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Nontraditional Couples: Different Planning Needs

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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.

Regarding the estate tax, however, it is quite a different story, with gay couples not being entitled to the marital deduction, Wohlgemuth said.

One opportunity here, she explained, is for a partner with a potentially taxable estate to gift $10,000 per year to the partner without a taxable estate and/or to the children, if any, of either or both partners.

Another planning opportunity, she said, is that the annual $10,000 gift limit can be exceeded without tax if it is for payment of medical bills or educational expenses for someone, even if that person is not a relative. In this instance, she cautioned, however, that the checks must be made out directly to the institution providing the education or medical services.

Wohlgemuth also gave some guidance regarding situations where the partners have children. One planning opportunity here, she said, is that if the partners are co-parenting and are in different tax brackets, it is worth calculating who should take the exemptions, deductions and credits.

She advised the audience that even a taxpayer who is not a legal parent but who provides over half of a dependent’s support may be entitled to claim any or all of the exemptions, deductions and credits. Here, as in many of the other opportunities she spoke of, Wohlgemuth said that documentation is crucial to support the claim.

Wohlgemuth also enumerated some of the changes in the recently passed tax bill that could impact gays and lesbians. These are the creation of the 10% tax bracket and phased-in lowering of existing brackets; extension and expansion of adoption tax benefits and the dependent-care tax credit; repeal of the estate tax after 2009; and phased-in rate reductions until repeal; and finally, the increase in contribution limits to retirement plans.

Another session at the conference dealt with the emotional challenges of financial planning for same-sex couples.

One of the biggest challenges, agreed both Lauren Komack, a clinical social worker with a private practice in Massachusetts and Peg Downey, a partner in the financial planning firm Money Plans, Silver Springs, Md., is dealing with internalized and externalized homophobia.

Komack said that often in gay clients there is an unacknowleged vein of self-hatred that manifests itself as internalized homophobia. Planners need to be aware, she said, that when such people come for planning advice, they “take the risk of outing themselves.”

This internalized homophobia could thus manifest itself as “clients being reluctant to take actions,” Downey said, and planners have to work with some sensitivity around it.

Dealing with same-sex couples can mean some unaccustomed soul-searching for planners. Komack said planners “have to check out their own belief systems, personal assumptions, and use and choice of language.”

Planners also have to be sure that when they make referrals to other practititioners that they are not homophobic, Komack said.

Another emotional area that may be new for planners is validating “the oppressed experience” of gay clients, said Komack. “When a same-sex couple comes to you, it could be the only place where their relationship is validated,” she said. “It is an honor and privilege to do this, as well as a fiduciary responsibility.”

She said planners should understand that often “it is assumed by the couple that they are not going to get what they need.”

Planners should remember, she said, that same-sex couples have often felt “marginalized and this may be their first attempt to mainstream.”

Downey said that when clients complain about all the legal work that has to be done, she says, “‘Yes it is a pain that we have to do all these forms, but’”

Trying to understand where same-sex couples are emotionally does not preclude speaking directly, however, if the planner perceives unacknowledged or potentially undesirable undercurrents in the couple’s relationship, according to Komack. “If you have something in your gut, you have to put it out there. Be direct.”

She said she will often use phrases such as “Is it clear what happens if” or “It is for your protection that I’m bringing this up.”

Downey said that she tells clients, ‘It’s my job to tell you these bad things.” But, she added, “you have to make it clear to them that you support the relationship.”

Downey said she tells all clients they have to talk about the “3 Ds”–death, disability and divorce. For instance, she will ask the couple, “What happens if one of you becomes disabled?” When the planner finds out their intentions, she said, then advice can be given and arrangements put in writing.

Another way of being direct, Downey said, is asking the couple what they are trying to accomplish if, for instance, one partner is spending lots of money that the other partner is making. She said in cases like this she reminds them about the wisdom of saving for retirement, “but in a nonjudgmental way.”

Komack, in conclusion, reminded planners of something universal in the advisory world: “All you can do is give people information; you can’t force them to do something.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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