11/02/2015
How our One-Stop Shop for Legal, Tax, and Wealth Management Solved a Same-Sex Couple’s Unique Problem

How our One-Stop Shop for Legal, Tax, and Wealth Management Solved a Same-Sex Couple’s Unique Problem

Our story for solving a unique problem is as follows:

In the summer of 2013 we were referred to a new client, a same-sex couple that wanted to retire within the two years and needed a financial plan to determine the best way to get them there. They were highly educated dual income professionals, and had been in a committed relationship together for more than 20 years. They wanted to maintain their current standard of living in retirement, including travel and vacations, and were not adverse to the idea of working part-time in retirement. They had investable assets of approximately $1.6 mil, all pre-tax money in retirement accounts, in addition to significant real estate holdings; a vacation home and a rental property in Florida they owned together, plus their primary residence in this area, which one of the partners had purchased a long time ago and was owned is his name individually.

We completed a comprehensive financial plan and developed an investment strategy consistent with their time horizon, objectives, and risk tolerance, which was in the Moderate range. We also ran Monte Carlo analyses to determine their probability of success under multiple scenarios, including various levels of lifestyle expenses, both partners working part-time at the beginning of retirement, and selling one or more of their properties. Through our sister company, the Cohen & Burnett law firm, we also developed an estate plan and redid their estate planning documents,  creating wills, powers of attorney, and advanced medical directives and establishing living trusts to avoid probate and efficiently direct assets to their respective heirs.

Much of their net worth was tied up in illiquid real estate and not surprisingly, the scenarios with the higher probability of success involved selling their primary residence, relocating to Florida, which has lower cost of living and no state income taxes, and working part time for a few years to delay significant withdrawals from their retirement account.  However, there were two issues these scenarios failed to address: health care costs in retirement for one partner and capital gains on the sale of the residence.  First, one of the partners had worked for a health care provider that offered lifetime medical benefits for retirees and their spouses, but they did not extend coverage to domestic partners. Second, their house, owned by one partner, had appreciated significantly over the years and now had over $600,000 in unrealized capital gains that would be taxable upon its sale.

For someone retiring today, out-of-pocket medical costs can amount to $200,000 or more over the rest of their lifetimes, and one partner having to purchase medical insurance would add $500 each month to their lifestyle expenses. Furthermore, long term capital gains taxes on the sale of their real estate would be about 25% including both local and federal taxes. For single people, the first $250,000 of capital gains on the sale of the primary residence is exempt from taxes, but for married couples, the exemption amount is $500,000.

Then we got a fantastic stroke of good luck. In August 2013, about the same time we were completing their financial plan, the US Treasury/IRS ruled that same-sex couples, if legally married in jurisdictions that recognize their marriages, would be treated as married for taxes purposes. This analysis and the IRS ruling lead us a simple conclusion; to maximize their probability of success in retirement, they not only had to reallocate their investment portfolio and implement our other financial recommendations, they had to get married!

We presented our findings and recommendations to them later that month, including advising them to get married prior to selling their residence, which they seemed receptive to.  I certainly can’t remember another time in my 20 plus year career that I was able to provide a client with matrimonial and financial advice at the same meeting. We implemented the recommended portfolio changes and they began readying their house for sale, but we did not hear anything from them for a while after that. About three months later, I received an email link to a video of their wedding proposal, and about two months after that, my wife and I got an invitation to the wedding.

It was the first same-sex wedding that I’d been invited to and one of the most elegant and inspiring ones that I have ever attended. The ceremony was moving, the venue and guests were fantastic, and the food, drinks and entertainment were amazing. I will never forget the Flintstone size lamb chops oeuvres they served during the cocktail hour.

Best of all, at the reception, they told all the guests that our firm’s advice was the reason they had finally decided to get married! It was really gratifying for us to be able to give them the right advice at the right time, just as the law was changing.

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