Estate planning for New Jersey's more than 22,0001 same-sex couples has undergone several seismic changes for the better since 2004. First, the state legislature passed the Domestic Partnership Act of 2004, providing them with limited recognition. In early 2006, registered domestic partners were granted intestacy and other inheritance rights, placing such couples on a nearly equal basis to married couples. Then, the Garden State made national headlines when on Oct. 25, 2006, the state Supreme Court held in Lewis v. Harris2 that it was an equal protection violation to deny “committed same-sex couples … all of the rights, benefits and obligations of married couples” under the laws of New Jersey. Although the court stopped short of finding a fundamental right to same-sex marriage, it gave the legislature 180 days to conform New Jersey laws regarding marriage to its holding. In response, the legislature quickly passed a civil unions bill that purports to provide treatment equal to that of similarly situated married couples.

Despite these welcome developments, the lack of recognition of civil unions by the federal government and most states, including those bordering New Jersey, continues to make estate planning for same-sex couples significantly more difficult — and expensive — than for comparable opposite-gender married couples, at least for the near future.

So what exactly did New Jersey's same-sex couples win vis-a-vis the state probate code? How will their rights and obligations be recognized outside of New Jersey? And, more importantly, what kind of planning should we be doing to protect them?

CONTEXT

Although much of the press coverage focused on the passage of the Civil Unions bill, it's important to understand the context in which it was enacted.

Lewis v. Harris involved the consolidation of several challenges to the exclusion of same-sex couples from marriage in New Jersey. The seven plaintiff couples had each applied in various jurisdictions for issuance of a marriage license in 2002. The case was consolidated in Mercer County and was decided in 2004. During the time the trial court was hearing the case, the legislature introduced the Domestic Partnership Act (DPA),3 which provided legal recognition for same-sex couples (and opposite-sex couples age 62 or older) along with a limited set of rights for registered couples. Among the rights provided was an exemption from the state's inheritance transfer tax for registered couples. However, the DPA did not provide inheritance or intestacy rights, nor did it affect the application of the state's estate tax, which was tied to the federal estate tax.

The trial court's holding in Lewis was a not-unexpected rejection of the plaintiffs' claim that the failure to allow same-sex marriage in New Jersey was a violation of the guarantees of equal protection and due process rights under the New Jersey constitution. In particular, the court rejected the plaintiffs' claim that there was a fundamental right to same-sex marriage.

In June 2005, the state appellate division ruled against the plaintiffs in a 2-1 decision. Both the majority opinion, written by Justice Stephen Skillman, and the concurring opinion, written by Justice Anthony J. Parillo, rejected the claim that same-sex marriage was a fundamental right. Yet both justices opened the door to further litigation by opining that they could see an equal protection violation when same-sex couples were denied individual rights of marriage, without having to address the right to marry. Because there was a dissenting opinion, the plaintiffs were entitled to an automatic appeal to the state supreme court.

Meanwhile, in response to a 2005 challenge to the exclusion of domestic partners from the intestacy provisions of the probate code,4 the legislature enacted two bills that added registered domestic partners to the probate code, providing inheritance and guardianship rights equal to that of a married couple. Although helpful to those couples without wills, this important change, which went into effect in January 2006, did not provide relief from the New Jersey estate tax. As a result, planning for same-sex couples had to take into consideration the inapplicability of the marital deduction to registered domestic partners, requiring them to plan for a state estate tax on transfers to partners in excess of $675,000, the current state estate tax exemption.

On Oct. 25, 2006, the supreme court released its long-awaited decision in Lewis. A unanimous court ruled that, although it could find no fundamental right to same-sex marriage, the denial of all of the rights, benefits and obligations of marriage to committed same-sex couples constituted a clear equal protection violation under the state constitution. Although widely reported as a four-to-three decision, the justices differed only on the method they would have used to correct the inequality. Four held that it was up to the legislature to choose the manner in which the equal protection violation was corrected, allowing the state lawmakers either to extend civil marriage laws to include same-sex couples or to enact a civil unions law. The three dissenters (including the chief justice) held that there was no reason to have a separate legal structure to provide the rights of marriage.

Despite the introduction of a civil marriage bill modeled on the California Civil Marriage and Religious Equality Act,5 the leaders of the Democratic party-controlled Senate and Assembly quickly opted for civil unions. The legislature acted with uncharacteristic speed, clearly intending to enact a civil unions bill before the end of 2006, to avoid the controversy from lingering into 2007, an election year for most of the state lawmakers.

