LGBT clients need help protecting their finances from a blitz of varying state laws
“When I started my career as a financial planner, I worked with a senior advisor who had a client with a long-term life partner. Within six months, this client, an executive in a well-known global company, passed away from cancer without having made a will. This was in 1998. His partner lost their house, which was inherited by the client's sister. The partner did receive assets as a beneficiary of the executive's retirement plan, but estate taxes took 40% of what he could have inherited.
“It was very sad—and it left a real impression with me that we had failed our client by not ensuring that he did the estate planning he needed to. The experience spurred me on to serve clients like these in a much better way.”
The advisor who's speaking is Craig Lemoine. As director of the Chartered Financial Consultant (ChFC) program at The American College, Lemoine is now in a position to educate other advisors on working with clients who are gay, lesbian, bisexual or transgendered (LGBT). Last July, the College announced that it was adding new courses to its ChFC designation to help advisors address special planning issues for the LGBT community (see sidebar, “Earning Credentials in LGBT Planning”).
The Nontraditional Couple
Back in 1970, most Americans would have scoffed at the idea that by 2015 there would be 250,000 legally married couples of the same sex. And who would have thought that households of a married man and woman with one or more children would shrink to a small minority? But just 19.3% of U.S. households now fit the traditional type, compared to 40.3% in 1970, according to Allianz's 2014 “LoveFamilyMoney” study.
In this study of modern family types, same-sex households with kids had a financial profile very similar to that of traditional families. Half (50%) described themselves as either wealthy/affluent or financially comfortable, and over one-third (37%) claimed a high level of financial security. (For traditional families, the numbers were 52% and 41%, respectively.)
However, these potentially desirable clients are being underserved. Only 48% of LBGT families said they work with, or have worked with, a financial professional, compared to 53% of traditional families. (Allianz queried 35- to 65-year-olds with household income of $50,000 or more.) The primary reasons to work with an advisor, said the LGBT couples, were better investment returns and help with financial decisions or specific financial issues—which makes them not so nontraditional after all.
The State of Marriage Rights
Currently, 35 U.S. states recognize marriage for same-sex couples. Since Section 3 of the Defense of Marriage Act (DOMA) was struck down by the Supreme Court in 2013, married same-sex couples residing in these states are also entitled to the same federal benefits as other married couples. Although this is a great step forward, it still leaves headaches for financial advisors whose LGBT clients live, or even travel, in states that don't honor their marriage.
Moreover, in January the Supreme Court said it would consider a case challenging state bans on same-sex marriage; most observers expect the Court to overturn those bans.
In the 15 holdout states, “a client's second cousin has more protection than the partner of 20 years might have,” said Joshua Hatfield Charles. Hatfield Charles, who is CEO of Financial-360 in Rockville, Maryland, and an ambassador for the CFP Board of Standards, has focused his 20-year practice on strategic planning for the LGBT community. As the spouse of a male husband, he also has personal experience with the vagaries of the law.
“If I get married in Maryland but live in Alabama [which does not recognize same-sex marriage], then I’m protected on the federal level, but not on the state level,” he pointed out. “Whereas if I’m married in Maryland and live there, I’m protected on all levels.”
The financial implications of a married LGBT couple's state of residence can be enormous in a divorce or death. Consider the real-life case of a lesbian couple who married in one state but lived in another where same-sex marriage was not recognized. When one partner died, the other spouse was denied survivor benefits because Social Security (unlike most federal programs) is required to use individual states’ definition of marriage. Had the couple been living in a state that did recognize their marriage, the survivor would have received $800 a month in benefits.
Marriage or Not?
Sharon Rich, president and founder of Boston-area financial planning firm Womoney, has been in a long-term relationship with her spouse, Nancy, for 35 years. They’re the parents of two children, aged 26 and 23. Although they’ve been married since Massachusetts legalized same-sex marriage 10 years ago, it wasn't until DOMA was declared unconstitutional that their financial situation became simpler in many ways.
“Our planning for divorce and estate planning shifted as a result of the federal recognition of our marriage,” Rich said. “Before that, if we co-owned a piece of property, the second person would have had to prove how she’d paid into it. After marriage, we were able to shift ownership of the property into both our names. Also, we could transfer gifts to each other without incurring taxes. If we’d lived in a state that didn't recognize same-sex marriage, things would have been more complicated.”
Serving LGBT clients is one of Rich's specialties, although she is not taking new clients at present. In 1999, she co-founded the PridePlanners Association with Debra Neiman and Sandra Reynolds to help advisors work more effectively with gay, lesbian, bisexual and transgendered clients. Now with 95 members serving all 50 states, PridePlanners will host its biannual conference in conjunction with the Financial Planning Association's annual conference in Boston, Sept. 26–28.
