Estate Planning for Unmarried Couples: What Financial Planners Need to Know
In their 2005 book, Money Without Matrimony: The Unmarried Couple’s Guide to Financial Security,1 co-authors Sheryl Garrett, CFP®, and Debra A. Neiman, CFP®, painted a grim picture of what the surviving member of an unmarried couple might face after the death of a partner. “They can become mired in a financial and emotional mess—destitute and homeless—all while trying to cope with the loss of a partner.”
To squelch any skepticism about how wretched things could get, they added, “None of that is exaggeration, either.”
Little has changed in the intervening years, save the recognition of gay marriage in a few states—a development that does not eliminate all estate planning pitfalls for such couples in those states. The scenario painted by Garrett and Neiman may still be read as a loud wake-up call for planners who find themselves working with unmarried couples, whether heterosexual or homosexual, as well as married gay couples.
Given today’s demographic trends, it would hardly be unusual for a planner to be sitting across the desk from an unmarried couple. The percentage of unmarried households in the United States, as measured by the Census Bureau, grew by 24 percent in the decade ending in 2010.
A Growing Demographic Segment
Six percent (about seven million) of all 115 million U.S. households fell into the “unmarried” category in the 2010 Census—representing nearly 14 million individuals. Roughly 90 percent of that group is heterosexual couples, and the other 10 percent is same-sex couples, nearly evenly split between female and male couples.
For financial planners, the challenge is to know enough to provide accurate and helpful general guidance on estate planning (and related) topics to such couples, but avoid straying beyond their level of expertise—just as they would with married heterosexual couples. But some planners may wish to take on an additional challenge: boning up on the estate planning issues specific to unmarried couples in order to broaden their client base.
David J. Alex, CPA/PFS, is a seasoned financial and tax-planning practitioner for individuals and small businesses in Cincinnati, Ohio. Although he does not specialize in gay or other unmarried couples, such clients represent a significant component of his client base. “I do a lot of estate planning work for the gay community and others,” he says. “I read a lot of wills and trusts. People ask me, ‘When I die, is this really what’s going to happen with my estate?’” He did not set out to build a niche market of same-sex couples, but he hadn’t seen other firms in the Cincinnati area make a formal effort to build a practice around this segment, and many of his gay clients referred gay friends to Alex.
Neiman, of the financial planning practice Neiman & Associates in Arlington, Massachusetts, has made more of a commitment to serving “unmarried couples or couples whose marriage is not recognized federally.” Early on she built up a core of such clients and “realized how underserved the group was, and that the advice [on estate planning matters] they had been getting was not necessarily correct.”
The evolution of the practice of Jill Hollander, CFP®, a principal of Financial Connections in Corte Modera, California, was somewhat different. Her first office was in Berkeley, California. “Berkeley being Berkeley”—home to the University of California and a longtime magnet for freethinkers—the local demographic was rich with unmarried and gay couples. In addition, she recalls, as a gay person herself, she had an epiphany. “Boy, if I’m having these financial issues, there must be a lot of other people like me having the same challenges.”
Invasion of the Body Snatchers
In many circumstances, without expert, tailored planning, unmarried couples’ assets could wind up not where they intend because of disputes from family members. In one extreme case recounted by a planner, the actual body of the deceased was snatched from the custody of his gay partner by a family member in order to control the funeral and burial arrangements.
In a more typical conflict that Alex has witnessed, an unmarried heterosexual couple jointly owned a house. The man had contributed all of the funds to purchase and improve the house, and considerable equity had built up in the property. The couple intended to marry, but shortly before the scheduled event, the wife-to-be died, and her family laid claim to her interest in the house. It was a legally defensible position in that jurisdiction, so Alex’s client “had to pay many thousands of dollars to get her family off his back.”
Planners who assist unmarried straight and gay couples with estate planning issues have, naturally, made a priority of learning the unique rules and strategies that apply in their jurisdictions (see “Resources” sidebar). As a starting point, Hollander suggests that planners make an exercise of listing basic estate planning issues and strategies, then make a side-by-side comparison of how they may or do differ between married and unmarried couples. Even when lacking all the answers, doing this comparison begins the essential thought process of focusing on the distinctions and makes planners aware of the limits of their knowledge.
The financial priority for many of Hollander’s clients is retirement planning. So, for example, she can factor Social Security survivor benefits into the equation for married couples but not for unmarried couples. The same may apply to aspects of qualified retirement plans.
