Not only do Same Sex Couples have to deal with the relationships problems we “straighties” do same sex couple have another level of problems associated with Financial and Estate Planning. Oh by the way, I just made up the word Straighties, I hope it gets picked up.
Before we start, I will let you know right off the bat, I am for the legalization of same sex marriages. So any of the hurdles we are going to talk about are not hurdles I think should be there, but in 2010 America, are there.
What is DOMA? and how Does it Affect Same Sex Couples?
DOMA is an acronym for, Defense of Marriage Act – before you continue reading and think the evil President Bush signed into law…it wasn’t! It was signed into law by President Clinton. Yup your liberal dream executed the bill…oh also the same guy who more or less abolished welfare. DOMA has two main parts, and wikipedia provides simple explanations of them,
- No state (or other political subdivision within the United States) needs to treat a relationship between persons of the same sex as a marriage, even if the relationship is considered a marriage in another state.
- The federal government defines marriage as a legal union exclusively between one man and one woman.
The first problem is obvious and creates a lot of problems. In a recent article that I read, “Considerations, Pitfalls and Opportunities that Arise when Advising Same-Sex Couples” by Raymond Prather (American Bar Association Membership required) sums up this problem perfectly,
…if a couple is married in Massachusetts and the moves to Rhode Island, which does not recognize same-sex marriage, then Rhode Island will not provide a forum for divorce…Most States allowing same-sex couples to divorce have residency requirements for jurisdiction over the divorce. The only way a couple in this situation can divorce is for one person to move to a state recognizing the marriage
Problem Number 2 is easier to understand…none of that jurisdiction garbage. According to that same article by Mr. Prather, there are 1,138 federal benefits of marriage, ONE THOUSAND ONE HUNDRED AND THIRTY-EIGHT BENEFITS! Wow.
Now that we understand DOMA and its two sections how does it affect Same Sex Financial Planning?
Same Sex Couple Financial Planning
I truly believe the basics of financial of planning are always the same. Spend less than you earn, keep good records, etc. etc. and I don’t think it matters if you are two Mr., two Mrs., or somewhere in between. But what about when it comes to two topics, Life Insurance and Retirement Accounts?
Same Sex Couples and Qualified Retirement Plans
Retirement plans can get tricky with same sex couples. When a ‘surviving spouse’ inherits most retirement accounts they actually can roll over that amount into their own IRA and then still delay requirement minimum distributions until 70 and 1/2. This is could lead to a problem since under DOMA a same sex couple can’t have a surviving spouse. So what do we do?
We make sure they are set up in the best way possible. So we would make sure each surviving same sex spouse is named as a beneficiary (or a trust for the benefit of that surviving same sex spouse) this way the surviving same sex spouse can at least stretch it over his or her lifetime.
Same Sex Couples and Life Insurance
Life Insurance for Lesbian, Gay, Bisexual and Transgender Couples can get very complicated very quickly if you aren’t working with someone who understands the issues. Since in the eyes of most states and the federal government these couples aren’t married then where is the insurable interest?
The easiest way to fix this is to use an Irrevocable Life Insurance Trust (ILIT). An ILIT, very simply put, is a trust which is used to hold life insurance. This may or may not work depending if the insurance company reads the trust document closely. Another option would be to have one spouse purchase the policy on themselves and then transfer the policy to the partner, but this could have gifting issues as well as insurance issues associated with transferring the policy soon after it was created.