When New York residents Mark Strong and Craig Partin married in New York last October, their marriage wasn't recognized by the federal government. So the duo took extra planning steps to make sure either spouse could afford the estate tax on what he would inherit from the other.
"We each took out a tremendous amount of life insurance, compared to what we might otherwise have, so that the survivor wouldn't be burdened by the need to pay estate tax," Strong says. They pay $300 monthly for coverage.
Now the couple is considering letting those policies lapse. They stopped needing them in June when the U.S. Supreme Court changed the couple's financial and legal status by striking down a central feature of the Defense of Marriage Act. The ruling represents a major change for financial planners and their clients who are in - or are considering - same-sex marriages.
"The federal benefits mean that there's more reason for gay people to get married now. Some people had been holding out on getting married, waiting for federal recognition," says James Tissot, Strong and Partin's planner and the owner of Prism Planning in New York.
Same-sex couples now get the same federally derived legal and financial benefits that heterosexual married couples receive. So in states where same-sex marriage is legal, advisors should revisit married same-sex clients' plans with a particular eye toward federal issues - including those pertaining to Social Security and veterans' benefits, taxes and housing.
The ruling also allows the Obama administration to take executive action to broaden benefits to same-gender couples in states where gay marriage isn't recognized; as of early July, the federal government was already expanding spousal benefits to cover gay and lesbian married employees.
Among the planning issues affected by the high court ruling are:
* Transferring property to a spouse during a client's lifetime without owing federal gift tax.
* Inheriting property from a spouse without paying federal estate tax.
* Filing federal taxes jointly.
* Receiving a spouse's Social Security benefits.
* Receiving pension survivorship benefits.
* Receiving spousal benefits without owing taxes on the benefit value.
PATCHWORK OF RULES
Yet the court's ruling does not mandate same-sex marriage nationwide. Nor did the decision force states that don't allow such marriages to recognize those that were legal in other states; That portion of the law was not heard by the court.
As a result, there is substantial confusion as to who will be considered married under the revised law. In determining whether a same-sex couple is married, current laws and regulations might point to either federal rules, or the law of the state where the couple lives, or the law of the state where they were married.
What does this means for planners? In the 13 states that currently permit and recognize gay marriages, client couples almost certainly will now enjoy the benefits that both the state and federal governments confer on married partners. Until now, these clients benefited only from state laws recognizing their marriages.
But in states that do not recognize same-gender marriages, client couples could find themselves married from a federal point of view, but single as far as the state is concerned.
"You could end up with federal benefits, but no state benefits if your state doesn't recognize gay marriage," says Debra Neiman, principal at Neiman & Associates Financial Services in Arlington, Mass. Couples in that situation might, for instance, have to pay state estate tax - but not federal - when one spouse dies.
Another example: If Strong and Partin take steps to or buy property in a state that doesn't recognize their marriage, their financial situation becomes less clear. At the very least, the survivor could owe state estate tax on the inheritance when one of them dies.
The situation can grow more confusing for people who marry in a state that allows same-sex marriages but live in one that does not. Think of the awkward situations for people who marry in New Hampshire, which requires one year of residency to divorce, but who move to New Jersey, where they cannot dissolve their marriage because the state doesn't recognize that their marriage exists.
FOCUS ON REDUNDANCY
Unless same-gender marriage is recognized by all states, Tissot, Neiman and other planners who specialize in working with same-sex couples recommend a redundant approach, in case clients are forced to defend their rights in unfriendly jurisdictions.
In addition to marrying, same-gender clients should also consider signing a domestic partnership agreement, in case the couple moves to a state that recognizes domestic partnerships, but not same-gender marriage, Tissot says.
Advisors also recommend that each couple create a will to lower the chance that a relative might legally demand a share of property. Couples should ensure that real estate titles stipulate joint ownership, with the right of survivorship. That's particularly important if a couple lives in a state that recognizes the marriage, but buys or inherits property in a state that does not.
One spouse's right to visit or make medical decisions for the other might be safe in right-to-marry states, but may not protect a client who has a heart attack while visiting Florida, for example, which doesn't recognize same-sex marriage.
Rules about health care proxies are made at the state level, says Stuart Armstrong, a planner and accredited domestic partner advisor at Centinel Financial Group in Needham Heights, Mass. In that situation, a health care proxy would help.
"A layering of documentation, especially when you're in a hostile environment, carries weight," Tissot says. "If I have a will and another piece of paper and they both say the same thing, it's hard to refute that. It's hard for someone to say that you were coerced. There is definite intent and contractual agreement."
Advisors who work with same-sex couples offer another caution, which may sound familiar to heterosexual planners (and clients): Just because the high-court ruling offers married couples a financial payoff doesn't mean same-sex clients should rush to the altar.
"It's important for people to be thoughtful about making decisions and not rush into marriage," Armstrong says. "I have a number of clients who have the ability to get married in Massachusetts, but have chosen not to. Sometimes the issue is a wealth difference between the two partners [and] the wealthier partner often doesn't want to combine finances too closely."
Other relevant issues exist. A couple could have children from previous relationships who will inherit property. A family may want to avoid listing stepparent assets on student financial aid applications. One member may need single status to adopt in a country or state that is hostile to gay parents. Or a client might not want to open his or her finances to discussion with a partner.
"I'm in the position of seeing lots of couples before they actually get married, which isn't usual in the straight world," Tissot says. "I'm not a marriage counselor, but I do try to take care that they not get into contracts that they shouldn't. My services are for clients' wellbeing, not just for allocating money."
Ingrid Case, a Minneapolis financial writer, is the author of Your Own Two Feet (and How to Stand on Them): Surviving and Thriving After Graduation.
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