New York State's passage on June 24 of a contentious bill permitting same-sex marriage has given a powerful boost to gay and lesbian couples' decades-long drive for legal and social equality. For life insurance and financial service professionals, say experts, that equality will afford them greater flexibility with which to help couples meet financial planning objectives.
The bill's enactment in New York--the 6th and most populous state to allow same-sex marriage--brings to 14 the number of states that legally sanction such relationships. Eight other states allow civil unions or domestic partnerships that provide spousal rights. And three offer recognition of same-sex marriages from other states.
The movement won a federal victory, too, when President Obama, in a major policy shift, directed the U.S. Justice Department in February to stop defending the Defense of Marriage Act--the 1996 law that bars federal recognition of same-sex marriages--against lawsuits challenging it as unconstitutional.
Producers serving gays and lesbians (who, with bisexuals and transsexuals, comprise the GLBT or LGBT community) applaud the legislative gains. But they note the nation's patchwork quilt of laws--most notably the continuing disconnect between federal and state recognition of same-sex marriage--mean that gay and lesbian couples and their advisors face a more complex planning landscape than do their heterosexual counterparts.
"Recognition of same-sex marriage among a growing number of states is good in that it bestows numerous state rights and benefits," says Gregory Herman-Giddens, a principal of Trust Council, Chapel Hill, N.C. "But that recognition can lead to a false sense of security and inadequate financial planning."
Lynn Elmer, a certified financial planner with Des Moines-based Principal Financial Group, agrees, noting that state recognition of same-sex marriage changes nothing at the federal level. "You have to plan as if you were complete strangers," Elmer says of same-sex couples, "because under federal law that's what you are. Everything about the relationship has to be contractual."
The lack of federal recognition impacts many areas of planning, such as income taxes, estate taxes, Social Security benefits, pensions and life insurance benefits. Same-sex couples, for example, do not enjoy the federal unlimited marital deduction, the ability to transfer assets to beneficiaries free of gift and estate tax. Nor can they defer income tax on assets rolled over from an individual retirement account or pension plan.
Perhaps the chasm between state and federal law is felt most deeply at tax-time. While gay and lesbian couples can file a joint state tax return in a state that recognizes same-sex marriages, they must file separate federal income returns, adding time and expense.
"Because a virtual tax-free flow of assets is permitted for federally recognized marriages, in the retirement planning arena, the analysis is generally always combined for couples," says David Taube, a certified financial planner and principal of Kalorama Wealth Strategies, Washington, D.C. "For same-sex couples, we typically provide an analysis on a separate and combined basis."
Carol Grosvenor, a certified financial planner at Los Angeles-based CG Financial Services, adds that recognition of same-sex marriages in California has been a mixed blessing for gay and lesbian couples.
"The combination of two things--being married in a state governed by community property laws that mandate joint ownership of most property acquired during marriage; and having to file separate federal income tax returns--adds to the complexity and cost of planning," she says. "Add to this the fact that many accountants don't know how to prepare income tax returns for same-sex couples because they lack the necessary expertise or software."
To be sure, recent Congressional legislation has eased retirement and estate planning for many same-sex couples. Experts point, for example, to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 for extending the Bush-era tax cuts and raising the estate tax exemption level to $5 million per individual and $10 million per couple. They flag also the 2006 Pension Protection Act permitting IRA rollovers to non-spousal beneficiaries, thus allowing a same-sex partner to stretch IRA payouts, and income tax on the distributions, over their lifetimes.
Reduced tax burdens on IRAs may not count for much, however, if a retiree does not have much of a nest egg to start with. Often, says Grosvenor, a gay or lesbian will be asked by siblings to care for an aging parent because he or she does not also have to look after children. In accepting the responsibility, the individual may forego retirement savings to pay for the parent's long-term care.
"Even when making such sacrifices, gays and lesbians frequently are denied an inheritance because of a parent's aversion to their sexual orientation," says Grosvenor. "As a planner, I always have to ask about tensions in family relationships and whether an inheritance is realistic to expect."
Experts note that more and more same-sex couples are choosing to have children--through adoption, artificial insemination, surrogate parenting or other means--in part because society is increasingly accepting of same-sex relationships. Hatch says about one million same-sex couples now raise two million children. Some states allow both partners' names to be on a child's birth certificate; other states won't allow same-sex parents to adopt their own children.
The death of a same-sex spouse can leave a surviving partner bereft of children the couple had been raising. States that do not recognize same-sex relationships might, for example, seek to return the children to the biological parents or other family members.
