaii valued at more than $1 million. Under their current trust documents, Westover owns 25 percent of the house and Felton owns the rest.

"Straight people can know each other for two hours, get married in Las Vegas and everything gets conveyed automatically."

While making such changes across state lines would be relatively simple and straightforward for a heterosexual married couple, for Westover and Felton it will require onerous documentation and additional attorney fees, Westover says. To avoid the hassle of arranging for their lawyer in California to rewrite the trust agreements, and then having those agreements signed at a prearranged time in front of two witnesses in Washington, the couple is considering having trust agreements drawn up with a lawyer in Washington.

"It drives you crazy," Westover says. "Straight people can know each other for two hours, get married in Las Vegas and everything gets conveyed automatically." In the meantime, Westover is well aware of the precariousness of his situation. If Felton died, his family could swoop in and claim his share of the vacation home. "Now, I don’t think they would do that to me. But it is disconcerting."

Defensive Posture
There are some basic steps gay couples can take to mitigate these risks. The first is to craft wills with particular care so they can survive challenges from relatives who would otherwise benefit from an estate. "What I find with gay couples is that when one of the partners dies, all these family members who they didn’t even know objected to their lifestyle suddenly come out of the woodwork and contest the will," says Elaine Kiernan, president of Financial Resource Associates, a financial advisory firm in Santa Cruz, Calif.

"These couples really have to plan their lives, and their post-lives," says Milstein. "Too many times, I’m involved in litigation where one partner dies, and mom and dad suddenly walk into the house and say to the surviving partner, ‘Wait a minute . . . the house is not in your name. You were just a friend. Now, get out.’ "

To avoid litigation, Kiernan advises her clients involved in same-sex relationships to keep a videotape of each other reading their wills–a practice that all couples should consider. "It’s a wonderful tool," she says. "When the will is videotaped, it doesn’t have a chance of going to court." Gay couples should also have airtight living wills, health care directives and durable powers of attorney.

Estate planning becomes even more complicated when gay couples share ownership of real estate assets. First, there is the matter of titling. In most states, the default status for jointly owned homes is "joint tenants in common." But that designation opens the door for relatives to step in and claim ownership of the property. Titling the property under the designation "joint tenants with rights of survivorship" will guarantee transfer of ownership to the surviving partner. However, a joint tenants with rights of survivorship title cannot be used if a couple does not share equal interests in the home.

The question of equal interest also has tax ramifications. Because the federal government automatically assumes the deceased partner owned 100 percent of the home, the surviving partner could end up paying estate tax on the entire home–not just the portion that he or she inherited. To prevent this, gay couples must keep meticulous records of their individual contributions vis-à-vis all home-related expenses, including mortgage payments.

Estate taxes remain the primary obstacle for wealthy gay couples. When one partner in a straight marriage dies, the estate may be transferred to the survivor without triggering a taxable event. But this marital deduction does not apply to same-sex couples. Many lawyers and planners working with same-sex couples look to trusts to alleviate the tax consequences of this ineligibility. Charitable remainder trusts are one popular strategy. These irrevocable trusts allow investors to put in money and withdraw a monthly income from the trust until death or for a fixed period. They may be structured so that monthly income is passed to the surviving partner of a gay couple. After that partner dies, remaining assets go to charity, tax free. The trust grantor receives an immediate tax deduction for the amount expected to go to charity.

For same-sex couples, charitable remainder trusts are most effective when they incorporate assets that would otherwise be taxed. (See "To Give and Receive," June 2005, page 102.) For example, when one spouse in a heterosexual marriage dies, the remaining spouse may inherit the assets in the decedent’s 401(k) plan without paying income tax on those assets. Not so for same sex couples. If the 401(k) assets are put into a charitable remainder trust, however, the surviving partner may draw income from those assets, tax free.

Gifting Options
Similarly, same-sex couples can ensure that their surviving partner receives a monthly income through a charitable gift annuity. These annuities are contracts between a donor and a charitable organization by which the charity agrees to make fixed, annual payments to the donor, or surviving partner, in return for a gift of cash or marketable securities. "Giving away assets during life is better than waiting until death," says Don Weigandt, a managing director for JPMorgan Private Bank in Los Angeles. "That’s because you get those assets out of the estate at today’s value rather than some (higher) value in the future."

Married heterosexual couples enjoy unlimited gifting privileges. But same-sex couples are only allowed to give each other $11,000 a year before running into the gift tax. Even so, gay couples do have one advantage over married couples in one area of gifting: a grantor retained income trust, or GRIT. Essentially, a GRIT is an irrevocable trust established for a fixed term in which the grantor retains all of the income generated. After the trust period ends, its assets are usually distributed to the beneficiary, which may include a surviving spouse. The main advantage of a GRIT is that its assets are removed from the grantor’s taxable estate during the trust period or as long as the grantor lives. At the same time, the grantor keeps the annual income derived from this property. The law prohibits married couples from naming spouses or other family members as the beneficiaries of a GRIT. But gay couples, because their relationship is not recognized by the federal government, have the ability to name each other.

Of course, the estate tax is scheduled to disappear in 2010, and then reappear in 2011. But whatever the future holds, proper estate planning for gay couples is likely to require a higher level of due diligence for many years into the future. As Norman A. Dawidowicz, a director with Personal Capital Management in New York City, explains, "Anyone who deals with homosexual couples has to assume that nothing works."

Frederick P. Gabriel-Deveau is a writer who is based in Boston.

Illustration by Isabelle Arsenault/agoodson.com.