On Dec. 4, 2006, an identical civil unions bill was introduced in both the Senate6 and General Assembly.7 With one amendment, the Assembly and Senate passed the bill on Dec. 14, and the governor signed the bill on Dec. 21, 2006. Although the bill had a number of flaws, both major and minor, further attempts to amend the bill were rejected for political reasons.8

N.J. CIVIL UNION

The bill as passed creates a separate but (allegedly) equal statutory scheme based on the Vermont and Connecticut civil unions laws.9 To enter into a civil union, two persons must satisfy all of the following criteria:

  • not be a party to another civil union, domestic partnership or marriage in New Jersey;10

  • be of the same sex;11 and

  • be at least 18 years of age, unless they obtain the consent of their parents or guardian or, if under the age of 16, they obtain the consent of a family court judge.12

Because New Jersey does not have a residency requirement for marriage, a nonresident same-sex couple can enter into a civil union in New Jersey.13

Unlike Vermont and Connecticut — which did not have a preexisting legal status for same-sex couples — the New Jersey law had to deal with the existence of domestic partnerships. As a result, no new domestic partnerships will be registered following the effective date of the Civil Unions bill, except for same-sex and opposite-sex couples in which both partners are at least 62 years of age.14 Currently registered domestic partnerships will continue to be recognized with at least the rights, benefits and obligations provided under the current state Domestic Partnership Act.15 Eligible domestic partners will be given notice of their right to enter into a civil union and those who enter into a civil union with their current partners will have their domestic partnership automatically terminated.16

The most important provision in the Civil Unions bill is Section 92, which I characterize as a “catch-all” provision. This section provides: “Whenever in any law, rule, regulation, judicial administrative proceeding or otherwise, reference is made to ‘marriage,’ ‘husband,’ ‘wife,’ ‘spouse,’ ‘family,’ ‘immediate family,’ ‘dependent,’ ‘next of kin,’ ‘widow,’ ‘widower,’ ‘widowed’ or another word which in a specific context denotes a marital or spousal relationship, the same shall include a civil union pursuant to the provisions of this act.”17 As a result of this provision, every occurrence of these and other marriage-related terms must be read to include civil unions. This is further reinforced by Section 4 of the bill, which states that “civil union couples shall have all of the same benefits, protections and responsibilities under law, whether they derive from statute, administrative or court rule, public policy, common law or any other source of civil law, as are granted to spouses in a marriage.”18

Some of the key rights and obligations of civil unions impacting estate planning and administration include:

  • the rights and obligations “with respect to a child of whom either becomes a parent during the term of the civil union, shall be the same as those of a married couple with respect to a child of whom either … [partner] … becomes the parent during a marriage.” This includes a partner's child from a previous relationship within the definition of “stepchild;”19

  • the laws of “title, tenure, descent and distribution, intestate succession, survivorship, or other incidents of the acquisition, ownership or transfer, inter vivos or at death, of real or personal property, including but not limited to eligibility to hold real and personal property as tenants-by-the-entirety;”20

  • causes of action for “wrongful death, emotional distress [or] loss of consortium;”21

  • laws governing probate and probate procedure, “including nonprobate transfer;”22

  • laws relating to “insurance, health and pension benefits;”23

  • victim's compensation benefits, including compensation to spouse, children and relatives, and workers' compensation benefits, including survivors' benefits;24

  • home ownership rights of a surviving spouse;25

  • tuition assistance for higher education for surviving spouses and children;26

  • advance directives;27 and

  • state and municipal tax treatment.28

Unlike the Domestic Partnership Act, with its limited set of rights and responsibilities, the enumerated list of rights, benefits and obligations of civil union couples is nonexclusive29 and must be interpreted liberally.

In the introduced version of the bill, the reference to “taxes imposed” specifically excluded estate taxes. Several parties objected, including me, on the basis that such exclusion would be unconstitutional, particularly in light of a specific mention in the Lewis decision30 of the “adverse inheritance tax consequences” suffered by committed same-sex couples. As a result, the phrase, “other than estate taxes” was struck from the act as passed.31 At this time, there is some indication that the New Jersey Department of Taxation may take the position that the New Jersey estate tax still applies to the surviving spouse of a civil union; such a position would invite immediate challenge, as it seems clear that the state legislature, by striking this language, clearly intended the estate tax to be included among the list of taxes requiring equal treatment of civil union couples.

INHERITANCE, INTESTACY

The inheritance treatment, including intestacy rights, of a surviving spouse in a civil union (and for most purposes, the surviving domestic partner), is now equal to those of a similarly situated married couple, at least under N.J. law.