To head off potential court challenges, says, Hatch, "enlisting an experienced legal professional--not just a well-meaning neighborhood generalist--is critical. The stakes are too high."
Problems can also arise for gay or lesbian partners in states such as Florida, that do not recognize same-sex marriage laws of other states. If partners get married in Iowa and thereafter suffer a car accident in Miami, then one partner will be unable to make healthcare decisions for the other absent a medical power of attorney. Florida might also deny the same couple a divorce, something in which the states courts offer no guidance because the case law has not yet been written.
Advisors warn of other consequences that might result from a failure to plan. A common scenario is when one partner in a same-sex relationship dies and hostile family members force the surviving partner to move out of a home owned by the deceased. Because the surviving partner does not enjoy the rights of inheritance (assuming the relationship is not recognized by the state), all property belonging to the deceased partner goes to next of kin.
Conversely, a surviving partner who does inherit a spouse's property under state-recognized same-sex marriage laws could, without the benefit of the federal unlimited marital deduction, pay a substantial estate tax--and do so more than once.
"Same-sex couples are subject to federal estate tax on the death of the first partner," says Jennifer Hatch, a CFP and managing partner at Christopher Street Financial, New York. "If assets are not titled correctly or documents are inappropriately drafted, then estate taxes could be paid twice: once on the death of the first partner, and again after the second partner's death."
Tax issues can arise, too, when unmarried couples make substantial gifts to one another. If a partner who owns a home should add the other partner to the title, the transaction is subject to federal gift tax. Assuming the home is valued at $1 million, the federal gift tax would total $500,000.
How to avoid the tax? Rather than establish joint title, suggests Herman-Giddens, the partner making the gift can place the assets in a revocable living trust or in a will established for the benefit of the surviving partner.
"The advantage is that the [gifting] partner gets the benefit of those assets over his or her lifetime," says Herman-Giddens. "When the individual dies, assets received by the surviving partner aren't subject to estate or gift tax. This strategy can help preserve assets for children or other beneficiaries."
He adds that he encourages couples to enter into joint property agreements that, like pre-nuptial contracts, may stipulate a certain division of assets among the partners and heirs in the event of divorce.
In other cases, the challenge is to establish each partner's contribution to jointly held property, such as a business. Absent documentation attesting to each partner's interest, a surviving partner could be subject to an estate tax on both partners' assets.
One solution in this situation is to establish two living trusts, each holding 50% of estate assets for the benefit of one of the partners. Life insurance proceeds can be used to pay tax on a now smaller estate (50% of assets previously held jointly). If held inside an irrevocable life insurance trust, the death benefit also escapes estate tax. Policy proceeds can also avoid estate tax if each of the partners buys a policy insuring the other.
"If I own a policy on my partner and am the beneficiary upon her death, the proceeds don't go through her estate," Hatch says. "It's that simple. This type of cross-purchase arrangement is more convenient and less expensive than setting up an ILIT."
Pre-existing life insurance policies, she adds, need to be checked to ensure that beneficiary designations are appropriately updated. If a partner and children from a previous marriage are still listed as beneficiaries at the time of the insured's death, they will receive the proceeds, even if the policy owner's intent (as expressed in a will or other estate planning documents) is to do otherwise. That is because beneficiary designations bypass probate court.
To make couples aware of planning pitfalls and of the techniques that can protect them financially, Hatch hosts frequent seminars. Dubbed "Gay Money," the gatherings explore ways to achieve family planning, retirement, plus end-of-life and wealth transfer objectives in the absence of federal or state marriage rights for couples.
"If you're not part of the community, then make sure that you are comfortable working with people who are different from you," says Taube. "To develop trust [with a same-sex couple] you have to be respectful of diversity and differences."
Because of such differences, he adds, documents and literature, such as fact-finding questionnaires and presentations, should be tailored to the same-sex couple. For example, rather than addressing clients in documents as "Mr." and "Mrs." or "husband" and "wife," advisors might write "client 1" and "client 2."
Grosvenor observes that education about same-sex couples' life issues and planning needs is a must for non-GLBT advisors who wish to expand their practice into this market niche. But she questions whether many straight advisors can match a gay or lesbian advisor's ability to establish a trusting relationship with those in the community.
"Gay and lesbian advisors bring an immediate connection to the table with GLBT prospects," she says. "That's a key competitive advantage."
Elmer agrees, adding: "I have a closer bond with my clients than do straight advisors. And because I know them better, I have better suitability information as to their planning needs."