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Being Financially Prepared for DOMA Ruling

Tuesday, 23 Apr 2013 | 4:25 PM ET
Photographer | Collection | Getty Images

Ready for DOMA's demise?

Speculation is rife that the Defense of Marriage Act, popularly known as DOMA, will be struck down by the Supreme Court before the end of their current term and rule on the case by June or July. If that happens, it will mean a host of changes in tax laws, retirement benefits, and more for same-sex couples.

That's why financial planners working with same-sex couples —- not to mention the couples themselves —- have their pencils sharpened.

"Are clients asking about this? You bet," says Kyle Young, a first vice president and certified financial planner at Wells Fargo Advisors, the financial-advisory arm of Wells Fargo. The practice Young co-manages is focused on LGBT clients, and he says it's the largest such practice within Wells Fargo.

"Every day or every other day I get a call" about posible changes in the federal definition of marriage, he adds. "This comes up in every meeting."

The challenge is that no one knows how the Supreme Court will rule on DOMA. And even if the justices do strike it down, no one knows how sweeping the ruling might be or when it might take effect. So financial planners are telling clients to be prepared for anything.

"There are still common sense things — survivorship planning and other things — that people should be doing," says Stuart Armstrong, a certified financial planner with Centinel Financial Group who has served on the board of directors of PridePlanners, financial planners serving the LGBT community.

"I see a lot of people just doing this 'wait and see, wait and see." That can be a dicey approach," he added.

One move that both Armstrong and Young are recommending to same-sex couples is filing a so-called protective claim with the IRS.

If the federal government recognizes same-sex marriage, and the court ruling is retroactive for tax purposes, a same-sex couple who filed individual federal returns could be eligible for refunds from prior years if their tax bill as a married couple would have been lower. In that situation, a protective claim would preserve the to file for that refund, provided the claim is filed before statute of limitations is reached for the tax filing in question.

But beyond protective claims, Young says, there are few obvious steps for couples to take — as long as they are up to date on their financial housekeeping.

"A health care proxy, a living will, those are things that anyone should do," he told me.

Part of the uncertainty stems from the fact that even if DOMA dies, a majority of states still forbid same-sex marriage. The 2010 Census Bureau survey found nearly 600,000 same-sex couples in the U.S., with only a tiny minority living in states that recognized same-sex marriages at the time of the survey.

And since most estate tax law is state law, many same-sex couples will still need to be extra careful with their financial planning.

Some couples are, but many others seem to have difficulty wading through the thicket of rules, and exceptions to rules, that apply to same-sex couples' finances.

For example, in a recent survey of LGBT investors by Wells Fargo, the respondents had above average median net savings, and they were more likely to have a detailed retirement plan in place. But fewer than half understood that their ability to transfer assets like real estate and life insurance to a partner varied widely, depending on the state laws where they live.

The bottom line, says Young, is for same-sex couples to be ready for just about anything in terms of changes to their financial planning. "I suggest that anyone in a same-sex couple be fluent in the type of planning" they may need to be doing," he says. "Have a financial adviser, have other experts at your disposal over the next couple of months."

And stay tuned.

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