For the surviving spouse in a civil union (and for the surviving domestic partner), the intestate share of the survivor is the same as that of a surviving husband or wife.32 A civil union partner omitted from a will that the decedent executed before entering into a civil union is entitled to the same share he or she would have received if the decedent had died intestate,33 unless the omission appears to have been or if the will expressly states that it's to be effective notwithstanding any subsequent civil union or if the decedent provided for the surviving partner through some form of nonprobate transfer in lieu of a testamentary transfer.34 Devises made to the surviving civil union spouse under the decedent's will are applied first to satisfy the appropriate intestate share and all other devises are proportionately abated.35

The statutes relating to elective share are similarly applicable to civil unions. For decedents who were domiciled in New Jersey, the surviving civil union spouse has the right to take an elective share of one-third of the augmented estate, provided the spouses were not “living separate and apart in different habitations.”36

Civil union spouses have now been placed on an equal footing with husbands and wives with regard to the administration of intestate estates. Surviving civil union spouses have the absolute first right to be named as administrator over their spouse's intestate estate, if they choose to seek appointment.37 Furthermore, when the total value of the real and personal property of the intestate estate does not exceed $20,000, the surviving civil union spouse is entitled to all of the assets without administration, with the first $5,000 in assets free from the decedent's debts.38 When a non-resident civil union spouse dies intestate, New Jersey recognizes the decedent's spouse's right to administer the ancillary estate.39

PROPERTY OWNERSHIP

For parties to a civil union, as in a marriage, the default form of joint property ownership is tenancy-by-the-entirety. This is a significant change for same-sex couples, who previously were denied this form of ownership even under the Domestic Partnership Act.40 Many same-sex couples currently own their home and other property as joint tenants with rights of survivorship. Entering into a civil union does not change the form of ownership; and civil union spouses, just like married couples, can choose joint ownership of property. Many couples entering into a civil union will want to consider the advantages and disadvantages of converting title in such property to tenancy-by-the-entireties.

It is not clear at this time how the federal government, in general, and the Internal Revenue Service, in particular, will view property titled in this way. Currently, the federal Defense of Marriage Act41 defines marriage for purposes of federal law and regulation to exclude same-sex marriage.42 Furthermore, the term “civil union” is never used anywhere in federal law.43 However, federal law leaves the definition of title to property to state law. Therefore, if a state such as New Jersey allows same-sex couples to hold property as tenants-by-the-entireties, it may be possible to argue that federal law should defer to the state definition.

ESTATE PLANNING

Estate planning for same-sex couples who enter into a New Jersey civil union will continue to be tricky, even assuming that the state Department of Taxation concludes that the estate tax treatment of such couples should be the same as for married couples. The primary difficulty is the disconnect between state law, which recognizes same-sex couples, and federal law, which does not. Moreover, New Jersey's adoption of a civil union statutory scheme, and not civil marriage, ensures that federal discrimination against same-sex couples will continue, even if the federal Defense of Marriage Act is abolished.

At least in New Jersey, same-sex couples will find some relief from state estate taxes. All transfers to the spouse are entirely free of inheritance transfer tax, because civil union spouses (and domestic partners) are Class ‘A’ beneficiaries. Under state law, the first $675,000 of transfers is also free from taxation under the state's estate tax exclusion. The tricky part will be allocating the difference between the $675,000 state exemption and the current federal estate tax exemption.

For a married, opposite-sex couple, taking advantage of the full $2 million federal estate tax exemption will result in a state tax on the difference of $1.325 million. The married couple can avoid the state tax, however, if the remainder is allocated to the surviving spouse's marital deduction under federal and state law. For a civil union couple, the federal marital tax deduction is unavailable, however, the state should allow the difference to remain free of tax under a state marital deduction. The key here is to treat the civil union spouse as if the federal government recognized the civil union in the same way New Jersey does. Thus, it would seem to mandate the creation of two trusts: a bypass trust funded to the full amount of the state tax exemption ($675,000) and a second “bypass/marital” trust funded with the difference between the two exemptions. For state estate tax purposes, the spouse would elect treatment of the second trust as a marital trust.

Another area of difficulty for estate planners is the unavailability of the unlimited federal gift tax exclusion for civil union couples. As a result, transfers from one civil union partner to another are exempt only to the extent that the sum total of such transfers during any given year does not exceed $12,000. This makes commonly used estate equalization techniques trickier for civil union spouses who must report gifts in excess of the annual exclusion. One technique that may be considered is the use of a promissory note between the partners to convert the gift into a sale secured by the note. Some important considerations here are that the note should provide for interest based on prevailing rates and the amount secured by the note should reflect the fair market value of the asset being transferred.

