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Regulation and Compliance > State Regulation

After DOMA, Financial Planning Still a Challenge for Same-Sex Couples

By Danielle Andrus

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When Section 3 of the Defense of Marriage Act was ruled unconstitutional last year, gay and lesbian couples gained access to some federal benefits afforded married couples, but the ruling didn’t require states to recognize their unions. Now, state bans on same-sex marriage are dropping like flies, but the legal landscape for same-sex couples is still in flux. It can be especially challenging for married couples who move to a state that doesn’t recognize their union.

David Gordon, executive director of The Gordon Financial Group at Morgan Stanley and a former attorney, spoke with ThinkAdvisor about how financial planning has changed for same-sex couples after DOMA was ruled unconstitutional and what planning challenges still exist for those couples and their advisors.

One of the biggest changes, he said, is in Social Security spousal benefits and survivor benefits.

“In a traditional opposite-sex marriage, it’s not unusual to see one or the other spouse stay home to take care of kids. That stay-home spouse’s exclusion from the work force would mean that they typically wouldn’t have enough work experience, or at least enough high-dollar work experience, to qualify for Social Security benefits on their own,” he said in an interview on Wednesday. “In a same-sex couple, in the past, the decision to be a stay-at-home parent would come along with the recognition that there was going to be a potential Social Security entitlement disadvantage. Now there isn’t.”

Same-sex couples also have access to benefits available to them under the “Family and Medical Leave Act, veterans’ benefits, immigration rights and everything under the tax code,” Gordon said.

He outlined some of the tax benefits gay and lesbian couples can now claim. “You can deduct up to a quarter of a million, $250,000, in appreciation from the sale of a personal residence. A couple could now do $250,000 times two. In a heterosexual marriage, there was no taxation on giving or transferring assets from one spouse to another spouse, but under prior federal tax rules, a gift from a same-sex couple could create a gift tax event. In a heterosexual marriage, there was no taxation at the death of the spouse if the survivor was the beneficiary. That now applies to same-sex couples with the marital deduction.”

He continued, “I haven’t seen it tested yet, but I presume in the case of income tax evasion that the Innocent Spouse Rule would now prevail in a same-sex marriage as well.”

Gordon stressed, though, that “the impact of the law on same-sex couples varies from state to state. It’s a fluid area that is still being demarked.”

For example, a couple in a in state that doesn’t recognize same-sex marriage could file joint federal income tax, but they would still have file single returns for their state taxes, Gordon said. “The real trap comes when you have a married same-sex couple in a state that recognizes same-sex marriage moving to one of the states that do not recognize same sex marriage. That’s where the real problem is, when you have a couple that has the impression that everything is fine and dandy and all of a sudden they move to a place where that’s not the case.”

Most of the legal benefits denied same-sex married couples can be circumvented with “proper drafting and planning,” he said, but he suggested partnering with an expert who’s familiar with the nuances of the law.

“You really need to be connected or taking advice from someone who is up to speed in the field; someone who’s studied the landscape,” Gordon said. “Just like law, where each state licenses their own attorneys, and attorneys who are not licensed in a particular state is not allowed to practice — generally, except by special permission of the court — each state will have its own experts that should be consulted before legal or financial decisions are made.”

Health care coverage, visitation rights, bankruptcy protection, Medicaid — these are all areas that need to be addressed specifically, he said.

“Medicaid, which is the federally funded by state regulated — the state delivers the Medicaid — all of these are dependent on what the state’s regulations are. Other legal liabilities could extend to a married partner. Health care is a big one. Employers in states that don’t recognize same-sex marriage may not extend employment benefits to same-sex partners,” Gordon said.

He continued, “Visitation rights in hospital situations — again, these are things that can be overcome with proper documentation, but you don’t need documentation to make a health care decision for an incapacitated spouse in a heterosexual marriage. In a same-sex marriage where the state doesn’t recognize that, you would need either a power of attorney in advance, which is what we suggest, or you’re going to need a court order. Otherwise the hospital simply won’t be allowed to recognize that relationship and extend those entitlements.”

Property ownership is another area where heterosexual and homosexual couples are treated differently. “Tenancy in common presumes opposite-sex couples in many states,” Gordon said, and more than half of states have adopted tenancy in the entirety, which “allows primary residence ownership held by a married couple jointly to be essentially immune from creditors unless the creditor obtains a judgment on both spouses. If they don’t recognize the marriage, you don’t have the ability to put the house into tenancy by the entirety format.”

States don’t follow the federal gift and estate tax rules uniformly, either, Gordon said. “In the case of a couple that might be married in one state legally moving to another state that doesn’t recognize the marriage, at the first death, the property could simply be transferred to the survivor free of federal estate taxes but subject to the state transfer tax.”

Gordon recommended advisors who are interested in serving these types of couples look into the College for Financial Planning’s Accredited Domestic Partnership Advisor certification, which he holds.

“It’s a curriculum and a certification that is based on not just same-sex couples but also any type of domestic partnership, including unmarried heterosexual partners,” he explained. “It’s a very valuable series of modules that deal with everything from end of life and health care and adoption issues, to taxation issues and legal issues across the board.”

The curriculum “is the first and only program created to address the unique needs of unmarried couples that are living together,” Chris Allen, director of marketing for the College for Financial Planning, said in an email. “While sometimes labeled as the ‘gay marriage’ designation, that’s really only one facet of the program.”

Advisors must already have financial planning designations like the CFP, AAMS, CRPC, AWMA, APMA, CFA, CPA, CTFA, CIMA or ChFC to begin the course, Allen said.

“These prerequisites allow the program to focus on this unique and growing niche without repeating familiar topics or reteaching financial planning basics,” he said.

Advisors have a year to complete the course, although Allen said it typically takes between eight and 10 weeks. “Interactive online classes meet twice per week for six weeks, however students can study on their own and watch on-demand class recordings in order to proceed at their own pace,” he said.

“The need for expertise is blossoming and there are very few places you can go to get a direct focus on these issues,” Gordon said. “Experienced counsel is really your best friend in this type of scenario. It’s really necessary.”

— Check out Nontraditional Families Open to Financial Advice: Allianz Study on ThinkAdvisor.

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