Even the surviving member of a same-sex couple married in a state that recognizes gay marriage would not be eligible for Social Security survivor benefits, as same-sex couples generally amount to “legal strangers” under federal law, Hollander says—although that area of law has grown more complex in recent years.
That result often necessitates particular attention to the titling and disposition of assets of the member of the couple with greater assets to ensure the less wealthy member is adequately provided for if he or she were the second to die.
Federal tax law, which does not make allowances for unmarried couples, can create unexpected financial consequences upon the death of a member of an unmarried couple. An example that illustrates the level of planning required is the surviving member of an unmarried couple’s inability to get a stepped-up tax basis in real estate inherited from the deceased.
Even such basic planning tools outside the realm of finances, such as advance medical directives used by unmarried couples, may lack legal authority if couples use boilerplate documents, Hollander warns.
Because unmarried opposite-sex couples vastly outnumber same-sex couples, the estate planning issues opposite-sex couples face may be more familiar to general practice planners. Working with same-sex couples may be a different matter, particularly given the legal recognition of gay marriage by several states in recent years. An overview of the current state law treatment of same-sex couples, courtesy of Frederick Hertz, J.D., an Oakland, California-based attorney and specialist in same-sex couples’ legal issues, is provided in the “States” sidebar.
Complexity is added to the variety of state laws by the interrelationships among those laws, and the impact on couples moving from state to state, Hertz says.
“Same-sex couples can’t be married in California today, but if they got married in New York, that marriage would be recognized [in California].”
Thus generalizations are hazardous, says Hertz, co-author of the book Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnerships, and Civil Unions.2
Ambiguity of Marital Status
“Knowing whether you are considered married under state law is easy if you’re a straight couple,” Hertz says. “Either you got married, or you did not. For gay couples, sometimes it isn’t clear.”
But for same-sex couples there is no ambiguity about their status under federal law. As noted, their marriages simply aren’t recognized—at least for now. Any doubts about that were eliminated in 1996 when Congress enacted the Defense of Marriage Act (DOMA). That law explicitly rejects federal recognition of same-sex marriages and declares that states are under no obligation to recognize gay marriages that took place in other states.
To many clients and even other lawyers and planners, the whole concept of being “state married and federally single is just intellectually incomprehensible,” Hertz says. So that’s the essential point he drives home with gay couples whose marriages are recognized by their states.
“Every time you make a decision—opening a bank account, getting a loan, putting somebody on a title, doing a will, buying an insurance policy, setting up a beneficiary designation—there are different state and federal rules” that must be taken into account, says Hertz.
Estate Issues with Retirement Plans
The top estate planning considerations for same-sex couples with respect to federal law include taxation of the estate and transferability of pension and retirement plan benefits. The surviving spouse of a gay couple inheriting assets of a qualified retirement plan would face more costly immediate tax consequences than the spouse of a married heterosexual couple.
So one way to offset that potential tax penalty might be for one gay spouse to leave his or her interest in the house to the other and use residual retirement plan assets for charitable bequests.
Financial planners shun the role of advising clients on the wisdom of marriage—other than pointing out some of the financial ramifications. Indeed, most planners are presented with the marital status of couples as a fait accompli. When Massachusetts first recognized gay marriages in 2004, “I had clients who ran to the altar, and afterwards came to me and began asking questions,” says Neiman.
When Hertz has an opportunity to discuss the financial implications of marriage for gay couples, he strives to present a balanced picture. “Marriage is as much about responsibilities as it is about benefits,” he points out. That can include liability for debts.
Also, ending a same-sex marriage may be more complicated than one might think. A same-sex couple legally married in New York, for example, who moves to Arizona and tries to get a divorce there would be unsuccessful. “Arizona won’t give them a divorce; they’d have to move to a state that recognizes their marriage,” Hertz says. “What I always say to people is, ‘You have to learn what the rules are for you in your particular situation with your particular life and dynamics.’”
Whose Money Is It?
Hertz and others who have significant experience in this realm suggest that certain attitudes about money are common among their gay clients. One of the central issues in financial planning for same-sex couples is: whose money is it? “There is a much greater tendency for them to think of their money as separate rather than combined,” according to Hertz.
