Will the Illinois Civil Union Law Affect Your Family? II

Posted By Judy Chau || 7-Aug-2011

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.

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