More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
While financial planning for same-sex couples living in a state that recognizes their marriage just got easier with the Supreme Court’s overturning of the Defense of Marriage Act Wednesday, advisors and attorneys say lots of same-sex planning issues remain unresolved.
The benefit of the Supreme Court striking down DOMA “is still pretty narrow,” says Anna Pfaehler, a CFP and advisor at Palisades Hudson Financial Group in Scarsdale, N.Y., who advises same-sex couples.
While the high court’s striking down of DOMA gives same-sex couples who marry the same federal benefits as straight couples, the ruling also preserved individual state laws on the issue, Pfaehler notes.
“For some very basic cases” the Supreme Court’s decision “makes financial planning easier,” but “it didn’t solve a lot of the problems [involved] with more difficult” same-sex planning cases, Pfaehler says. Planning for same-sex couples is “still kind of a mess.”
In a 5-4 decision, the Supreme Court struck down the portion of DOMA that bans the federal government from recognizing same-sex marriages performed in a state. As it stands now, “legally married gay men and women are entitled to claim the same federal benefits — such as social security survivor benefits—and are subject to the same Federal burdens — such as the so called ‘marriage penalty’ — available to opposite-sex married couples,” says John Olivieri, a partner with the law firm White & Case, who advises same-sex couples on how they should structure their estates.
Olivieri notes that “there are more than 1,000 federal laws, programs and benefits where one’s marital status is relevant.” Previously, he says, “people in a same-sex marriage were not considered ‘married’ for federal purposes. Now they are.”
But individual state laws — specifically in those states that don’t recognize gay marriage — can still cause significant planning headaches for same-sex couples. “For couples that are living in states that don’t permit same-sex marriage, they will still be in the same situation they were in before” the Supreme Court ruling, says Nicole Pearl, a partner in the Los Angeles office of McDermott Will & Emery, who focuses on estate and wealth transfer planning and marital property agreements.
For same-sex couples who live in the 12 states that recognize same-sex marriage—not including California, which could change soon as the Supreme Court declined on Wednesday to decide a case involving California’s Proposition 8 ban on gay marriage—the DOMA ruling brought some real benefits.
As Pfaehler explains, a same-sex couple who were married and living in New York could now file a joint state and federal tax return, and if one partner died without a will, the other partner “would be entitled to receive some of the property.” Also, in gifting from one partner to another, the recipient would not have to pay federal gift tax now, she says. “With DOMA repealed, a married, same-sex partner has the same rights as any spouse would. Therefore, you can now transfer property to your (married) partner free of federal gift tax.”
“What about the [same-sex] couple who lives in New York and then decides to move to another state that doesn’t allow same-sex marriage?” Pearl asks. “Is the federal government still going to recognize” their marriage? Estate and income tax issues also crop up in this scenario, she says. Then there’s the couple who goes on vacation and gets married and then returns to a state that doesn’t recognize gay marriage. Again, she asks, “Will the federal government recognize it?”
The answers, Pearl says, will likely come in federal regulation that has yet to be issued.
As to the tax and benefit implications of the Supreme Court ruling, Olivieri notes that “financially, it is not always beneficial to be considered married. For example, two-earner couples with high incomes will pay higher income taxes if they are married than if they were single.”
However, he continues, “all things considered, the benefits outweigh the burdens. Although they may pay higher income taxes during life, when one spouse in a same-sex married couple dies, the surviving spouse will now be entitled to claim the so-called ‘marital deduction’ from the estate tax (which generally allows one spouse to leave an unlimited amount of property to the other spouse without estate or gift taxes) and to make a ‘spousal rollover’ of the deceased spouse’s IRA or 401(k).”
Indeed, from a benefits perspective, the ruling’s “broad impact” extends to matters such as spousal protections and rollover rights in retirement plans, the taxation of group health benefits, COBRA health coverage elections, special enrollment rights under the Health Insurance Portability and Accountability Act, and leave rights under the Family and Medical Leave Act, say Cathy Stamm and Valerie Grace of Mercer’s Washington Resource Group.
In an alert issued Wednesday, both write that regarding employer action, the Supreme Court rulings in both DOMA and the high court’s action vacating a 9th Circuit decision but leaving intact a U.S. district court decision declaring California’s Proposition 8 unconstitutional take effect “immediately” and possibly even retroactively.
The two write that if “marital status affects the delivery of benefits to an employee’s same-sex spouse or that spouse’s child, employers may need to amend the plan’s ‘spouse’ definition; reprogram tax reporting systems; and update enrollment forms, distribution election packages, tax notices, beneficiary designation forms, SPDs, and the like.”
Other steps may involve filing refund claims for taxes paid on the value of same-sex spouses’ health care coverage, revisiting domestic partner policies, and evaluating whether DOMA “workarounds” adopted in the past are still needed to achieve HR objectives, the two write.
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