In June 2013, the United States Supreme Court struck down the federal Defense of Marriage Act (DOMA) presenting same-sex married couples with a new set of financial issues. While same-sex couples can look forward to equality under federal tax laws, the U.S. Internal Revenue Service is still deciding how to make equality happen in agreement with each state. We are at the beginning of a new era, so it is time to prepare your practice for the unique same-sex financial issues that lie ahead.
The need is great. According to the 2013 Allianz Life Women, Money & Power Study, 80% of female same-sex couples said their unique situation creates a need to be financially aware and independent, yet 58% of them reported that that they currently do not work with a financial professional. On top of that, the majority of these women said their inadequate retirement savings could greatly affect their retirement. These couples are not only concerned about their financial future; they also need a financial professional to help.
With the changing legal landscape and increased appetite for financial support, take into account the evolving federal and state tax, retirement, and estate planning issues for same-sex couples.
Because of the inconsistencies with how each state approaches taxes, your job is more complex. The DOMA ruling split the country especially with respect to how same-sex couples will file their income taxes. For instance, same-sex married couples can, like any other married couple, file jointly on a federal level. However, if the state in which they reside doesn’t recognize same-sex marriage they may have to file as “single, or head of household” for both state and federal taxes. One potential advantage of filing this way is that they are able to manage two separate tax brackets, potentially utilizing two standard deductions and two personal exemptions, thus possibly reducing their overall income tax liability.
One strategy: leverage the federal income tax deductions that will most benefit same-sex partner clients by managing their deductions. Have one partner file using itemized deductions, while the other partner takes the standard deduction. They may be able to gift income-producing investment assets to the partner with the lower marginal income tax, thus reducing the couple’s overall tax liability. Another possibility is to assign federal tax deductions to one partner who could best utilize them based on income. To reduce their overall tax liability, these couples can also group the federal deductions for the partner that owns their home, using the mortgage interest deduction and the real estate tax deduction.
Beyond taxes, create a strategy for your same-sex clients’ financial future by addressing their retirement and estate planning needs. Discuss the accumulation and distribution strategy of retirement assets for qualified and non-qualified retirement plans, Social Security and pension plans. Some employers may not give same-sex spouses or partners benefits. Understand employer benefits and pension plans to determine what, if any, benefits are available to a same-sex partner. Finally, if you determine that their current portfolio of spousal or partner survivor benefits is not sufficient, life insurance may have additional value.
Life insurance can help curb other estate planning issues as well. Utilize life insurance proceeds to benefit the surviving partner and children. Death benefits can help pay for federal estate taxes at the time of the first death, if the surviving partner isn’t able to get the unlimited marital deduction. Life insurance proceeds can also help pay off debts and other expenses.
As the federal government works through the changes that DOMA will bring, same-sex couples may also seek your help preparing legal documents such as trusts, wills, health care directives and power of attorney designations. If you want to build your expertise even further with these issues, use resources available. Financial professionals should collaborate with a qualified attorney and a tax preparer that understands the complexities of same-sex financial issues unique to your state. By doing this, you can help take away same-sex couples’ concerns and create lasting relationships for your practice.