In the second part of a series on planning issues for same-sex couple clients, following the legislative changes in New York, Amy Buttell highlights some of the issues wealth managers should be aware of.
Editor’s Note: In the second part of a series on planning issues for same-sex couple clients, following the legislative changes in New York, Amy Buttell highlights some of the issues wealth managers should be aware of. To view the first article click here.
With state laws in flux regarding same-sex marriage, wealth managers with same-sex couple clients need to pay careful attention to the many planning issues that are especially complex for this group of clients. Wealth managers should be very proactive in financial, tax and estate planning around marital issues, because while state laws in eight jurisdictions recognize same sex marriage, the 42 other states and the federal government don’t recognize those marriages, potentially leading to complicated issues surrounding cohabitation and divorce, according to Lynn Maier, a family law attorney with Kurzman Eisenberg Corbin & Lever in White Plains, NY.
Many of these issues include rights that opposite-sex married couples take for granted, including tax-free pension and retirement plan distributions in a divorce; spousal COBRA rights upon unemployment and in a divorce; rights to property in a divorce; and the fact spousal IRAs aren’t granted to many same-sex couples under federal law and the laws of many states, according to Maier and Jim Toto of WeiserMazars, an accounting and wealth management firm in Edison, NJ.
As of September 2011, Massachusetts, Connecticut, California, Iowa, Vermont, New Hampshire, New York and the District of Columbia allow same-sex marriage, according to the National Conference of State Legislatures. New York and Maryland recognize same-sex marriages performed in other states. Five states – Delaware, Hawaii, Illinois, New Jersey and Rhode Island - allow civil unions, providing state-level spousal rights to same-sex couples. Oregon, Nevada, California and Washington state grant most state level rights to same-sex couples and opposite-sex couples who file for a domestic partnership while the District of Columbia, Hawaii, Maine, Wisconsin and Washington DC provide some of those benefits to domestic partners.
Here’s a look at some of the issues wealth managers should be aware of when undertaking financial, estate and tax planning for high net worth individuals who are involved in a same-sex relationship or same-sex marriage:
Qualified Domestic Relations Orders (QDROs): In a marriage of opposite-sex partners, pensions and retirement plans can be transferred to divorcing partners without taxes and penalties under Qualified Domestic Relation Orders, according to Toto. Not so for same-sex partners, who if they separate or divorce and want to transfer pension or retirement plan benefits, must pay taxes and penalties, which can be stiff, notes Maier.
According to the IRS, a same-sex couple would pay tax on the amount that is withdrawn from the retirement account as well as a 10 per cent penalty in the event of a withdrawal due to a separation or divorce.
COBRA Rights: Under federal law, divorcing spouses and unemployed people have the right to pay to continue employer-based health insurance under COBRA. But those rights don’t extend to same-sex couples in a divorce or separation or to the spouse of a same-sex couple when one spouse becomes unemployed, says Susan Slater-Jansen, an estate planning attorney with Kurzman Eisenberg Corbin & Lever.
“COBRA is a federal insurance program so it’s a problem for same-sex couples,” she says. Maier agrees, adding, “If you’re in New York and you’re operating under a state issue in regard to medical insurance it won’t be a problem, but if you’re a federal worker it obviously will be a problem.”
Property Rights: In New York and many other states, property can be titled jointly though joint ownership with rights of survivorship, which is a state right, says Slater-Jansen. However, for property that is inherited for federal purposes, the surviving spouse is going to have to prove that he or she made a contribution, otherwise the assumption is that the property belonged in its entirety to the deceased, she adds.
“The surviving same-sex spouse will have to prove that he or she made a financial contribution towards purchasing that property,” she says. “It’s nice to be able to buy property with rights to survivorship so you know that the other party will inherit. But there are still tax consequences to deal with on a federal level if federal law doesn’t consider the spouses as legally married.”
Even state law in New York governing property is full of potential landmines for same-sex married couples, because the date of the acquisition of the property is the date of the marriage, notes Maier. “Many same-sex couples have been together for years before same-sex marriage was legal, so their joint property ownership dates back much farther than the date of the marriage. If there is a divorce later, it could be difficult to trace everything back and figure out which spouse put which assets into which pieces of property.”
Spousal IRAs: Unemployed spouses of opposite-sex couples can establish a spousal IRA even if the spouse doesn’t receive any income from employment, which is the usual standard for making an IRA contribution as long as those spouses file jointly, according to the IRS. Because federal law doesn’t recognize same-sex marriage, this isn’t a retirement contribution option that same-sex couples can take advantage of, Otto notes.
Prenuptial agreements: A potential solution
Just as prenuptial agreements in opposite-sex marriages can head off potential problems upon the break-up of a relationship, they serve the same or an even more important function in same-sex marriages, notes Maier. “There are many issues in regard to finances, to potential issues should the marriage or relationship end, that can be examined before the marriage and can be covered in a prenuptial agreement that can mitigate these issues,” she adds.
“Many couples have more clarity in regard to these issues and can figure out what they want in advance and that’s what a prenuptial agreement does, clarify financial issues in a marriage and in the event of a dissolution of a marriage or relationship,” Slater-Jansen says.