This may go against the grain of straight planners who tend to have a different concept of how money is treated within a family. At the same time, the issue that gay couples may not be aware of, Hertz says, is that their money may in fact be shared. “I’ll hear things like, ‘Oh, my girlfriend pays me rent,’” when in fact some states might consider their assets pooled if a dispute arose. “So working with same-sex couples means having to do a lot of education about legally whose money it really is”—both in the present and in terms of the estate planning implications.
It also can mean being willing to ask delicate personal questions and creating an atmosphere in which clients are willing to answer them. “You have to be comfortable dealing with the qualitative issues” in clients’ personal and family relationships, says Hollander. To alert clients (including unmarried opposite-sex couples) to the possibility of family disputes arising after a death, she asks them, “How does your family feel about your relationship?”
When there is any chance that the answer is disapproval, Hollander encourages clients to ensure that their estate planning documents leave no doubt about their intentions. One way is to explicitly disinherit particular family members to preclude an assault on the client’s estate.
Each planner must develop a good sense of “knowing what you know and what you don’t know” in dealing with these clients, or any others, of course, warns Neiman.
How much does a general practice planner need to know? Most fundamentally, that “some of the basic assumptions of estate planning don’t hold true” for unmarried couples and married same-sex couples, Neiman says. Beyond that, she says planners need to know how to say, “I would like you to consult with a specialist”—whether it be an estate planning attorney, another financial planner who has specialized in this client segment, or even a specialized counselor or therapist when conflicts over money overshadow developing an estate plan.
Neiman also warns planners not to trust their financial planning software to produce the right scenarios or options for these clients. Her own role in estate planning, as she sees it, “is really to get a sense of who owns what? What are the sizes of the estates? Where are they regarding titling and privacy? Do they own assets a certain way for privacy issues, or should they?” When she sorts it out, she briefs the estate planning attorney the clients have agreed to visit and lets the attorney take it from there.
General practice planners might feel some reluctance to refer an unmarried couple or married same-sex couple to another planner for general advice if they want to retain that client to handle, for example, asset management. But trying to carve out distinct aspects of a client’s financial needs and attempting to have the client maintain relationships with two planners might not serve the client well, according to Neiman.
Looking ahead, advisers ill-equipped to address some of the needs (including basic estate planning) of unmarried couples and married gay couples may be forsaking a growing demographic sector, based on the trends indicated by the U.S. Census and also a movement toward legal acceptance of gay marriages.
“The number of people who are married is declining all the time,” observes Hollander. As for public attitudes toward homosexuality in general, and gay marriage in particular, “to younger people, it’s a ‘ho-hum, who cares’ response,” she says.
Hollander also considers the U.S. military’s abandonment of its “don’t ask, don’t tell” policy in September 2011 a sign of things to come. In addition, the Obama Administration’s declared policy of not defending DOMA against any legal challenges is considered a significant step.
And for Neiman, the decision by New York’s legislature last June to recognize gay marriage represented a tipping point. “I think it’s a matter of time that, one by one, other states will start to pass” similar laws, she says. If so, that pattern and the increase in unmarried couples will challenge planners to expand their horizons and deepen their knowledge of the estate planning needs of this growing segment of the population.
Richard F. Stolz is a financial writer and publishing consultant based in Rockville, Maryland.
- Garrett, Sheryl, and Debra A. Neiman. 2005. Money Without Matrimony: The Unmarried Couple’s Guide to Financial Security.Chicago: Dearborn Trade Publishing.
- Hertz, Frederick C., and Emily Doskow. 2009. Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnerships, and Civil Unions. Berkeley, CA: Nolo.
Resources for Serving Gay Couples
Knowing how the estate planning and related needs of unmarried opposite-sex and same-sex couples, as well as married same-sex couples, differ from married opposite-sex couples is not instinctive. Planners who seek to serve these groups invest time to build the expertise needed to do the job well.
One resource they recommend for helping gay and lesbian couples is the membership organization Pride Planners (www.prideplanners.org). Debra Neiman, CFP®, of Neiman & Associates in Arlington, Massachusetts, is one of its founders.
Pride Planners began in 1999 with a small, informal meeting of planners sharing experiences and concerns. The organization today holds regular conferences, and its website includes a “find a professional” function to link prospective clients with qualified financial professionals in their community. It also lists several books, including Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnerships, and Civil Unions, co-written by Frederick Hertz, J.D., and Money Without Matrimony: The Unmarried Couple’s Guide to Financial Security, co-written by Debra Neiman, CFP®.
by Richard F. Stolz for February 2012 issue of Journal of Financial Planning Magazine