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Think Beyond the Needs of Ozzie and Harriet Families

When a spouse dies, the law is completely clear. In the U.S., even without a will, the widow or widower automatically gets the assets. Being married is like taking the car pool lane, says Frederick Hertz, an attorney in Oakland, Calif., and author of A Legal Guide for Lesbian & Gay Couples (Nolo Press). That leaves most households in the slow lane, if not in legal limbo because most U.S. households

When a spouse dies, the law is completely clear. In the U.S., even without a will, the widow or widower automatically gets the assets. “Being married is like taking the car pool lane,” says Frederick Hertz, an attorney in Oakland, Calif., and author of A Legal Guide for Lesbian & Gay Couples (Nolo Press).

That leaves most households in the slow lane, if not in legal limbo — because most U.S. households don't resemble the Ozzie and Harriet families of yore. Less than 25 percent of U.S. households consist of married heterosexual couples with kids, according to the latest census. A sign of the times: The New York Times has started running announcements of same-sex commitments on its Weddings/Celebrations pages.

Social acceptance is one thing. Legal rights are another. The rights to property or even custody of children in the case of unmarried couples is anything but clear under the law. Brokers and advisors who don't learn how to address the planning needs of nontraditional families could wind up limiting their market potential.

Baby Boom

The issues for same-sex couples are particularly complex and growing more so. Debra Neiman, a CFP with the Neiman-Maloy Financial Group in Wakefield, Mass., points to what she calls “the gayby boom.” In her mostly fee-based business, she helps same-sex couples plan for the birth or adoption of children. “I know five couples who have had children over the past two to three months,” she says. “Suddenly, we're making plans for 20 years down the road.”

To make such plans, financial advisors need to learn how to work around laws that never anticipated such families. So far, only Vermont allows same-sex couples to tie the knot with its civil union law. The law confers many of the same benefits married couples enjoy. Litigation that could lead to legislation to permit gay marriages is under way in Massachusetts, says Ellen Wade, a partner at Wade & Horowitz in Brookline, Mass.

California recently passed a domestic partnership law, which provides benefits to couples who register their commitment and the same hospital visiting rights that heterosexual partners get. It also includes adoption rights and the right to sue for wrongful death of a partner. A number of cities, including New York, San Francisco and Seattle, have domestic partnership laws, too.

However, gay marriage is a hot political issue that may not get support in most states. Many states do not permit same-sex couples to have joint custody of children. And the federal government defines marriage as a union between one man and one woman, and has many laws that benefit only legal partners of the opposite sex — including the estate tax exemption that is only available to married partners and allows all of a spouse's wealth to pass untaxed to the surviving spouse.

Unmarried partners, especially same-sex partners, face numerous difficulties and delays, especially when it comes to transferring assets, taxes and estates. Unless, or until, the laws change, it is up to financial advisors and lawyers to help gay couples figure out how to build a financial future together and keep their assets.

Sharing the Wealth

“Investments for gay folks are no different,” says Richard Hearn, a financial advisor and founder of Starcare Associates (affiliated with Linsco/Private Ledger) in Newport Beach, Calif. “It's how you hold title that's different.”

Spouses can transfer and comingle assets freely, but for unmarried partners, transfers of funds or property are seen as gifts and can trigger taxation. If John deeds the cottage on Fire Island to George, or if Jane gives a Porsche to Mary, they have easily exceeded the annual tax-free gift limit of $11,000. If gifts exceed that amount, the giver will use part of his or her lifetime exclusion, currently $1 million.

What about joint tenancy, a common vehicle that couples use to share ownership of financial assets? “Partners need to be very careful,” says Alan Hirschfeld, an attorney with Neuberger Berman Trust in New York. “They may create a gift where they didn't intend one.” For example, if John adds George's name to his brokerage account as joint tenant, the IRS could contend that he has gifted George half the assets in the account. Again, the gift tax would apply.

Gifts are a viable tax planning strategy, but the government has anticipated the possibility that someone might give away everything to avoid estate taxes. The gift tax starts at 38 percent, like the inheritance tax. Advisors generally caution people to divide a gift into proportions that do not exceed the maximum allowed in any given year and to keep careful records.

Neiman urges same-sex couples to keep careful financial records, cautioning, “in dealing with the IRS, the burden of proof is on you.” Keeping track of who pays for what is smart in any event. Hertz points out that although gay couples can't in most states divorce like married folks, they can and do break up, and good documentation makes the untangling somewhat smoother.

The worst of the horror stories are the ones occurring after the death of one partner. A number of gay men and women who lost partners in the September 11 tragedy are fighting for their rights as survivors, including aid from various benefit programs. In Virginia, one woman who lost her partner of 18 years was denied benefits from Virginia's Criminal Injuries Compensation Fund. Administrators refused to accept the couple were anything but “friends.”

