Review marriage implications with same-sex couples – or be on the hook

Employee benefits and tax, retirement and estate planning must be discussed under Finra rule, compliance expert says.

Jan 21, 2014 @ 9:56 am

By Darla Mercado

+ Zoom

Financial advisers who meet with married same-sex clients and don't review how last year's Supreme Court decision affects their financial and retirement plans face regulatory risk.

In a key decision last year, the Supreme Court found Section Three of the Defense of Marriage Act of 1996 unconstitutional, meaning the federal government could not define marriage as being between two people of the opposite sex. Nevertheless, states are still permitted to determine who is married and who is not. This means a same-sex couple can marry in a state that recognizes such unions, but the marriage may not be recognized in other jurisdictions.

The update to the federal law warrants a thorough review of four critical areas for same-sex married clients: employee benefits, estate planning, income tax planning and financial independence or retirement planning.

“If you have a same-sex married couple and you haven't demonstrated this [review], where you call them and say you need to discuss these issues because of where you live and where you married — if you didn't do that that, then you fail Finra's 'Know Your Customer' rule,'” Thomas N. Tillery, vice president and chief compliance officer at Paraklete Financial Inc., said at the American Institute of Certified Public Accounts' annual Advanced Personal Financial Planning conference in Las Vegas on Monday.

Similarly, if the adviser fails to ask the client if he or she got married in another jurisdiction and the topic fails to come up, the adviser will be on the hook for claims that arise from planning mishaps.

On the employee benefits front, advisers need to be aware of scenarios in which clients in same-sex marriages can receive spousal benefits in the event of a spouse's death. “Before [the Supreme Court decision], the Labor Department would say that you have to rollover to a beneficiary IRA,” Mr. Tillery explained.

With federal recognition of same-sex marriages, the adviser may have to go back and unwind that beneficiary IRA. Those couples now have access to options that were only available to opposite-sex married couples, such as a rollover of the qualified plan assets or the election of a survivor annuity.

On the income tax front, before the case, United States vs. Windsor, advisers probably filed two separate federal tax returns for same-sex married clients. This year, those clients can file as married. But beware the difference between state income tax laws and federal laws.

Further, for clients who are considering marriage, advisers need to discuss the tax implications of that choice. Providing an extreme example, Mr. Tillery asked, “Do you really want to get married if you have to pay an extra $150,000 a year in taxes?”

Estate plans merit a thorough review, too. Pre-Windsor, advisers used revocable living trusts, limited liability companies, grantor-retained income trusts and IRA trusts to give same-sex married clients the survivor benefits they would not have been able to receive. Not only do these plans merit a review to determine whether they're still needed, but advisers must take stock of estate planning tactics that are now available to their same-sex married clients.

For one thing, these clients can take advantage of the marital deduction and can use portability of the estate tax exclusion. They can take advantage of split gifts, which permits a married couple to double the annual gift tax exclusion amount.

If the gift splitting took place years ago, clients ought to consider filing a protective refund claim, according to Mr. Tillery.

“You need to talk to your client and have them engage you to review their returns,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

How to effectively engage and serve female clients

It is clear building relationships with women is a proven way to grow your business. Heather Ettinger of Fairport Asset Management explains proven segmentation strategies.

Latest news & opinion

Take 5: Vanguard's new CIO Greg Davis talks bonds, stocks and costs

Having just stepped into the role, this veteran of the firm now oversees $3.8 trillion in assets in more than 300 mutual funds and exchange-traded funds.

Tech companies deploy behavioral finance tools for advisers

They seek to turn knowing more about clients into growing more revenue.

Retirement planning for women

Longer lifespans and lower savings require creative income strategies.

Sean Spicer resigns as press secretary after Anthony Scaramucci is appointed communications director

Scaramucci is known as an ardent foe of the DOL fiduciary rule, having said during the campaign that Trump would repeal it .

Redoing the math on a 4% retirement withdrawal rate

Given the current interest-rate environment and other factors, advisers disagree about whether the number is too conservative or not conservative enough.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print