“As the laws and social mores have changed, it's been an evolution working with gay and lesbian couples,” Rich said. “Clients who have been together for many years may now be considering the implications of getting married. It's important for planners to understand the legal implications of same-sex marriage in states that don't recognize it, and to keep up with changing laws, working closely with the client and their lawyer.”
From a lawyer's perspective, that teamwork is equally essential. “The legal and political movement for gay and lesbian marriage has been framed as a civil rights issue, not a couples and money issue,” said Frederick Hertz, a San Francisco-area attorney, mediator and author of “Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnerships and Civil Unions.”
He said, “If a couple comes to me asking, ‘Would it be good for us to get married?’ I have to say to them, ‘Well, it's not an “us” question. If you’re the low earner, it's a great deal—you get to share in your partner's assets. If you’re the high earner, you may end up paying alimony for decades.’ These will be very emotionally charged issues that the financial advisor will need to discuss with them.”
What Advisors Need to Know
The first thing financial advisors need to know to work well with same-sex couples, said Hertz, is the legal landscape in their state on the particular day they’re meeting with their clients. Is marriage recognized? Is there a marriage-equivalent registration such as civil union or domestic partnership? Or is the only option for the couple to have a private agreement regarding money and assets?
Knowing the landscape enables a planner to advise people about their options. It's also a way of signaling to the couple that you care about their concerns. “If you’re not up to date on this information, they’ll fire you or never hire you in the first place,” Hertz said. “Why would I go to someone who doesn't care about my concerns and isn't knowledgeable about them? It's like going to someone to fix my Volkswagen who says, ‘I don't know anything about Volkswagens, but I’ll try fixing yours.’ This doesn't inspire confidence.”
Once you’re familiar with the law, Hertz noted, you need to know who legally owns the assets. You may need to explain this reality to your clients to see whether it matches the emotional reality of how the couple considers them to be owned. If it doesn't match, he said, the couple will often need to work with a marital attorney in order to retitle their assets.
A prenuptial or postnuptial agreement may also be desirable. In his own work with gay and straight couples as well as family businesses, Hertz spends half his time on relationship formation (e.g., prenups, nonmarital cohabitation agreements, real estate co-ownership agreements) and the other half on relationship dissolution (mediating or advocating for partners in breakups).
Aside from the intricacies of asset ownership, LGBT clients may need significant help in preparing for retirement. In a 2014 study of adults aged 45-75 by SAGE (Services and Advocacy for LGBT Elders), more LGBT adults were “very concerned” or “extremely concerned” than their non-LGBT counterparts on several vital issues:
That said, the solutions you recommend don't have to be different for LGBT and non-LGBT clients. Advisors who work with gay couples and individuals have found that sexual orientation has little or nothing to do with the way people's brains are wired to either spend or save for tomorrow. As Registered Financial Consultant Lori Atwood of Lori Atwood—Fearless Finance in Washington, D.C., put it, “Differences exist more between personality types—spenders, savers, etc.—than between gay and straight clients.”
Tip: Don’t Assume
It may seem obvious that planners shouldn't judge how a client handles funds or try to impose his or her own morals or assumptions. Ultimately, Rich of Womoney pointed out, a planner should be sensitive to the unique needs and attitudes of each client.
One key is not to make assumptions about gender. As attorney Hertz told us, “I was just mediating a lesbian divorce, and when I used the pronoun ‘she’ in referring to a client's new partner, she corrected me: ‘No, it's a guy.’”
He continued, “So be open minded, be curious and don't make assumptions. Ask people what pronoun they prefer to use. It is totally fine to say, ‘I’m new in this line of work. I’m not familiar with what is appropriate. What pronoun do you prefer I use in referring to you?’ Being aware of differences is not bias, it's sensitivity.”
We made that mistake ourselves in referring to Hertz's mate as his “life partner.” He made a face. “I hate that term! We just call each other partners.”
“You want to refer to your clients in a way that makes them comfortable,” agreed Stuart Armstrong, a financial planner at Centinel Financial Group in Needham Heights, Massachusetts. “Ask how they refer to each other: partner, life partner, spouse, husband-husband, wife-wife or ‘hey you!’ Fact-finder documents used to say ‘husband’ and ‘wife,’ which was off-putting. Now they’ll say ‘Partner A’ and ‘Partner B’ or ‘Spouse A’ and ‘Spouse B.’”
A member of the FPA National Board of Directors, Armstrong is also the treasurer of PridePlanners. He said, “I’m married myself, and we refer to each other most often as partners, though I have used ‘husband’ occasionally.”
