Estate Planning For The 'Non-Traditional' Couple

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."