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The Rainbow Plan


By Norman A. Dawidowicz

June 1, 2006 - Sam and his partner Earl spent more than 20 years together, building a ranching business, raising Sam's three sons from a previous marriage and tending to Earl's elderly mother. In 2000, Earl died of a stroke and, after his will was deemed invalid, the property he and Sam shared was passed to estranged cousins. Sam was left struggling to hold onto whatever assets he could. His story, chronicled in the documentary Tying the Knot, is just one example of why same-sex couples need extra special care and protection when it comes to financial planning.

According to the 2000 U.S. Census, there are over 600,000 unmarried same-sex couples in this country. They all face disadvantages and hardships because they are not legally married in the eyes of the government. As the number of same-sex couples continues to rise, there is a growing urgency for advisers to help members of this group take control of their estate and financial planning needs.

Since the core elements that constitute a financial plan are the same for everyone, regardless of sexual orientation, same-sex partners should begin by identifying goals, creating a budget and determining insurance needs. An investment program that includes an emergency fund and saving for retirement and specific life events is important for everyone. Same-sex couples, however, are at a decided disadvantage in many other ways and those who advise them require specialized knowledge and preparation.

FINANCIAL ROADBLOCKS
Our society bestows myriad legal, economic and financial benefits on the traditional family unit--husband and wife--that other social units do not enjoy. Legally married couples are afforded over 1,000 rights and benefits of marriage at the federal and state levels. These rights and benefits do not--by law--apply to same-sex couples.

Consider, for example, Social Security and Medicare. A heterosexual spouse is recognized as being economically affected by the death of a spouse and can continue to receive the federal benefits of the deceased partner. The law does not recognize same-sex couples' financial interdependence; therefore the surviving partner has no claim to the deceased partner's benefits and can lose a significant stream of income.

Same-sex partners also don't have the same rights to a partner's employer-sponsored plan, such as a 401(k) plan. A heterosexual surviving spouse can usually roll 401(k) assets into an IRA and defer taxation, but a same-sex partner will probably have to withdraw all of the assets either as a lump sum or under a dramatically accelerated schedule, thus incurring a substantial tax liability.

In addition, married couples enjoy the benefit of marital deductions, effectively eliminating federal gift, generation-skipping and estate taxes on transfers between spouses. In a same-sex couple, the individuals are essentially treated as strangers.

NAVIGATING THE NONTANGIBLES
There are other significant challenges for same-sex couples that married couples avoid. Think about the unfortunate situation in which a partner becomes incapacitated. Suddenly, the lack of rights accorded to the partners becomes a stark reality. Same-sex partners can be entirely removed from decisions regarding medical care. And, short-term decisions such as funeral arrangements and religious proceedings as well as long-term decisions such as the handling of financial affairs, may be left, as a matter of law, in the hands of an estranged family member--perhaps one who disapproves of the couple's lifestyle--rather than with the partner.

In fact, few same-sex couples realize they don't even have the same hospital visitation rights as their heterosexual counterparts. Often, something as simple as calling the hospital to get information during an emergency can be an excruciating experience. This intangible damage to a same-sex couple can often be as severe as the material and financial deprivation.

Thus, whether it's tax issues surrounding estate planning or medical decision-making, same-sex couples aren't protected under federal laws and need the help of an adviser to recreate many of these benefits through proper financial planning techniques and preparations. Unfortunately, same-sex couples often don't think in these terms.

PLOTTING THE COURSE
Planning is critical, and the first step is to list all the financial and intangible issues that might affect a same-sex relationship. Advisers should help partners understand the situations in which they are inherently disenfranchised, so they can adequately address the obstacles before they become insurmountable.

The way to achieve this is with careful estate planning and designation through legal forms. Preparing a proper will and putting relationship agreements and powers of attorney in place can counteract many of the inequalities same-sex couples could face. An attorney knowledgeable in same-sex scenarios can help create all the essential documents and steer a couple through all the elements of the life plan.

A well-drafted last will and testament will designate how an estate is to be distributed and who is responsible for carrying out the wishes of the deceased. By naming the surviving partner as executor, much anguish regarding inheritance issues can be avoided.

An entire estate, however, can be legally challenged, so it's important to create a testamentary plan that can withstand court claims. Disapproving parents, estranged siblings or even distant relatives can surface after death to challenge wills and lay claim to estates. Without an airtight estate plan, a same-sex surviving partner can become embroiled in ugly disputes with relatives, who are often favored by the law.