Also, find out if an LGBT client is out of the closet. Armstrong himself went through “a long, difficult coming-out process” over 30 years ago. “But when I was hired by this firm where I’ve worked for 29 years, I was hired as an openly gay man,” he said. “That's made my career much easier.” But, he pointed out, “Not everyone is ‘out’ to everyone. If you’re making inquiries about a client, you need to know what level of sensitivity to use.”
Added Hatfield Charles of Financial-360, who serves on the PridePlanners board, “Although I need to glean information about my clients’ health status, I wouldn't ask, ‘Do you have AIDS?’ I might say, ‘Do you have any health issues I should know about?’ If you speak in a culturally sensitive manner, having conversations slowly and explaining why you need to know, you will create trust and more receptivity.”
Womoney's Rich feels that LGBT clients are generally less stressed out about their situation. “Ten years ago, gay clients may have been more closeted and worried about families of origin challenging their estate plans,” she said. “I think that's less so these days. As a lesbian, I don't discriminate on the basis of sexual orientation, one way or the other. I use humor with everybody.”
You Don’t Need to Be Gay
Russ Weiss, a planner at Marshall Financial Group in Doylestown, Pennsylvania, who has the Accredited Domestic Partnership Advisor designation from the College for Financial Planning, in addition to being a CFP, is a member of the board of PridePlanners, but he isn't gay. His client niche is nontraditional families, especially unmarried couples living together.
When he began his career, Weiss told us, the challenges and advantages of planning for unmarried couples were front-of-mind because he and his girlfriend were then living together. Since central Bucks County, where he grew up and now works, has a large LGBT community, gay and lesbian couples naturally became part of his clientele.
In his experience, sexual orientation is much less important to clients choosing an advisor than other factors such as area of financial specialization, pricing, style or social interests. “When a lesbian couple recently came to us, we asked why they chose our firm,” he said. “They were interested in retirement planning, and they liked the fact that we were fee-only.”
In general, Weiss said, “Lesbian, gay, bisexual and transgendered couples want advisors who are sensitive to LGBT concerns or at least sensitive to their culture, but they have the same concerns as straight couples. ‘Do we have enough money to retire? If we have kids, are we providing well for them?’ I think that if you’re a planner who's objective and empathetic with your clients and who focuses on what's important to them, it doesn't matter whether you’re gay or straight.”
What About the Kids?
Same-sex couples with children tend to want an advisor who will treat their financial needs no differently than those of any other family, according to Allianz's “LoveFamilyMoney” survey.
“Having a child takes precedence over everything else,” agreed ChFC program director Lemoine. “Gay and straight couples are very similar in that regard. In fact, a gay couple with a three-year-old has more in common with a straight couple with a three-year-old than they do with a gay couple without children.”
But Rich pointed out one crucially different aspect of same-sex couples’ planning: knowing who is—and who isn't—legally a parent. “We’re working with a couple now who have two children in their household,” she said. “The older child, a boy, was born to one of the partners during a prior relationship. This partner is also the birth mother of the younger child, whom the other partner has adopted.
“Now they’re breaking up. The boy's legal parent makes only about a tenth as much as the other partner, who is not legally his parent. The non-legal parent had orally promised to pay all college costs, and has paid through the first year. But now they’ve broken up and there's a $30,000 bill due next month. Who's paying it? The non-legal parent says, ‘I’d love to help, but I’m not sure I’m able to now that we’re breaking up.’ And she has no legal duty to support him, even though he's been in their household for 15 years.”
Failing to plan for the kids can lead to even more heartbreaking scenarios. Another true story: After breaking up with her long-time partner, the biological parent of a little girl denied her ex further contact with the child. The ex went to court repeatedly in hopes of regaining access, but since the couple had not been married before the child's birth and the non-parental partner had not adopted her, there was no legal way to protect the relationship between the now ex-partner and the child she loved.
“In order to do a good plan, you need to know the legal relationships,” Rich cautioned. “Don't presume that a person who appears to be a parent is a legal parent.”
Attorney Hertz recently asked his financial planner to help him develop a strategy that would work in either of two possible scenarios: first, if he and his partner of 32 years stayed together; and second, if he became single.
Hertz's partner went through the same process. “Our plan is for each of us to feel financially secure and self-sufficient, regardless of what happens in our relationship,” Hertz explained. (Despite their stable union, they elected not to marry because of the expense of altering plans made before California legalized same-sex marriage.)
