For Clients, Advisors & Community
In an earlier article, I discussed what a civil union is and how Illinois
law affects spouses in a civil union under the new law.
There is a major disconnect, however between the Illinois civil union law
and Federal law. Illinois recognizes civil unions. Because of the Defense
of Marriage Act (DOMA) (defining marriage as a union between a male husband
and a female wife only), Federal law does not generally recognize the
civil union. (There is currently extensive litigation concerning DOMA.
It might or might not be struck down by the Supreme Court. The Obama administration
has taken the position that it will no longer defend DOMA. For purposes
of this article, we assume that DOMA is still the law of the land.)
Income Tax: A couple whose union in registered under Illinois’ civil
union law should be able to file a joint income tax return, at least in
Illinois. However, that’s not the case. No joint filing is allowed
for unmarried couples under Federal law for filing Form 1040. The Illinois
tax is based on the adjusted gross income
of the Federal 1040. So, there is no benefit to a civil union for individual income tax purposes.
Estate Tax: In the eyes of the Federal law, a couple united under Illinois’
civil union law is not married. So, they cannot take advantage of the
unlimited marital deduction that allows a spouse to leave upon his or
her death, an unlimited amount of money to the surviving spouse, free
of estate tax. This would allow deferral of any estate tax to the death
of the second spouse to die. (I should comment, however, that for 2011
and 2012, at least, this affects only individuals whose gross estates
exceed $5,000,000). As a result, spouses of a civil union have the risk
of paying estate tax at the first to die where this would not be the case
if they had a traditional marriage. This is a very big deal because it
will cost tax money at the death of the first partner to die and could
cause significant reduction in the inheritance available to the survivor!
Gift Tax: The same is true with the gift tax. Each spouse may make an unlimited
amount of gifts to his or her spouse during his or her lifetime. Since
Federal law does not recognize the spouse under an Illinois civil union,
there is no unlimited gift tax marital deduction. (Again the same comment
regarding the $5,000,000 lifetime exemption applies).
Qualified Pre-Retirement Survivor Annuity (QPSA): Many retirement plans
require that the automatic beneficiary of the employee’s retirement
plan account is the “spouse”. This law was designed to protect
spouses. Many plans also require that if the employee names a beneficiary
other than the spouse, written spousal consent is required. This is a
Federal law. Although there has been no firm guidance, most practitioners
think that the QPSA will NOT apply to an employee who has entered into
a civil union. Hence, it is very important that the employee have a carefully
drafted beneficiary designation which makes his or her intentions known
concerning the beneficiary of his or her retirement plan benefits.
Social Security Benefits: Here is an area where an anomalous result will
be most interesting to seniors. Once again, Federal law does not, at the
present time, recognize Illinois civil unions. These aspects of the law
can bring about an interesting result. An example explains it:
Art was married to Beverly. Art died at age 70. Beverly continues to receive
the survivor portion of his social security benefits. Two years later,
Beverly meets Charlie, a widower age 73. They are thinking about moving
in together and getting married. Beverly knows that if she marries Charlie,
she will lose about $1,500 per month in the survivor benefits she is receiving
from social security. However, after consulting us, Beverly and Charlie
realize that if they enter into a civil union (where they get most of
the benefits under Illinois law),
Beverly will continue to receive the survivorship social security benefits
from her deceased spouse because Federal law does not recognize the Illinois civil union as a “marriage”.
The difference in planning could be significant! Here, the couple is far
better financially by choosing the civil union route.
There are many different considerations in choosing a civil union as opposed
to a traditional marriage. Sometimes the results can be surprising. Couples
contemplating a civil union need counsel so that they fully understand
the consequences of their actions before taking that big step.