When challenged, a will may also be subjected to a long and costly probate. During this process, personal information becomes public and subject to review. To circumvent this potentially painful legal procedure, advisers often recommend that same-sex couples transfer as little as possible through a will.

A MATTER OF TRUST
Instead of, or in addition to, a standard will, a same-sex couple should consider setting up a trust, which will give partners more control over the administration of their assets. A properly established trust can protect assets from claims made by creditors or estranged family members and generate some tax savings. Furthermore, assets in the trust can be transferred immediately to beneficiaries according to the terms of the trust because they aren't subject to probate.

It's also essential for same-sex couples to have documents in place that address the major issues associated with finances and property. The most effective way to maximize the protection of their joint finances is through a durable power of attorney in which each partner designates the other to control the finances should one become incapacitated. In addition, couples who jointly own real estate assets should retitle those assets as tenants by entirety or joint tenants with right of survivorship to ensure that ownership is transferred to the other partner in case one partner dies.

Same-sex couples need to take steps to address the role, rights and responsibilities of a partner in the event of a medical emergency. The best way to accomplish this is through a living will. An advance directive establishes an individual's wishes for the administration of medical treatment. A healthcare proxy grants a same-sex partner authority to make medical decisions on behalf of his or her loved one. And, because most hospitals limit visitation rights to "family" members, a hospital visitation authorization is needed to allow same-sex partners to visit one another while hospitalized.

STAYING ON COURSE
While there is a laundry list of documents available to help protect same-sex couples under various medical and financial circumstances, this is where, logistically, individuals make the most mistakes. Advisers need to make sure that all legal documents are filled out correctly, witnessed and notarized as outlined by local law and updated with timely information. It takes time and effort to maintain an estate plan, but failing to keep beneficiaries designated in retirement plans and to keep insurance policies up to date are often irreversible mistakes.

In addition to a sound estate, it's important to work with a qualified tax professional to maximize tax benefits and understand potential pitfalls. The financial lives of same-sex couples are more complex and require careful attention and strategy. For example, it may be financially advantageous to have one partner make all of the charitable contributions, shifting the deductions to the higher-income earner. There is an array of strategies that financial professionals can use to help same-sex couples avoid a number of tax burdens.

Just as insurance is important for all clients, it's also critical for same-sex couples. Adequate life insurance should be in place and each partner should be entirely protected under the plan. Long-term care insurance is another effective tool, particularly in a case where there is an unequal distribution of wealth and one partner may need more protection in the future than the other.

A financial adviser with experience in same-sex planning can help same-sex couples chart a basic financial strategy and adequate savings plan to put them on the path to secure financial futures.

Serving same-sex couples may represent a lucrative opportunity for planners. The gay and lesbian community is generally regarded as well-educated and affluent, with greater disposable income than the heterosexual community. Many same-sex couples wield a lot of purchasing power and may not have to plan for traditional life events such as children, college educations and weddings. Where couples don't have immediate families, there are fewer obligations, negating the need to leave behind a portion of their estate, making more money available to live comfortably during retirement years.

However, the perception that same-sex couples have dual incomes, no kids and therefore more luxurious lifestyles and spending habits is not always the case. Advisers should not approach such couples with an agenda or any preconceptions, but simply help them identify their goals and implement a plan that will help the couple achieve those goals like any other client.

The tools and mechanics of meeting a same-sex couple's financial objectives may differ from married couples, but the process is fundamentally the same. A focus on the goals, an awareness of the issues at hand and an understanding of the law can help advisers to escort these couples through a road to financial security that may be pitted with potholes. The adviser's job is to help make the couple aware of those bumps and troughs and keep them on course toward a financially secure future. Through proper registration of forms, taking advantage of tax planning benefits and proper transfer of assets between the two individuals, same-sex couples can enjoy many of the same benefits our society confers on legally married couples.





Norman A. Dawidowicz is a director and senior financial consultant at Personal Capital Management in New York, a National Financial Partners company. He can be reached at (212) 972-0056 or ndawidowicz@pcmny.com.

(c) 2006 Financial Planning and SourceMedia, Inc. All Rights Reserved.

http://www.Financial-Planning.com http://www.sourcemedia.com




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