Stern Advice - Get ready, gay couples, for a new financial world

WASHINGTON, June 20 Thu Jun 20, 2013 3:52pm EDT

WASHINGTON, June 20 (Reuters) - Next week the Supreme Court is widely expected to hand down a ruling that will confer federal recognition on state-sanctioned same-sex marriages.

If that ruling comes down as anticipated, it will send some gay and lesbian couples to the altar - but it is likely to send even more to financial planners, trust attorneys and tax accountants.

Such a ruling would open up a new world of financial planning for couples in same-sex-marriage states: There are more than 1,100 federal tax and benefit provisions that refer specifically to marriage or spouses. It would change the way they retire, pay taxes, accumulate wealth, plan their bequests and more - mostly, but not entirely, for the better.

(Twelve states recognize same-sex marriage, and roughly 12 others are considering it.)

"Everything we learn in law school is geared to a married couple with two kids," said J. Max Barger, an attorney with the Washington, D.C., firm Ackerman Brown. "It will be a pleasure to apply that to gay couples. Planning will get a lot easier."

If you are in a same-sex marriage or expect to be, here are some planning issues to review with the appropriate professionals, such as estate planning attorneys and tax advisers.

- Estate taxes. Wealthy people have the most to gain from federal recognition. It will mean that spouses can leave each other as much money as they want - billions of dollars, if they fall into that select class - without paying federal estate taxes, just as married heterosexual couples can. A couple together will also be able to leave as much as $10.5 million to their heirs free of estate taxes.

Under current law, even state-married gay couples don't have those spousal exemptions. Instead they each have a $5.25 million limit on the amount they can leave each other without paying federal estate taxes. And while each person can leave $5.25 million to the kids directly, the second spouse can't leave more than that, even if the first spouse didn't "use up" his or her own exemption.

What does that mean? You may be able to drop your life insurance if you've been carrying a pricey policy just to pay estate taxes, says John LeBlanc, a financial adviser with Modera Wealth Management in Boston.

Not all the new changes will save you money: If one of you is wealthy and one of you is not, you may have to spend time, money and emotional energy considering a prenuptial agreement. Rather than hiring lawyers to combine your financial lives, you may have to spend money on lawyers to keep them separate, if you are married or want to marry.

- Retirement planning. The hottest retirement strategy among heterosexual married couples involves optimizing Social Security benefits, in which one spouse takes benefits early and then switches to spousal benefits later. That strategy isn't available to same-sex couples now, but will be for those who get federal recognition. An even bigger benefit coming your way with federal recognition: Same-sex widows and widowers would be eligible for spousal Social Security.

Pension benefits are trickier, says Kyle Young, a financial adviser in Short Hills, New Jersey, and a vice president of Wells Fargo Advisors, where he specializes in gay, lesbian, bisexual and transsexual (GLBT) clients. Big companies may find themselves required to give spousal pension benefits to workers in states that sanction gay marriage but not in states that don't, he says.

It's not clear whether those companies will give all same-sex couples parity on pension issues, even if they don't live in the right states. And if they do? That could actually hit some companies' pension funds hard enough to push them into underfunded status.

- Income taxes. The Supreme Court giveth, and it taketh. Moving to a joint federal tax return could cost same-sex couples, since they would no longer be able to optimize their deductions by giving them all to one partner or the other. Meanwhile, there is the "marriage penalty" - the tax code is structured with progressive tax brackets so it can penalize married couples who have roughly equivalent income.

It isn't completely clear who will be filing those joint returns - court observers have conjectured that if a couple were legally married in one state but live in another, they will be able to file a joint federal return even if they live in a state that doesn't recognize same-sex marriage and forces the partners to file separate state returns. But not every tax expert agrees with that interpretation, so it is likely to play out over time or even - no surprise here - in the courts.

Depending on whether effective dates for the decision are in the future or the past, there may be moves to make as soon as the court acts. Separate filers who will eventually file jointly could make big charitable gifts now and apportion them to the partner who will save the most by making them. A retroactive decision that goes back beyond January could prompt some to file amended tax returns for previous years.

"I'm going to literally be looking at every single tax return and estate document for all my same-sex clients," LeBlanc said. So, if and when the court acts, take the day to celebrate, and maybe line up your caterer. The day after that, call your lawyer and your accountant.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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