Born This Way

Advisors warn of other consequences that might result from a failure to plan. A common scenario is when one partner in a same-sex relationship dies and hostile family members force the surviving partner to move out of a home owned by the deceased. Because the surviving partner does not enjoy the rights of inheritance (assuming the relationship is not recognized by the state), all property belonging to the deceased partner goes to next of kin.

Conversely, a surviving partner who does inherit a spouse's property under state-recognized same-sex marriage laws could, without the benefit of the federal unlimited marital deduction, pay a substantial estate tax–and do so more than once.

"Same-sex couples are subject to federal estate tax on the death of the first partner," says Jennifer Hatch, a CFP and managing partner at Christopher Street Financial, New York. "If assets are not titled correctly or documents are inappropriately drafted, then estate taxes could be paid twice: once on the death of the first partner, and again after the second partner's death."

Tax issues can arise, too, when unmarried couples make substantial gifts to one another. If a partner who owns a home should add the other partner to the title, the transaction is subject to federal gift tax. Assuming the home is valued at $1 million, the federal gift tax would total $500,000.

How to avoid the tax? Rather than establish joint title, suggests Herman-Giddens, the partner making the gift can place the assets in a revocable living trust or in a will established for the benefit of the surviving partner.

"The advantage is that the [gifting] partner gets the benefit of those assets over his or her lifetime," says Herman-Giddens. "When the individual dies, assets received by the surviving partner aren't subject to estate or gift tax. This strategy can help preserve assets for children or other beneficiaries."

He adds that he encourages couples to enter into joint property agreements that, like pre-nuptial contracts, may stipulate a certain division of assets among the partners and heirs in the event of divorce.

In other cases, the challenge is to establish each partner's contribution to jointly held property, such as a business. Absent documentation attesting to each partner's interest, a surviving partner could be subject to an estate tax on both partners' assets.

One solution in this situation is to establish two living trusts, each holding 50% of estate assets for the benefit of one of the partners. Life insurance proceeds can be used to pay tax on a now smaller estate (50% of assets previously held jointly). If held inside an irrevocable life insurance trust, the death benefit also escapes estate tax. Policy proceeds can also avoid estate tax if each of the partners buys a policy insuring the other.

"If I own a policy on my partner and am the beneficiary upon her death, the proceeds don't go through her estate," Hatch says. "It's that simple. This type of cross-purchase arrangement is more convenient and less expensive than setting up an ILIT."

Pre-existing life insurance policies, she adds, need to be checked to ensure that beneficiary designations are appropriately updated. If a partner and children from a previous marriage are still listed as beneficiaries at the time of the insured's death, they will receive the proceeds, even if the policy owner's intent (as expressed in a will or other estate planning documents) is to do otherwise. That is because beneficiary designations bypass probate court.

To make couples aware of planning pitfalls and of the techniques that can protect them financially, Hatch hosts frequent seminars. Dubbed "Gay Money," the gatherings explore ways to achieve family planning, retirement, plus end-of-life and wealth transfer objectives in the absence of federal or state marriage rights for couples.

"If you're not part of the community, then make sure that you are comfortable working with people who are different from you," says Taube. "To develop trust [with a same-sex couple] you have to be respectful of diversity and differences."

Because of such differences, he adds, documents and literature, such as fact-finding questionnaires and presentations, should be tailored to the same-sex couple. For example, rather than addressing clients in documents as "Mr." and "Mrs." or "husband" and "wife," advisors might write "client 1″ and "client 2."

Grosvenor observes that education about same-sex couples' life issues and planning needs is a must for non-GLBT advisors who wish to expand their practice into this market niche. But she questions whether many straight advisors can match a gay or lesbian advisor's ability to establish a trusting relationship with those in the community.

"Gay and lesbian advisors bring an immediate connection to the table with GLBT prospects," she says. "That's a key competitive advantage."

Elmer agrees, adding: "I have a closer bond with my clients than do straight advisors. And because I know them better, I have better suitability information as to their planning needs."