Steve Gunn, CRPC, is a Financial Advisor who holds the Accredited Domestic Partnership AdvisorSM Designation with Wells Fargo Advisors, LLC, in Seattle. He addresses the financial challenges that same-gender partners face. Reach Steve at firstname.lastname@example.org and www.wfadvisors.com/steve.gunn
Divorce is rarely easyand it’s often not a topic that most couples like to discuss. But understanding its financial implications can help same-gender couples navigate an always difficult and emotional situation.
How couples’ assets may potentially be divided, and the resulting financial or tax impact, can differ substantially depending on if they are legally married, partnered or in a civil unionand where.
The laws on same-gender divorce and marital dissolutions vary substantially from state to state, as do those on same-gender marriage and unions. Couples should strongly consider seeking advice from a tax and legal professional with experience in LGBT family-law issues before initiating any divorce proceedings. If there are children in the family, there can be an additional level of complexity and heightened need for assistance from qualified legal counsel.
A spouse considering or amidst a divorce may want to prepare for a discussion with a financial advisor and tax and legal advisers by taking the following steps:
1. Gathering key tax, investment and financial documents. Spouses should have their own accessible copies of all important records, including:
- tax returns;
- bank and brokerage account statements;
- pension/retirement-account (401[k], IRA, etc.) balances and statements.
2. Knowing the cost basis of all assets. As spouses gather their financial information, it will be important to find or determine their assets’ cost basis, as well as their fair market value, in order to calculate the assets’ after-tax value.
3. Estimating a post-divorce budget. Before a divorce, a spouse should create an individual budget of projected living expenses and income, along with a net-worth statement. It is wise to factor in smaller expenses, such as extra transportation for shuttling children between parents or extended daycare costs.
4. Developing a plan for healthcare benefits. One option that may be available: Under COBRA, a non-working, financially dependent spouse may be entitled to up to 36 months of coverage from his/her working spouse’s employer group health plan. Regardless, a spouse covered on the other spouse’s healthcare plan should plan to obtain new individual coverage. Not to be overlooked: coverage for children or other dependents, the additional costs of which should be incorporated into the spouse’s individual budget.
5. Understanding retirement benefits. A spouse should know the after-tax value of employer and individual retirement accounts that belong to each spouse.
- Spouses younger than age 59 who need income from retirement accounts should ask their tax adviser if there are ways to potentially avoid the 10 percent premature-distribution penalty. For example, a Qualified Domestic Relations Order (QDRO) distribution directly to a spouse from the ex-spouse’s employer-sponsored qualified retirement plan may be available.
- If a spouse wants an ex-spouse to remain a beneficiary, some accounts may require filing a new beneficiary designation form after the divorce, even though the ex-spouse may already be named as a beneficiary.
6. Reviewing and updating estate-planning documents and strategies. Spouses should determine if their exes should continue to be designated as a primary or secondary beneficiary, an executor or personal representative, and a successor trustee or agent under healthcare and property powers of attorney. Less common items that should not be overlooked include:
- disability insurance;
- long-term-care insurance;
- company benefits.
Although this information is not comprehensive, a review of itcombined with a discussion with a financial advisor, tax adviser and attorneycan help spouses understand their situation and options. These conversations may uncover additional issues or concerns or lead to opportunities that help divorcing spouses better achieve their long-term financial and life goals.
While the recognition of federal benefits is a welcome development, state laws affecting marriage, divorce, family relationships, discrimination and employment are still unfavorable for LGBT individuals in many states. As a result, it’s important to work closely with a qualified attorney and CPA in the state where you live to get up-to-date information in a rapidly changing tax and legal environment.
Wells Fargo Advisors is not a tax or legal advisor. Investment products and services are offered through Wells Fargo Advisors, LLC, member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Wells Fargo is No. 17 in the 2014 DiversityInc Top 50. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE.