Domestic partners have unique financial planning needs. Whether lesbian, gay, bisexual or transgender (LGBT) individuals, or heterosexual couples who choose not to marry, navigating the complex financial laws can be a challenge. Advisors can provide much-needed assistance to an often-ignored market and open up a new source of revenue by helping domestic partners find the right path to achieving their goals.
Financial planning for domestic partners is different from planning for legally married couples. In fact, because the rules are different, specialized expertise is necessary in the areas of:
· Estate planning
· Wealth transfer and gift planning
· Income taxation
· Investment management
· Retirement planning
· Insurance planning
· Financial goals
What’s the Big Deal?
Living a life together might not seem to be a big deal legally or financially to an unmarried couple, but it can be – in unexpected ways. Let’s look at the following examples:
Todd and Paul have been living together for three years. To celebrate their anniversary, Todd buys Paul a new car for $30,000. If Todd and Paul were a heterosexual married couple, this would have no impact for tax purposes. However, as an unmarried couple, the IRS views this transaction as a reportable gift. Because the gifted amount is over $13,000, Todd must file a gift tax return.
Louise is retiring from her job and is entitled to lifetime pension benefits. Louise assumed that her partner, Polly, could be protected with a survivorship benefit. Unfortunately, Louise’s pension plan does not offer a survivorship benefit to anyone other than her legal spouse.
Jill is a highly paid software executive. Her domestic partner, Gail, does not work outside the home. Accordingly, Jill pays all of the household expenses. As above, since Jill and Gail are not legally married, Jill’s payment of Gail’s living expenses constitutes a reportable gift (assuming it amounts to more than $13,000 a year).
After a commitment ceremony, John and George convert their separate investment accounts to joint accounts. Additionally John adds George’s name to his house title. Because they are not legally married, adding the other person to the investment accounts and house titles creates reportable gifts.
Wendy supports her partner, Sally, and their son Bruce. Sally is the biological mother of Bruce and Wendy has not legally adopted him. Wendy thought that she and Sally could file a joint tax return, but discovered that joint returns are only allowed for married couples. Alternatively, Wendy asked about filing as “head of household”, claiming Bruce as her qualified dependent. Since Wendy does not have a legal relationship to Bruce, she cannot file as head of household either.
Alan and Mitch have been domestic partners for decades. Alan has been the breadwinner of the couple and will soon be eligible for Social Security. Since Mitch has not worked and is not legally married to Alan, he is not entitled to a spousal benefit – either during Alan’s life nor should Alan predecease him.
Many of these situations can be further complicated in community property states. For couples that are legally registered as domestic partners or married in community property states, earned income as well as assets acquired post-commitment are treated as owned fifty percent by each partner/spouse. Under Federal income tax rules, legally recognized couples in community property states must each report their fifty percent share of community income on separate “single” tax returns.
How Can Advisors Help?
Comprehensive financial planning leads to a road map for achieving clients’ goals – by coordinating all of the pieces of your clients’ financial life together. It is the advisors job to help their clients with the following questions:
· What are the tax and financial ramifications of becoming Registered Domestic Partners?
· How can income tax liabilities be minimized?
· How can insurance be structured to protect both the couple and their family?
· How can the investment portfolio provide the returns needed while considering the tax ramifications of both partners?
· How can estate planning protect heirs and each other?
· How can tax planning avoid unexpected gift consequences?
· How can secure cash flow during retirement be ensured?
· How can the couple position themselves for financial success in spite of the ever-changing legal and tax landscape?