Similarly, he tells clients that their financial self-sufficiency is one of the biggest gifts they can give their partner. That often leads to one of the hardest things an LGBT couple's advisor needs to do, which is to enable them to envision their death or the dissolution of the relationship. “If all the retirement assets are in one partner's name and they aren't married, then the other one has no retirement plan unless there's a written agreement,” he pointed out. “You have to have the courage to speak that truth. And then you have to be able to shape the financial plan in a way that's consistent with reality for those clients.”
Hertz has found that gay male couples tend to keep their money separate, allowing the higher earner to have control over his earnings. Getting married can be disruptive for that couple, since it imposes a sharing that is contrary to how they think.
By contrast, lesbian couples may tend to overly share in order to quiet the dissonance caused by economic inequality. “One of the reason why lesbian breakups are so often contentious is what I call ‘regretted generosity,’” he said. “Men are less generous, and therefore have less to regret. Since they never shared all that much, they tend to have simpler breakups.”
Marshall Financial Group's Weiss noted, “In a divorce, you can make a claim to assets. Two gay people living together unmarried, they’re legal strangers unless they’re protected by legal documents. Unless they have a domestic partnership agreement or cohabitation agreement in place, the lower earner isn't protected in any way if they break up. Say an unmarried couple lives together in a house for 15 years, but only one person is on the deed. If they break up, the person who's not on the deed has no claim to the house, even if he or she paid part of the cost of living there.”
Although the LGBT market may seem appealing, Financial-360's Hatfield Charles cautions advisors against rushing into it believing they’re experts. “A common mistake for planners who want to break into this market is that they go to a few seminars, they hear people like me, Stuart Armstrong or Fred Hertz speak, they meet with a gay or lesbian couple, and they start spewing off all the planning strategies the couple needs to take care of without listening long enough to identify their real needs and concerns,” he said. “So the couple gets overwhelmed and bolts and never comes back; or they miss an important detail that they never asked about and start going down the wrong path.”
An advisor is likely to have more success by actively maintaining relationships with allied financial professionals who serve the LGBT community, as Armstrong of Centinel Financial Group does. Armstrong has the added advantage of long experience with this demographic group. He told us, “I’ve been committed to serving the LGBT community throughout my career—creating and presenting over 30 financial awareness workshops in the ‘80s and ‘90s during the height of the AIDS epidemic, when people were craving guidance and fearing for their financial and physical lives.” This experience has led many new clients to seek him out. “They just feel more comfortable working with a financial advisor who's gay,” Armstrong said. “They don't have to be concerned about whether they’ll be treated with sensitivity and respect.”
Marshall Financial Group's Weiss is also committed to networking with other advisors outside the financial planning profession, such as tax professionals, lawyers and travel agents. In addition, he conducts interviews and writes articles on financial planning for unmarried LGBT couples. Most of his new clients come through referrals from existing clients.
Hatfield Charles has found that after his two decades of working with LGBT clients, prospects are drawn in by word of mouth. “Many people want to work with people like themselves who understand them,” he said. “They know that I’m gay and I’m married. Once I start working with them, we develop a very close relationship. Many of my clients have been to my house for dinner. It's an ongoing joke when they tell me they like my husband, Dixon, even better than they like me.”
On a more serious note, he added, “We prefer to have fewer clients and deeper, more intricate relationships. If they have a CPA and an estate planner, we’ll work with those professionals to develop a team that serves the client best.” If they don't already have an estate attorney and a tax professional, Hatfield Charles calls on specialists within his network.
“Because the challenges, obstacles and opportunities for the LGBT community are so different, we try to make sure that all planning aspects work in concert,” he said. “Clients want to work with us because they don't have to meet five different times with three different experts. We get all these experts together, so it's a much simpler and more efficient process for the client.”
Looking for Help
“Marriage equality has changed in many states this past year, and yet things are still very confusing,” said Margaret Archer, a vice president and portfolio manager at Wells Fargo Advisors in Atlanta. “We as advisors need to be more thoughtful in addressing the planning challenges that the LGBT community continues to encounter.”
“Clearly each of us brings our own personal experiences and our own biases to the financial planning process,” Womoney's Rich agreed. “It's important to explore with clients what their assumptions and biases are, and respect them. But I think my gay and lesbian clients share a lot of the same goals with my straight clients. Our job is to help them reach those goals, so we need to let them know about a broader landscape of options they might not have considered.”
“There's great opportunity for advisors, and these are great people to work with,” Weiss said. “They tend to be happy, positive adults, comfortable with who they are. And there's a lot of value you can add to their situation, because the laws don't look out for their best interests.”
As for those who aren't yet working with advisors: “I think they are looking for help,” Weiss said. “They just don't know who to go to. If more advisors let it be known that they’re sensitive to the culture, this group of clients will grow over time.”