“The most difficult part is making people aware of worst-case scenarios,” says Jill Hollander, a fee-only planner and money manager in Berkeley, Calif., who believes that many couples are naive about the ramifications of their relationship. “They may think their families are accepting, but money can bring out the worst in people.”

Hollander cites the example of a woman in a lesbian relationship who adopted a child and died suddenly. The parents of the deceased partner got custody of the child as well as ownership of the home the women had shared. A grieving partner may be in no condition emotionally or financially to win such a fight, Hollander notes.

Brokers need not become experts, says Gay Abarbanell, a financial planner in Culver City, Calif., but advisors can be valuable liaisons between clients and attorneys. “Make your clients aware of the issues,” she says. “Get them thinking about their choices and see that they know enough to ask the attorney the right questions.”

The simplest step is to make sure all clients have a valid will. A will may prevent a worst-case scenario. When someone dies without one, state laws determine who gets the assets, and priority usually goes to spouses, children, parents, siblings and other blood relatives.

Wills can be contested, Hertz points out, but they are not easy to overturn. Defending a will is costly and eats away at the estate assets. They are subject to probate, which is a public process and can be lengthy as well as expensive, tying up assets that a surviving partner needs to live on.

Insurance, IRAs and 401(k)s

Life insurance, IRAs and 401(k)s are non-probate assets, and can be transferred to beneficiaries without long delays. Until recently, same-sex couples had a hard time designating partners as life insurance beneficiaries. “The better insurance companies now allow domestic partners as beneficiaries,” says James Law, senior advisor for American Express in New York. Still, some states refuse to recognize a same-sex partner as having an insurable interest, and some insurance companies reject an application on these grounds. Some also require continued evidence of insurable interest. The insured partner's contribution to the rent or mortgage, for example, can justify insurable interest.

Although Social Security has no provision for survivor benefits for domestic partners, corporate benefit plans increasingly do. In 1990, less than two dozen companies recognized domestic partners. Now, 145 of Fortune 500 companies and a total of about 4,500 companies do. Tom Swift, cofounder of the Financial Avengers in San Francisco, points out that companies in California have led the way in providing pension and health care benefits for domestic partners, with those in Massachusetts and Minnesota following close behind.

IRS rules regarding IRAs have recently changed, too. Non-spouse beneficiaries have the same advantage as surviving spouses and can take distributions over a period of time according to their life expectancy, instead of in a lump sum. Abarbanell, who observes that same-sex partners often have considerable age disparity as well as disparity in earnings, suggests using 529 plans, which let money for education grow tax-free. “It's a great way to put away money for kids, and it can also be for a partner who wants additional education. It takes a chunk of money out of the estate, where it could be taxed.”

Trusts and Taxes

A living trust, sometimes called a revocable trust, is the best option in many cases because it avoids the probate process. “It allows for privacy and smooth transfer of assets,” Hirschfeld explains. “Funds can be immediately available to the beneficiary without court intervention.”

Trusts also offer flexibility. The individual who wants to leave assets to a partner as well as to a relative or a charity could spell it all out in a living trust. What's more, living trusts can be changed as circumstances change, and even permit an individual to designate circumstances under which a partner would or would not receive assets.

However, living trusts offer no estate tax savings that you can't get with a will. When a spouse dies, assets generally pass to the surviving spouse's estate tax-free, and no estate tax is due until the second spouse dies. Unmarried partners have no such advantage. A joint trust gives the survivor privacy and the ability to plan for distribution of their assets — and avoids probate or having a will contested. But with $1 million or more, you need another kind of trust to avoid the taxman.

“Couples with assets of $1 million or more, or where one partner has considerably more in assets than the other, need professional advice,” Hirschfeld cautions. For example, if John leaves George $3 million, the second million is taxed at 50 percent, and when George dies, it is taxed a second time.

A trust could specify that George gets to live out his days in the house, and afterward it would go to a child or other relative or to charity. Same-sex couples may use charitable remainder trusts, generation-skipping trusts and other vehicles available to married couples, and although tax-planning trusts are irrevocable, they can be drafted to meet changing needs.

But financial advice for gay couples isn't just about death, which was often the focus of planning, or lack thereof, during the darkest days of the AIDS epidemic before drugs extended survival times. “Now we're preparing them for life,” says the Financial Avengers' Swift.

Terms Defined

  • Durable power of attorney gives the person you designate the power to act as your agent in financial matters.
  • Health care power of attorney gives the person you designate the power to make health care decisions for you if you are incapacitated.
  • A living will specifies your wishes as to end-of-life medical treatment.
  • Memorial/burial wishes specify your preferences in a signed document not to be included in your will.
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