Nontraditional Couples: Different Planning Needs
This is the scene: You are a financial planner or advisor sitting at your desk in your office. The phone rings–it’s a prospective client with some questions about your practice, investing philosophy, fees, etc. The conversation goes well. Then when you are starting to feel good about the possibility for doing some business, the prospect springs the question: How do you feel about dealing with same-sex couples?
For many advisors this will be a moment of truth to which they are unaccustomed. Many have never had clients in same-sex relationships. And the fact is that a good many never will.
But the likelihood of encountering prospects in such relationships is growing–the most recent census figures show an increase in such relationships (see story on page 5). This, coupled with the increasing willingness of gay and lesbian couples to go public with their relationships, means that advisors will probably have to decide at some point whether they can or want to pursue this business.
If they decide it is worth pursuing, then planners will have to do some serious readjusting of how they plan for couples, because planning for gay couples not only has different technical challenges than for straight couples, but also often has an entirely different emotional terrain than the planner may be used to.
The reality is that gay couples have to go through a lot of legal paperwork to achieve the same family, tax and property status that a man and woman gain simply by getting married.
This was the point of a session at a recent conference, sponsored by Pride Planners, that was billed as the first National Conference for Financial Planners serving the gay and lesbian market.
Peter M. Berkery, associate publisher, securities, at CCH, Inc. in Riverwoods, Ill., said that to get the same things that ‘I do’ gets a straight couple, a gay couple needs: a domestic partnership agreement, a last will and testament, a directive regarding disposition of remains, a durable power of attorney for health care, a durable financial power of attorney, and an agreement to hold personal property in joint tenancy with rights of survivorship (JTWROS).
In addition, Berkery said, gay couples, depending on their circumstances, should also consider real estate agreements, buy/sell agreements, an agreement to hold real property JTWROS, a parenting agreement, and an advance guardianship agreement.
Regarding domestic partnership agreements, Berkery said, “The basic premise is that the parties can contract to anything; the basic exception being they can’t contract to what is illegal or against public policy.”
Among the basic considerations in a domestic partnership agreement are the division of income, expenses and assets, he said.
There are a number of ways to divide income in a DP agreement, according to Berkery, with equal division accounting for 80% of such agreements. “This is pretty traditional,” he said.
Dividing the income proportionally, adjusting it annually or keeping it separate are other options.
Expenses can be divided pretty much the same way, he said.
Regarding division of assets, Berkery said a number of things have to be taken into consideration in the DP agreement, including allocation of assets acquired prior to the relationship and of jointly acquired assets. Additionally, an agreement should probably take into account the possibility of the relationship breaking up and incorporate buy/sell provisions, if necessary.
Berkery said that with a buy/sell agreement the biggest issue is: Who gets the house? Therefore, the valuation and each party’s contribution should be spelled out. He also advised specifying the mechanisms in advance in the agreement for settling the ‘Who gets the house?’ question.
Other factors that might be included in a DP agreement, according to Berkery, are: investment property, which he advised to either treat separately within the DP agreement or to put in a separate agreement; a small business that might be jointly owned; and a method for resolving disputes.
In advising gay couples, he encouraged advisors to be “frank and forthright” in discussing DP agreements. If planners can get the couple to look at the DP agreement in terms of “whether they or the system decides and whether decisions are made now or in the heat of divorce, it can lead to empowerment and taking charge of decisions affecting the relationship,” Berkery said.
Barbara Wohlgemuth, a CPA, said that “generally speaking, tax law has not caught up with domestic partnerships, so there are opportunities” for gay couples who use them.
In terms of income tax, for instance, she said a gay couple actually had some advantages over a straight couple. There is no ‘marriage penalty,’ she said, and the partners pay tax at ‘single’ rates, which are generally lower than ‘married filing jointly’ rates.
Because domestic partners have no “legal” relationship, they have the ability to shift income between partners in the higher and lower tax brackets, Wohlgemuth continued.
She gave the following as an example: John has his own business and is making higher profits, paying over 40% of them to the feds and the state. His partner Stewart is a struggling artist, in the 15% bracket. John could hire Stewart in his business, Wohlgemuth said, and pay him a salary for something like filing or office management, thus shifting some of his 40% bracket profits to the 15% bracket.