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