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When the U.S. Supreme Court overturned the Defense of Marriage Act (DOMA) on June 26, that was just the beginning of the story for many wealth managers who serve same-sex couples.
San Francisco-based wealth management firm Aspiriant LLC, for example, has provided a checklist to help its more than 40 financial advisors in seven cities nationwide re-set the clock with clients whose lives will change as a result of DOMA’s repeal.
“I wrote a checklist internally for our advisors, who should take a fresh look at how the law’s repeal affects clients’ financial plans,” said Aspiriant Director of Planning Sandi Bragar (left) in a telephone interview with ThinkAdvisor on Thursday. “We have worked with a lot of same-sex couples in the Bay Area, and it’s something we’ve been watching very closely.”
Reviewing a same-sex couple’s financial plan can reap tremendous benefits for the client, Bragar said.
“In terms of tax benefits, we always found that same-sex couples didn’t get the same tax rights that other married couples get,” she noted. “If your marriage is recognized by the federal government, there is no estate tax. But if somebody in a same-sex partnership died and had an estate of more than $5.25 million, the surviving partner would have to pay tax above that $5.25 million. So for an estate of $10 million, you subtract $5.25 million, and that leaves $4.75 million that’s taxed at 40%, almost $2 million in tax, which is a huge penalty.”
Bragar, a CFP who serves 40 to 45 families, including a few same-sex couples, said Aspiriant has dealt for years with tricky wealth management issues involving same-sex couples, including estate planning, taxes and insurance. Aspiriant, with approximately $7 billion in assets under management, in 2013 was named No. 11 on Forbes’ list of Top 50 wealth managers.
Read Bragar’s 10 wealth planning tips for same-sex couples in a post-DOMA world on the following pages.
“The implications of the overturn of DOMA on same-sex clients living in states where marriage is legal is HUGE,” writes Bragar, who joined Aspiriant in 1999 and became a firm principal in 2002. She now chairs Aspiriant’s wealth planning committee, and serves on the client service committee.
Bragar counsels advisors and their clients to revisit financial plans to determine the big picture implications on their ability to financially achieve what’s most important.
“For wealthy couples, the estate tax savings alone will be a game changer,” Bragar says. “As part of this exercise, revisit your survivor needs. Maybe you can now self-insure, and don’t need as much life insurance.”
2. Update your estate plan
Trusts, wills, general powers of attorney and healthcare powers likely all need to be re-worked to more efficiently achieve estate transfer objectives, “and to ensure that your spouse can make important financial and healthcare decisions for you if you lose the ability to make them yourself,” Bragar writes.
Married same-sex couples can now execute joint trusts, when appropriate, she adds.
3. Revisit the beneficiary designations for your retirement accounts
“Until DOMA was knocked down, same-sex couples missed out on the ability to enjoy the survivorship rules for IRAs and other qualified retirement plans,” Bragar says.
These rules allow the surviving spouse to roll over the deceased spouse’s retirement account balance to the survivor’s IRA at the deceased spouse’s death without triggering taxes, she writes. “Since this opportunity wasn’t available to same-sex couples, some couples decided to name other beneficiaries (like their trust). Revisit your beneficiary designations to make sure they still make sense.”
4. Take a fresh look at your investment portfolio
Consider these questions: Is the portfolio organized in the manner that you’d like or should you be commingling investment accounts? Do account titles need to be updated? Should you be taking a different overall investment approach now that you can truly invest together without hurdles?
5. Revisit tax planning
“The ability to file joint federal and state income tax returns is a big logistical win,” Bragar reminds advisors to same-sex couples. “All income and expenses can now be captured on one tax return without figuring out how the expenses will be divided between partners’ returns. That said, the marriage tax penalty (i.e., where married couples end up paying more tax than they would if they were two single taxpayers) will now hit high-earning couples in the same-sex community. Make sure you know where you stand, and plan accordingly so you don’t get caught with a big, unexpected tax bill at the end of the year.”
Bragar recommends taking a look at whether amending the 2010-2012 tax returns as a married couple would generate tax savings. Tax returns can be amended up to three years from the tax filing date. “If you filed a gift tax return in the last three years to cover a gift made to your spouse, amend the return(s) to reverse the gift because spouses may make unlimited gifts to each other,” she writes.
“If you/your spouse’s employer doesn’t already provide you with spousal health insurance benefits, and enrolling for those benefits would improve your family’s overall health insurance program, make the change,” Bragar says.
7. Did your spouse die in the last three years, leaving you the net taxable estate?
Amend the estate tax return and have the taxes refunded. A person has three years from the tax filing date to amend the estate tax return. Also, Bragar recommends investigating Social Security survivor benefits.
8. Social Security
Married couples are eligible for spousal Social Security benefits equal to 50% of the spouse’s full retirement age benefit. “If this benefit is bigger than the benefit you earned (or if you didn’t earn a benefit), switch to the spousal benefit,” Bragar says.
9. Consider the whole family
Estate planning for a mixed-gender married couple also extends to parents who have drawn up estate plans that benefit both their child and the child’s same-sex spouse. “People might want to go back to their estate plan and define the word ‘spouse’ in the plan, to make sure that it includes the same-sex spouse,” she advises.
10. Consider a pre-nup if marriage is in the cards
“Marriage equality isn’t all a bowl of cherries,” Bragar writes. “Asset protection pits are involved, so carefully consider entering into a pre-nuptial agreement.”
Read High Court Bolsters Gay Marriage, but Financial Planning Hurdles Remain at ThinkAdvisor.