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May 8, 2013

States Decide: Can Same-Sex Spouses Become the Beneficiary of Their Partners’ Trust?

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An expert panel discusses “Is Your Spouse a Trust Beneficiary? State Law Holds the Key for Same-Sex Spouses” during an event hosted by the ABA Section of Real Property, Trust and Estate Law

Same-sex couples who marry or join in civil unions face unique challenges to determine whether their partner qualifies as a beneficiary of their trusts, and attorneys must often navigate complex or unclear laws to guide their clients appropriately.

“State law is key on this issue,” said Ray Prather, an attorney at Prather Ebner LLP. In general, the Internal Revenue Service defines a trust as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. Trusts are often used to pass monetary benefits to a spouse through a third party. However, state laws vary on whether same-sex partners who are married qualify as spouses.

Currently, 10 states and the District of Columbia have legalized same-sex marriage and five states have instituted civil unions for gay couples, but in most states, marriage is limited to heterosexual relationships.

On the federal level, the Defense of Marriage Act says that the government cannot acknowledge same-sex relationships and that states do not have to recognize any other states’ relationship laws, leaving it completely up to the state in which the case was filed to define “spouse,” Prather said.

The Supreme Court is currently weighing the constitutionality of DOMA, which defines a marriage as a legal union between one man and one woman. The decision will have an effect on how spouse is defined in trusts and estate law and whether states must acknowledge the marriage laws of other states.

In order to resolve trust cases, an attorney must seek clarity on who can be considered a spouse, experts said during the panel discussion “Is Your Spouse a Trust Beneficiary? State Law Holds the Key for Same-Sex Spouses.” The event was hosted by the _ Section of Real Property, Trust and Estate Law during its 24th Annual Spring CLE Symposia.

“The general rule is that a marriage in another state is valid and will be recognized … unless it is contrary to a public policy of the foreign jurisdiction, and of course, there is no public policy except when it comes to same-sex marriages,” said Daniel Ebner, an attorney at Prather Ebner LLP. “One of the places to start is, what are the various ways that spouse is defined in trust documents?”

Ebner said there are three standard ways of defining spouse in trust documents. One is simply based on the definition of “spouse” by the state in which the couple married. A second definition says they have to be “married,” without mention of where or how. The third is simply undefined.

“Some courts say to read the trust document as a whole to determine if there is an ambiguity and if it can be resolved by reading the entire document,” Ebner said. “If you cannot resolve the ambiguity by looking at the document as a whole, you look at extrinsic evidence.”

Extrinsic evidence not only includes state laws regarding the legal definition of spouse but also the grantor’s intent during the establishment of the trust.

“One of the great ironies in probably our entire field is the concept of grantor’s intent, because if we are really honest, I would guess that 85 percent of estate plans don’t put in any grantor intent,” said Stacy E. Singer, attorney at the Northern Trust Company. “The challenge for most of the last 100 years, the bulk of that time no one thought spouse meant anything other than different-sex couples who were engaged in a wedding.”

Lawyers should look to the timing and any language that can help determine whether there is true grantor intent.

When there is not a clear intent of the grantor, trustees and fiduciaries often turn to the courts to help resolve the issue.

“That’s where I think this is going to go for the next five years or so,” Singer said. “Absent some kind of Supreme Court ruling that gives us clarity on this.”

“It is not really a straightforward analysis,” added Terrence M. Franklin, an attorney at Sacks Glazier Franklin & Lodise LLP. “All these changing laws, societal opinions and even personal opinions about the recognition of same-sex relationships complicates just who is a spouse and who is entitled to inherit.”