These are not the only areas in which estate planning for civil union couples is affected by the federal-state law disconnect. Other examples include social security (civil union spouses are not entitled to their deceased partner's social security benefits) and pension benefits. According to a Government Accounting Office report, at least 1,138 federal statutory rights and benefits are tied to marriage. Among these are rights and benefits that estate planners take for granted with married couples, such as entitlement to a deceased spouse's social security benefits and tax exemptions for inheritance of pension and retirement plan. All of these benefits are denied to same-sex couples, whether they are in a civil union, as in New Jersey, or in a same-sex marriage, as in Massachusetts.

Unfortunately, until the federal Defense of Marriage Act is repealed, at least with regard to its definition of marriage for purposes of federal law, New Jersey estate planners will have to continue treating civil union couples as “married” for state law purposes and “single” for purposes of federal law. Nonetheless, the changes in New Jersey law are a welcome step forward on the path toward full equality for same-sex couples.

Endnotes

  1. This figure comes from the 2000 census. See “Married-Couple and Unmarried Partner Households: 2000,” February 2003, U.S. Census Bureau. See www.census.gov. This number is probably underreported, because it relied upon self-identification by the reporting individual as a person having a same-sex partner living in the same household. Furthermore, following the 1990 census, the federal Defense of Marriage Act was passed, as a result of which any response that contained both “same-sex” and “spouse” was struck. See Technical Note on Same-Sex Unmarried Partner Data From the 1990 and 2000 Census, U.S. Census Bureau, www.census.gov/population/www.cen2000/samesex.html. See also www.gaydemographics.org for more detailed information.
  2. 188 N.J. 415, 908 A.2d 196 (2006).
  3. The Domestic Partnership Act, P.L. 2003, ch. 246 (2004).
  4. In re Estate of Price (N.J. Super. 2005). The case, which was brought by the author on behalf of the decedent's registered domestic partner, subsequently settled.
  5. A. 3685 (2006).
  6. S. 2407 (2006).
  7. A. 3787 (2006).
  8. I was among those who submitted corrections to the bill. However, the primary reason articulated to me for the failure to make these needed corrections was that the opposition had threatened to include language that would have prohibited the recognition of same-sex marriage in New Jersey.
  9. In fact, the first version of the bill referenced several rights found only under Vermont law. These were pointed out in testimony by me to the Assembly Judiciary Committee and were subsequently fixed by the amendment introduced on Dec. 11, 2006.
  10. Public Law 2006, ch. 103, Section 3((a).
  11. P.L. 2006, ch. 103, Section 3(b).
  12. P.L. 2006, ch. 103, Sections 3(c) and 10.
  13. There are valid reasons for a nonresident couple to enter into a civil union. For example, registration in a civil union may be persuasive when attempting to establish a surviving partner's relationship with a deceased partner in a will challenge. Furthermore, a New Jersey civil union is certain to be recognized in other jurisdictions with similar laws, particularly Vermont and Connecticut.
  14. P.L. 2006, ch. 103, Section 91.
  15. Ibid.
  16. Ibid.
  17. P.L. 2006, ch. 103, Section 92.
  18. P.L. 2006, ch. 103, Section 4.
  19. P.L. 2006, ch.103, Section 4(e).
  20. P.L. 2006, ch. 103, Section 5(a).
  21. P.L. 2006, ch. 103, Section 5(b).
  22. P.L. 2006, ch. 103, Section 5(c).
  23. P.L. 2006, ch. 103, Section 5(e).
  24. P.L. 2006, ch. 103, Section 5(h) and (i).
  25. P.L. 2006, ch. 103, Section 5(p).
  26. P.L. 2006, ch. 103, Section 5(v).
  27. P.L. 2006, ch. 103, Section 5(k).
  28. P.L. 2006, ch. 103, Section 5.
  29. See www.njleg.state.nj.us/2006/Bills/A4000/3787_I1.HTM.
  30. Lewis, supra note 2, at 426.
  31. See www.njleg.state.nj.us/2006/Bills/AL06/103_.HTM.
  32. N.J.S.A. 3B:5-3, as amended.
  33. N.J.S.A. 3B:5-15a.
  34. Ibid.
  35. N.J.S.A. 3B:5-15b.
  36. N.J.S.A. 3B:8-1, as amended.
  37. N.J.S.A. 3B:10-2, as amended.
  38. N.J.S.A. 3B:10-3, as amended.
  39. N.J.S.A. 3B:10-7.
  40. P.L. 104-199 (1995).
  41. “7. Definition of ‘marriage’ and ‘spouse’. In determining the meaning of any Act of Congress, or any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only the legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” 1 U.S.C.A. Section 7.
  42. P.L. 104-199 (1996).
  43. Even if repealed, federal rights and benefits that are tied to marriage do not include civil unions or other alternatives to marriage. One of the arguments for the extension of full marriage equality is that the marriage definition in the Defense of Marriage Act can only be attacked by a couple or party to a marriage recognized under state law.