To Have and to Hold

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Same-sex couples face unique challenges in financial and estate planning

By Josh Alpert, Principal, Wealth Trac Financial Group

Same-sex couples—including seniors—have made enormous and historic strides in recent years with respect to marriage equality. Last June, a landmark Supreme Court ruling found that the U.S. government cannot withhold federal benefits to same-sex couples if their union is recognized by (or was performed in) a state in which same-sex marriage is legal. As of today, sixteen states, as well as Washington, D.C., allow same-sex marriage: California, Connecticut, Delaware, Hawaii, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont and Washington State.

While this social and civic progress is welcome, real obstacles remain. For all the legislative ground that has been gained, more than two dozen states have a provision in the state constitution defining marriage as the exclusive purview of a man and a woman. Until gay marriage is legalized and fully recognized both statewide and nationally, many same-sex couples will continue to face challenges with respect to retirement and financial planning.

Complications and considerations

For same-sex couples who are not legally married, there are a number of financial and estate planning complications and considerations that must be addressed. One important concern is the inability to utilize Social Security spousal benefit strategies, including the spousal option should one partner predecease the other. Additionally, unmarried same-sex couples are limited in their ability to strategize and structure the timing of their Social Security claims to maximize income.

Estate taxes are another issue. If an unmarried same-sex partner passes away, regardless of the presence or content of a will, the assets/estate will likely be subject to probate, delays and significant estate taxes. While this is more of a concern for wealthier couples, a similar dynamic applies to tax qualified accounts, such as IRA and 401(k) accounts, where the surviving partner has to deal with less flexibility, fewer options and some form of immediate taxation.

Pensions and other benefits—especially healthcare benefits—are another trouble spot. While federal employees can direct that their pension goes to a spouse (and same-sex couples can utilize a spouse’s healthcare coverage the same as any married couple), a state employee in a state that does not recognize same-sex marriage does not have those options in either circumstance.

Strategies and solutions

One of the best ways to avoid the complications that arise from not being legally married is, unsurprisingly, to get married. Because the federal government recognizes any gay marriage performed in a state or country where it is legal, one option for couples living in a state that does not recognize same-sex marriage is to tie the knot in a state that does. This is far from a perfect solution, however. Some states allow same-sex couples who are residents of another state to get married, while others do not. Additionally, while marrying in a state that recognizes same-sex marriage can be an effective way to access federal recognition and benefits, it still does not address any issues that fall under state law.

The legislative and judicial landscape is still evolving on this issue; therefore, a much safer and more reliable retirement planning and wealth management approach is highly recommended. Same-sex couples should consider implementing some basic legal and financial strategies designed to compensate for uncertainties, protect against exposure and mitigate potentially significant tax obligations and liabilities. Not only can this be helpful with financial issues, but it is also a benefit with regard to making healthcare decisions for one’s spouse and resolving estate issues upon one’s death.

From a legal perspective, there are several best-practices that can help minimize the gaps. Establishing durable powers of attorney and healthcare powers of attorney are steps that same-sex couples should strongly consider taking. Another specific solution is to ensure that a house or property is jointly owned or is in a trust. This not only protects against the estate tax issue, but also makes it possible to avoid probate and the delays that can result when only one individual’s name is on the property.

For many same-sex couples, a variety of insurance solutions can offer financial protection. For example, life insurance can be specially designed to provide a tax-free death benefit that can be used to offset taxation that may apply to inherited assets. In lieu of relying on pensions that may be subject to the whims of an individual state, retirement income-producing products, such as an annuity, can provide a dependable source of long-term financial security.

Every couple’s circumstances are different, and since there is so much legislative and judicial inconsistency and financial uncertainty at present, the single most important thing that any same-sex couple can do is to consult with trusted and experienced wealth management and estate planning professionals—especially those with demonstrated experience and expertise in the unique challenges facing same-sex couples. As laws are changing quickly, it will also be important to review and/or revise your plan regularly to ensure you and your spouse stay continuously prepared for the future.

Josh Alpert is a principal and co-owner of Wealth Trac Financial Group, based in Southfield, Michigan. With more than 12 years in the financial industry, Alpert counsels clients on wealth management and income planning using innovative strategies custom-tailored to the needs of each individual..

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