Same-sex couples do not enjoy the rights afforded to heterosexual counterparts under federal law, but strategies are available to help them achieve their estate planning objectives. Jeffrey Hollander, an assistant vice president in the Advanced Markets Group at MetLife, New York, delivered that message during a workshop of the Association for Advanced Life Underwriting, held here last week.
“Estate planning issues often arise because of a lack of the marital safeguards for same-sex couples,” said Hollander. “In the U.S., at both a state and federal level, laws that provide tax and planning benefits focus solely on the traditional family.”
Such laws affect a sizable portion of the population. Barbara Howard, a co-presenter of the AALU session and director of gerontology for MetLife’s Mature Market Institute, pointed to a U.S. Census Bureau report that shows 15 million plus adults over the age of 18, or between 6% and 7% of the adult population, belong to the gay, lesbian, bi-sexual or transgender (GLBT) community. And, according to the A Witek/Combs Harris Interactive survey from 2006, 83% of gay men and lesbians consider themselves “out.”
Retirement concerns among those in the GLBT community are even greater than among heterosexuals. Howard flagged a 2005 MMI report, which noted that 9% more GLBT boomers worry about retirement than do straights. GLBT boomers are also 18% more unlikely to worry about leaving money to heirs. And 16% of GLBT boomers have spent no time planning for retirement.
“We do see a greater anxiety among GLBTs about preparedness for retirement than among heterosexuals,” said Howard. “We also see that GLBTs are unwilling or less willing to change their spending habits in retirement to leave money for other people. If you’re more concerned about being healthy as you age, you may also believe that you don’t have money to deal with legacy issues.”
Those who are able and willing to leave a legacy will, however, find themselves at a disadvantage for federal tax purposes without adequate planning. Hollander noted that because the IRS does not recognize same-sex marriages (as allowed in Massachusetts) or civil unions (as permitted in a handful of states), such couples do not enjoy the rights of their heterosexual counterparts. Among them: the unlimited marital deduction, the ability to transfer assets to beneficiaries free of gift and estate tax, or to defer income tax on retirement assets rolled over from an IRA or pension plan.
Hollander noted, too, that an individual is without legal recourse when a partner who is the sole owner of a property occupied by the same-sex couple dies. Under state intestacy laws, a judge could order the property be turned over to surviving siblings and/or have the surviving partner evicted.
Similarly, the death of a “spouse” can leave a surviving partner bereft of children the couple had been raising. States that don’t recognize same-sex relationships might seek to return the children to the biological parents or other family relations.
“Horror stories abound about other family members stepping in and saying, ‘we never approved of this [same-sex] relationship’ or ‘we don’t want children living in this environment,’” said Hollander. “Planning ahead whenever possible to establish legal guardianship over the children is incredibly important in these situations.”
Hollander said that other advanced planning techniques, such as the use of trusts and health care proxies, can be leveraged to help same-sex couples fulfill long-term planning and to emulate the rights and protections afforded to traditional married individuals under federal and state law. Armed with a durable power of attorney for example, a partner can make financial or healthcare decisions on behalf of an incapacitated “spouse” or be permitted hospital visitation rights.
A testamentary trust may also be used to ensure that estate assets pass to intended beneficiaries. Too often, said Hollander, planning among same-sex couples provides only for the financial needs of a surviving partner; no thought is given to the where the assets should go when the surviving partner dies. Where there are no “common heirs” (e.g., adopted children), the surviving partner’s family relations may inherit all of the assets of both partners, though the partner who died first may have intended otherwise.
To ensure that the first-to-die’s assets pass to his to her own family relations, said Hollander, a testamentary trust can be set up that transfers all assets to a surviving partner. When this individual passes away, assets originally belonging to the first-to-die partner go to intended beneficiaries, such as siblings or cousins.
Alternatively, said Hollander, the first partner can provide for both the surviving partner and family relations immediately upon death by setting up an irrevocable life insurance trust. If estate assets are bequeathed to the partner, then the first-to-die’s family relations can be made beneficiaries of the ILIT’s life insurance proceeds. If, conversely, family members inherit the assets, then the partner can be designated as the policy’s beneficiary.
“Ensuring that assets go to where the partner wants them to go, rather than avoiding negative tax consequences, is often the biggest issues faced by same-sex couples,” said Hollander. “Life insurance can play a very important role in meeting a deceased partner’s objectives.”
Tax consequences are, to be sure, a major concern in dealing with a deceased partner’s individual retirement accounts. Because IRA rules concerning spousal rollovers do not apply to same-sex couples, a surviving partner who inherits a deceased partner’s 401(k) account cannot transfer the assets into an IRA titled in the surviving partner’s name and, thereby, defer ordinary income tax.
Hollander noted, however, that the Pension Protection Act of 2006 does permit a non-spousal beneficiary to roll the assets into a decedent IRA. That would allow the surviving partner to stretch distributions over his or her own lifetime. Prior to the PPA’s passage, all IRA distributions had to be completed by the end of the 5th year following the account holder’s death.
Whatever the estate planning challenges, said Hollander, advisors serving gays, lesbians and others in the GLBT community may find it advantageous to approach prospective clients with marketing materials that specifically target this audience.
“Many individuals prefer to purchase products from companies that have a GLBT-friendly focus,” he said. “But others see their sexuality as only one aspect of who they are. The important thing is that you take clients as you find them and let them know their sexual orientation is a non-issue.”