Estate planning: the new era

Saturday, 01 March 2014
Julian Washington discusses some of the issues posed by 21st-century families.

‘How do I love thee? Let me count the ways’ Elizabeth Barrett Browning

In the 1990s, it was quite depressing to consider the legal position of a gay couple in need of estate-planning advice. At that time, the relationship of gay couples who had lived together for many years was not recognised for any significant legal purpose. There were some things they could do about this: they could make wills and powers of attorney; they could hold properties as co-owners; and they could even sign one of the early ‘living wills’ (of frankly doubtful validity) that purported to require doctors to treat the partners as next of kin. However, there were also many things that they could not control and the lack of legal recognition of same-sex relationships meant that, for all tax purposes, the couple were treated as two single people. Crucially, no spouse exemption from inheritance tax would be available on the first death.

It was interesting back then to compare the position of those gay clients with other couples who were not married. The great problem in the case of heterosexual unmarried cohabitants was not that they did not have the option of marrying (they did) but that increasing numbers of them chose to live together without ever formalising their relationship. Those opposite-sex couples often laboured under the misapprehension that they would be treated as ‘common-law spouses’ and that the law would protect them if they separated or were bereaved. At least the gay and lesbian couples didn’t fall into the trap of assuming the law would look after them; they usually realised that they needed to take advice.

These examples – same-sex couples and unmarried heterosexual couples – are the two classic types of non-traditional family. They are not the only examples but they are the two most interesting cases for those of us concerned with estate and succession planning.1

The UK’s Civil Partnership Act 2004

Of course, a great deal has changed since the 1990s for the UK’s gay and lesbian population. The single most important development has been the passing of the Civil Partnership Act 2004 (CPA 2004). This was a hugely important moment in terms of equality for gay couples, but it was also an interesting time for advisors, who had to get to grips with this entirely new legal status.

Civil partnership is not quite identical to marriage. For example, the legal definition of adultery specifically relates to heterosexuals and couldn’t apply to infidelity on the part of a same-sex partner. There was no attempt to come up with a new definition of same-sex adultery and so adultery was omitted from the list of grounds upon which a civil partnership could be dissolved. The other divorce grounds – desertion, separation for two years with consent, separation for five years without consent, and unreasonable behaviour – apply equally to marriage and civil partnership. This illustrates that the substantive differences between the two are minor and highly technical. However, civil partnership is almost identical in terms of the rights and obligations it creates, and from it flow spouse exemption for tax purposes and recognition for succession law, immigration law and everything else.

Recognition of same-sex relationships worldwide

Fast-forward to 2013 and the legal recognition of same-sex relationships is, if anything, even more topical. In 2013 the French Parliament passed a gay marriage law, the US Supreme Court struck down the Defense of Marriage Act and Uruguay became the latest Latin American country to address the topic. Meanwhile, in the UK, Parliament passed the Marriage (Same Sex Couples) Act 2013, which will come into force in 2014.

STEP members will recall that advising gay couples in the past has been difficult. Legal and tax systems that had been designed to deal with single and married people did not easily bend to accommodate new patterns of family life. Now, however, the trend is towards equality, and life is becoming easier for same-sex couples (and their advisors).

Of course, this is not a universal trend. At the most liberal end of the spectrum are the countries that have established full marriage equality for gay and lesbian couples: Canada, Spain, France, Argentina and now the UK are examples. In the middle are countries that have taken steps towards recognition of gay relationships short of marriage equality. Here there is a complex mixture of registered partnerships, civil unions and many variations on a theme. Some of these statuses are legally close to marriage, but others are less generous; some of them apply only to same-sex couples, whereas others have also been made available to heterosexual couples, alongside marriage. Towards the other end of the spectrum are those countries that still subject gay relationships to the criminal law. Finally, at the most illiberal tip of the spectrum, are those countries that actively apply the death penalty to gay people.

For estate planners, the two opposite ends of this spectrum are relatively straightforward: at the liberal end, same-sex spouses are increasingly likely to be treated for tax and succession-law purposes on equal terms with their heterosexual counterparts. At the illiberal end of the spectrum, the position is also very clear (for all the wrong reasons).

The more interesting cases arise in the complex middle ground where partnerships in certain countries will give some rights but not others and perhaps not the full suite of tax privileges. The French pacte civile de solidarité (or PACS) is an example of this: it does not confer financial rights on a separation or inheritance rights on a death.

International same-sex couples

International same-sex couples present their own challenges for advisors. Visas and immigration problems arise where the two partners do not both have long-term immigration status in the same country. They will hope to be dealing with a jurisdiction whose immigration rules explicitly recognise same-sex relationships but, failing that, they will at least need to try to find lawful immigration paths for each partner separately that eventually enable them to cohabit. In the case of wealthy, internationally mobile couples, advisors may also find themselves asking, for example, whether a UK civil partnership will be recognised in the US, Denmark or Israel. Will it be treated like a heterosexual marriage in the new country or is there a comparable registered partnership in that country’s law? And is this treatment the same across the whole of the destination country, or does it vary from state to state within a federal jurisdiction such as Mexico or the US?

Private international law

Of course, these fascinating questions engage the body of law we know as conflict of laws or private international law. There is nothing unusual about having to grapple with these rules in the context of cross-border work, but, with same-sex relationships, we are in largely uncharted territory: there is nothing approaching an international consensus, let alone an explicit treaty or convention, as to how to approach the recognition of these relationships and we do have to look to the conflict rules (and, if necessary, the local laws of the countries concerned) on a case-by-case basis. The UK Parliament tackled this head on in the context of civil partnership and opted to bring in explicit statutory rules in Part 5, Chapter 2 and Schedule 20 of the CPA 2004. So it is that UK advisors can now look to Schedule 20 and see that a Belgian couple in a Gesetzliches Zusammenwohnen and a German couple in a Lebenspartnershaft will be treated and taxed as if they were civil partners for UK purposes.

The UK common-law marriage myth

In the UK at least, a stark divide has emerged between the legal position of lesbian and gay couples and unmarried heterosexual cohabitants. It used to be the case that both types of couples were legally vulnerable, but heterosexual couples at least had the option of getting married if they wanted to. Now marriage will be available to both (and civil partnership to same-sex couples) and it is the unmarried opposite-sex couples who may yet give planners the greater number of difficulties. The problem of the common-law marriage myth persists and the Law Commission report of 2007, recommending that financial claims between separating cohabitants be permitted, was firmly shelved in 2011.2

Thus an unmarried couple in the UK (once disabused of incorrect notions around common-law marriage) will not want to rely on general succession law but will need carefully drafted wills, life assurance, powers of attorney and any other tools they can use to bring good order to their affairs and security to their family. Similarly, an international gay or lesbian couple, perhaps uncertain about whether they will ultimately settle in a country that recognises their relationship, may also benefit from establishing a trust that removes their estate planning from the vagaries of local succession laws.

Estate planning for 21st-century families

Thus it is that patterns of family life continue to evolve (in some societies quickly; in others more slowly) but our legal and tax systems struggle to keep up with the pace of social change, or choose to ignore it altogether. If good estate planning is important for traditional families, how much more important it is for 21st-century families that don’t fit the old models around which all our legal systems were previously built.

  • 1Second marriages and stepchildren; surrogacy; and gender re-assignment: these are all interesting alternative takes on modern family life
  • 2 Cohabitation: The Financial Consequences of Relationship Breakdown, Law Com No.307
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Julian Washington

Julian Washington TEP is Private Client Director at RBC Wealth Management.

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