New York State’s passage on June 24 of a contentious bill permitting same-sex marriage has given a powerful boost to gay and lesbian couples’ decades-long drive for legal and social equality. For life insurance and financial service professionals, say experts, that equality will afford them greater flexibility with which to help couples meet financial planning objectives.
The bill’s enactment in New York–the 6th and most populous state to allow same-sex marriage–brings to 14 the number of states that legally sanction such relationships. Eight other states allow civil unions or domestic partnerships that provide spousal rights. And three offer recognition of same-sex marriages from other states.
The movement won a federal victory, too, when President Obama, in a major policy shift, directed the U.S. Justice Department in February to stop defending the Defense of Marriage Act–the 1996 law that bars federal recognition of same-sex marriages–against lawsuits challenging it as unconstitutional.
Producers serving gays and lesbians (who, with bisexuals and transsexuals, comprise the GLBT or LGBT community) applaud the legislative gains. But they note the nation’s patchwork quilt of laws–most notably the continuing disconnect between federal and state recognition of same-sex marriage–mean that gay and lesbian couples and their advisors face a more complex planning landscape than do their heterosexual counterparts.
“Recognition of same-sex marriage among a growing number of states is good in that it bestows numerous state rights and benefits,” says Gregory Herman-Giddens, a principal of Trust Council, Chapel Hill, N.C. “But that recognition can lead to a false sense of security and inadequate financial planning.”
Lynn Elmer, a certified financial planner with Des Moines-based Principal Financial Group, agrees, noting that state recognition of same-sex marriage changes nothing at the federal level. “You have to plan as if you were complete strangers,” Elmer says of same-sex couples, “because under federal law that’s what you are. Everything about the relationship has to be contractual.”
The lack of federal recognition impacts many areas of planning, such as income taxes, estate taxes, Social Security benefits, pensions and life insurance benefits. Same-sex couples, for example, do not enjoy the federal unlimited marital deduction, the ability to transfer assets to beneficiaries free of gift and estate tax. Nor can they defer income tax on assets rolled over from an individual retirement account or pension plan.
Perhaps the chasm between state and federal law is felt most deeply at tax-time. While gay and lesbian couples can file a joint state tax return in a state that recognizes same-sex marriages, they must file separate federal income returns, adding time and expense.
“Because a virtual tax-free flow of assets is permitted for federally recognized marriages, in the retirement planning arena, the analysis is generally always combined for couples,” says David Taube, a certified financial planner and principal of Kalorama Wealth Strategies, Washington, D.C. “For same-sex couples, we typically provide an analysis on a separate and combined basis.”
Carol Grosvenor, a certified financial planner at Los Angeles-based CG Financial Services, adds that recognition of same-sex marriages in California has been a mixed blessing for gay and lesbian couples.
“The combination of two things–being married in a state governed by community property laws that mandate joint ownership of most property acquired during marriage; and having to file separate federal income tax returns–adds to the complexity and cost of planning,” she says. “Add to this the fact that many accountants don’t know how to prepare income tax returns for same-sex couples because they lack the necessary expertise or software.”
To be sure, recent Congressional legislation has eased retirement and estate planning for many same-sex couples. Experts point, for example, to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 for extending the Bush-era tax cuts and raising the estate tax exemption level to $5 million per individual and $10 million per couple. They flag also the 2006 Pension Protection Act permitting IRA rollovers to non-spousal beneficiaries, thus allowing a same-sex partner to stretch IRA payouts, and income tax on the distributions, over their lifetimes.
Reduced tax burdens on IRAs may not count for much, however, if a retiree does not have much of a nest egg to start with. Often, says Grosvenor, a gay or lesbian will be asked by siblings to care for an aging parent because he or she does not also have to look after children. In accepting the responsibility, the individual may forego retirement savings to pay for the parent’s long-term care.
“Even when making such sacrifices, gays and lesbians frequently are denied an inheritance because of a parent’s aversion to their sexual orientation,” says Grosvenor. “As a planner, I always have to ask about tensions in family relationships and whether an inheritance is realistic to expect.”
Experts note that more and more same-sex couples are choosing to have children–through adoption, artificial insemination, surrogate parenting or other means–in part because society is increasingly accepting of same-sex relationships. Hatch says about one million same-sex couples now raise two million children. Some states allow both partners’ names to be on a child’s birth certificate; other states won’t allow same-sex parents to adopt their own children.
The death of a same-sex spouse can leave a surviving partner bereft of children the couple had been raising. States that do not recognize same-sex relationships might, for example, seek to return the children to the biological parents or other family members.
To head off potential court challenges, says, Hatch, “enlisting an experienced legal professional–not just a well-meaning neighborhood generalist–is critical. The stakes are too high.”
Problems can also arise for gay or lesbian partners in states such as Florida, that do not recognize same-sex marriage laws of other states. If partners get married in Iowa and thereafter suffer a car accident in Miami, then one partner will be unable to make healthcare decisions for the other absent a medical power of attorney. Florida might also deny the same couple a divorce, something in which the states courts offer no guidance because the case law has not yet been written.