The checklist every advisor needs to serve LGBT clients
Since the U.S. Supreme Court constitutionalized same-sex marriages last year, there are now approximately 491,000 same-sex marriages in the U.S.; 123,000 marriages 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, we revisit 10 most significant financial planning changes that advisors need to consider when serving same-sex couple clients.
1. Marital deduction
Same-sex couples can now 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 client's surviving spouse; and one spouse can now 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 passed 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 now 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 now 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. This change necessitates some important planning considerations. Higher-earning same-sex spouses may now 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+ years will now 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 now 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, California and Washington, explicitly recognize same-sex marriages performed in other states or countries. It's 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 all states must recognize out of state same-sex marriages, it's impossible to say what will happen in a non-recognition state.
Less than one-third of the community say they're working with an advisor, according to a Prudential Financial survey.June 24
A landmark Supreme Court ruling ironed out many but not all of the wrinkles in the legal landscape for gay clients.June 29
The federal government's denial of 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 IRA 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 age 70 ½.
There’s 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 a financial advisor's duty to ensure their clients are effectively taking advantage of these opportunities, and they understand how these changes have impacted their financial situation.