Although nontraditional couples are moving mainstream, relatively few financial firms and advisors have yet focused on their specific needs. This article will give you:

1. An overview of key planning/tax issues that affect the market; and
2. Links to more in-depth information.

Next week, I will provide ideas for marketing your services to nontraditional couples.

Evolving laws and rights

States extend rights to same-sex couples on three levels:

• Same-sex marriages create a legal union under a state-authorized license, putting same-sex couples on equal footing with traditional couples. With the overturning of DOMA by the Supreme Court, federal laws may no longer deny same-sex marriage rights. For federal tax purposes, the IRS will now look to state or foreign laws to determine whether individuals are married. For tax year 2013 and going forward, same-sex spouses generally must file jointly (or married filing separately). They are not required to amend prior-year tax returns, but they may choose to amend returns back to 2010.

• Civil unions give same-sex couples rights similar to those of married couples. For example, New Jersey issues a Civil Union License that conveys rights comparable to marriage. For state income tax filing purposes, New Jersey same-sex couples may choose a "Married/Civil Union Couple" joint return, and group health insurance must be offered to civil union partners, the same as to married partners.

• Domestic partnerships are legally-authorized personal relationships between two individuals (of either gender) who live together, without marriage or civil union. State law may allow domestic partnership agreements for purposes of titling and controlling property and sharing income. You can view a sample domestic partnership agreement form here: www.hrc.org/documents/Domestic_Partner_Agreement.pdf.

The IRS does not consider civil unions and domestic partners to be marriages, for federal income tax purposes.

Planning issues for nontraditional couples

Here are several issues financial advisors encounter in advising these couples:

Social Security benefits – Spouses of Social Security workers are entitled to survivor benefits and up to 50 percent of the worker's retirement benefit. When one partner previously has been married for 10 years or more (and does not remarry), that person is entitled to Social Security benefits under the former spouses' work record. With the repeal of DOMA, thousands of partners in same-sex marriages – and even a few divorced same-sex spouses – will qualify for higher Social Security benefits.

Exclusion of gain on sale of residence – Under IRC Code Section 121, capital gain on the sale of a main home may be excluded from the gross income of the seller up to $250,000 for a single filer and up to $500,000 for a married couple filing jointly. To qualify, the home must be owned and used as a principal residence for at least two years during the five years prior to sale and the taxpayer must not have used the exclusion in the two prior years. (For married filing jointly taxpayers, only one spouse must meet the ownership test.)

Example: Margaret bought a starter home five years ago, and then she and Mary married under state law. They decided to renovate and expand the home, so Mary's name was added to the deed. Although Margaret's cost basis may be less than Mary's (because she bought sooner), they now will jointly qualify for the $500,000 exclusion. Previously, they each had to qualify separately, as joint owners of the home, subject to a $250,000 exclusion limit.

Health care benefits – Several states that have legalized same-sex marriage or civil unions require group health insurance plans to cover partners. Many employers have chosen to extend similar benefits. Now that the IRS recognizes same-sex marriages, the value of employer-provided benefits for a same-sex spouse will not be federally taxable. Same-sex spouses who previously paid extra federal tax to declare employer health benefits in 2010-12 may file amended returns.

Also, the federal COBRA law provides for group health insurance continuation for spouses and dependents of workers who have been downsized or laid off. Now, it also will protect same-sex spouses.

Family and medical leave

Under the federal Family and Medical Leave Act of 1993, spouses may take up to 12 weeks of unpaid leave from work to care for a seriously ill spouse, parent or child. Federal law now covers same-sex spouses, as well as parents, legally responsible for children in nontraditional households.

Retirement plans and pensions

Upon the death of the owner of a qualified retirement plan or IRA, a spouse beneficiary may choose to treat the account as his/her own by transferring ownership and recalculating minimum distributions. Now, this choice will be available to same-sex spouses.

Most qualified retirement plans are required to offer a Qualified Joint and Survivor Annuity (QJSA). A spouse who has been married more than a year has the right to choose this payout option, to assure his/her interest in the plan, unless the right is waived in writing. A divorced former spouse may have QJSA rights awarded by a court under a Qualified Domestic Relations Order (QDRO). Previously, same-sex spouses who wished to protect pension rights had to do so through private legal agreements. Now, they are protected under federal law.

Wills, beneficiary designations, living wills and healthcare proxies

Under a change made in the Uniform State Probate Code in 2009: "A parent-child relationship exists between a child of assisted reproduction and an individual other than the birth mother who consented to assisted reproduction by the birth mother with intent to be treated as the other parent of the child." The same act states that "a birth certificate identifying an individual other than the birth mother as the other parent of a child of assisted reproduction presumptively establishes a parent-child relationship between the child and that individual."

Example: Beth and Jill, an unmarried couple, want to have a child together that Beth will bear through assisted reproduction. To become the legal parent of the child in a state that has adopted the Uniform act, Jill should:

1. Consent to the assisted reproduction; and
2. List her name on the birth certificate as parent.

This makes the child legally hers for purposes of state support laws, IRS dependency tests, Social Security benefits and probate rights.

In most states, unmarried nontraditional couples have no legal rights to inherit each other's assets under state intestacy rules. This makes an updated will essential for transferring property between partners. If family members do not accept the partner and are likely to challenge a will's terms, the maker of the will may wish to consider adding an "In Terrorem" (no-contest) clause that penalizes anyone contesting its terms.

To maintain privacy, partners can use beneficiary designations on life insurance, annuities and brokerage accounts, as well as Payable on Death (POD) bank accounts. At the owner's death, assets will automatically and privately pass to the designated beneficiary.

If an individual's goal is to give a nonspouse partner decision-making responsibilities, planning for nontraditional couples should include:

• A durable power of attorney to ensure that accounts and affairs of an incapacitated owner will be properly managed;
• A living will to convey wishes for artificial life support during a terminal illness; and
• A health care proxy to designate a partner as a patient's advocate, for making health care decisions and choices.

Estate tax marital deduction

A cornerstone of estate planning, the unlimited marital deduction allows any amount of assets to pass to a U.S. citizen surviving spouse free of federal gift or estate tax. Although legally married same-sex spouses now will benefit from the deduction, other nontraditional couples may not. The absence of a marital deduction increases the need for creative use of trusts and life insurance to:

• Reduce federal estate tax; and
• Fund whatever costs and taxes can't be eliminated.

Medicaid spend down

Federal law sets limits on the assets and income that a spouse may retain, for an individual to qualify for Medicaid coverage of long-term care costs. Now that federal law recognizes same-sex spouses, spouses' assets/income will be linked for Medicaid eligibility rules.

FASFA reporting

If either spouse is a parent of a child who is attending college and applying for financial aid, married couples must report income and assets for both spouses on the federal Free Application for Federal Student Aid (FAFSA). However, this requirement does not extend to unmarried same-sex couples or domestic partners.