10 points to keep in mind when serving LGBT clients
Since the U.S. Supreme Court constitutionalized same-sex marriages last year, there are now about 491,000 same-sex marriages in the United States, 123,000 more than prior to the ruling.
This landmark recognition ensured that all married gay clients are entitled to a plethora of financial planning strategies and workplace benefits that was once only available to opposite-sex married couples.
In order to help clients adjust and employ these developments into their strategies, here are 10 of the most significant financial planning changes that advisers need to consider when serving same-sex couple clients.
1. Marital deduction. Same-sex couples can take advantage of the unlimited number of assets that can be transferred to a surviving spouse upon the first death without incurring federal estate taxes.
2. Gift splitting. Any unused estate tax and gift tax exemptions are also allowed to pass to the client's surviving spouse, and one spouse can make a gift or transfer property to the other without incurring federal income tax or gift tax.
3. Portability of the deceased spouse’s unused exclusion amount. In the past, same-sex couples with sizable estates had no viable planning option but to lock up the lion’s share of their assets in life insurance policies. There was no other method to transfer money to each person tax-free.
The unlimited marital deduction for estate tax purposes eliminates this dilemma, allowing assets to be passed to the spouse at death without incurring federal estate taxes.
Other issues such as the ever-present threat of legal challenges to the estates of a deceased same-sex partner by family members has been minimized or eliminated. Previous intestacy laws didn’t recognize the inheritance rights of same-sex partners if they died without a will.
And even if they executed a will leaving the estate to the partner, family challenges were still commonplace (e.g., claims that they were coerced and not of sound mind). For married same-sex couples, the spouse is now the lawful beneficiary of a certain percentage of wealth as are any children.
4. Filing “married” status on federal income tax returns. Same-sex couples are required to file annual federal and state income tax returns using the “married filing jointly” or “married filing separately” filing status.
5. Taxability of spousal health insurance. An employee’s same-sex spouse is afforded the same health insurance COBRA rights along with survivor benefit rules for defined-contribution plan assets that an opposite-sex spouse has always had, both while married and in the event of divorce.
6. Social Security benefits. All same-sex married couples are eligible for Social Security spousal and survivor benefits. Should one spouse die, the surviving spouse will receive the higher of the two spousal benefits going forward.
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This change necessitates some important planning considerations. Higher-earning same-sex spouses may want to think about postponing the start of their benefits in order to build a higher monthly payment, not only for themselves but also for their surviving spouse.
Social Security Administration rules pertaining to divorce also apply. Divorced same-sex spouses who were married for 10-plus years will be eligible for the same benefits as couples who are still married.
7. Continuation of pension benefits. Rather than having to watch their partner’s pension die with them, same-sex spouses have the opportunity for pension continuation benefits. However, this necessitates a decision on the part of the spouse with the pension whether to opt for a larger single-life pension with no survivor benefit or a reduced pension with spousal continuation.
8. Change of residence state. When it comes to state recognition, the law is ever-changing. A few states such as California and Washington explicitly recognize same-sex marriages performed in other states or countries.
It is also probably safe to assume that any of the jurisdictions where same-sex marriage is legal will also recognize same-sex marriages from other states. As of September 2013, this includes California, Connecticut, Delaware, D.C., Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington.
Without a uniform law that says that all states must recognize out-of-state same-sex marriages, it is impossible to say what will happen in a non-recognition state.
9. Divorce. The federal government denied recognition to same-sex marriages prior to United States v. Windsor. Before the ruling in 2013, assets transferred in a divorce settlement were treated as gifts.
Now a same-sex marriage can be dissolved in any state, regardless of where the marriage took place.
10. Spousal protection on retirement plan elections. Rather than being required to begin distributions from an inherited individual retirement account in the calendar year immediately following the year of death of the original IRA holder, spousal beneficiaries are afforded the planning flexibility to delay taking distributions until such time as the deceased spouse would have turned 70 ½.
In conclusion, there is no question that a whole new world of financial opportunities has been unlocked and a host of onerous financial burdens lifted for married same-sex couples. It is an adviser's duty to ensure that clients are effectively taking advantage of these opportunities and they understand how these changes have affected their financial situations.
This story is part of a 30-30 series on smart strategies for RIAs. It was originally published on July 22.