Unmarried Couples, Same-Sex Partners and Financial Planning

At a recent press conference, Republican presidential candidate Rick Santorum was asked about his position on same-sex marriage. Santorum is well-known as a social conservative, and is also a devout Catholic. He opposes the federal sanctioning of same sex marriages (a position, incidentally, he shares with President Barack Obama.)

Someone in the crowd pressed him on some of the perceived injustices that flow from the denial of formal recognition of same sex marriages. Santorum countered that it is not necessary for same sex couples to be married to get these benefits – these benefits are available under contract law.

Well, to a certain extent, that’s true. Whether same-sex marriages are formally and legally recognized or not, it is still possible to appoint your same-sex partner as your sole heir in your will, for example, or to name them in a health care power of attorney document, and the like. There’s no problem naming a same sex partner as a beneficiary of a life insurance policy (subject to general insurable interest rules that apply to everyone), or as the beneficiary of your annuity or retirement account.

There’s nothing stopping same sex couples from making important medical and financial decisions on behalf of an incapacitated partner – provided you do a bit of planning ahead of time.

But there are some important aspects of legal, financial and tax planning that remain beyond the reach of contract law to address. A recent article in the Journal of Financial Planning took a look at the legal and cultural landscape surrounding same sex partners – especially as they get older and are confronted with critical end-of-life planning decisions.

It’s more than same-sex partnerships at stake

From a financial planning point of view, there’s not much difference between financial planning for an unmarried same-sex couple and an unmarried heterosexual couple. So if you’re in a long-term boy-girl life partnership situation, for which, for whatever reason, you have not sought the imprimatur of marriage, this applies to you, too. Here are some takeaways, both from the article, and from my own experience with these couples and families.

Take Nothing for Granted

This is critical. If you can’t produce a marriage license, you can’t expect anyone else to automatically defer to your judgment regarding the best interests of an incapacitated partner. If you are called on to make medical decisions, you will not have the same standing to make them, even after decades of partnership, as a long-lost sister your partner hasn’t seen or heard from in 20 years.

If you want your life partner to be the one making decisions on your behalf when you can’t make them for yourself, and if you want to be the one making decisions for the person you love more than any in this world, you really need to dot your ‘t’s and cross your i’s.

Your partner is also going to have no standing in probate court, either. For married couples, of course, the general rule is that all assets will go to the surviving spouse, bypassing probate courts, unless there’s a will or contract specifying otherwise.

This means, of course, that a legally married spouse has significant protection against, say, a creditor. If her name isn’t on the debt, and her husband who took out the loan dies, the creditor ordinarily has no recourse against her.

But if she’s not married, no such luck. All assets will go to the probate court system, and the creditor will get a chance to make its claim, before she gets a dime. (Incidentally, this is true, even with a will. The IRS, state revenue officials, probate officials themselves, and legitimate creditors of the deceased all get their money before the heirs named in the will get to see anything. Furthermore, unless you name your unmarried partner in your will, he’s not getting anything. Probate officials are going to divvy up the deceased’s assets according to the default provisions of probate law. State laws vary in their specifics. But in general, assets will go to married spouse’s first (is the divorce final?), then to children and grandchildren, brothers and sisters and parents.

Go over the basic, primary financial planning documents any good planner is going to nag you about. Your living will, your power of attorney documents, any medical care directives, and your will, and make sure you name your partner specifically in those documents.

Ownership

Drawing up a few basic documents can help out a lot, but it’s not enough. You also need to pay close attention to how assets are titled. Otherwise, you and your partner can buy a home together, only to find out that when your partner dies, you don’t own the whole house. Instead, because of your state’s laws on how property is transferred, you could find out that your partner’s estranged ex-husband or brother actually owns half the house with you. Problem.

Retirement Planning

The most common issue with unmarried couples in retirement planning is they don’t get spousal benefits for Social Security. If a couple has been married for over 10 years, a surviving spouse gets half the deceased’s’ Social Security benefits. No marriage? No dice.

Estate Planning

Got more than $5 million in assets? Careful! You could have an estate tax problem on your hands. Under current law, the IRS charges a 35 percent estate tax on any assets over $5 million. If you were married, you don’t have to worry about that during either of your lifetimes – the surviving spouse gets an unlimited exemption. But since you’re not, if your partner dies with, say, $6 million in assets to his name including the home, then that estate is going to have to cough up about $350,000 in cash to pay the estate tax with.

Where’s that cash going to come from? And will it have to sell your home in order to do it?

The Legal Landscape

Legally, the landscape surrounding same sex couples who have been married in a state that does recognize same-sex unions is more complicated, because there are shades of gray. If you get married to a same sex partner in one state, as the article’s author points out, and you move, and then you want to get divorced, you won’t necessarily be able to get divorced in the state that you live in, if that state doesn’t recognize same sex unions. You’ll have to go back to the state that married you, or to another state that formally recognizes same sex unions, to have access to divorce laws.

All told, there are loads of issues with unmarried couples and same-sex couples that require a very close look, generally by experienced financial planners and legal professionals.

At Vaerdi, we certainly enjoy this kind of financial planning, and we value our clients, both same-sex and traditional, married and unmarried. The goal for all our clients is the same – to help you meet your financial goals and provide for the security of your family and loved ones.

For a detailed look at your personal situation and for help making sure you lay the foundations for success, both now and at the end of life, please give us a call and schedule an appointment.

How to Avoid the Financial Slaughterhouse

One of my favorite terms in the English language comes from the world of agriculture: The “Judas cow.”

The Judas cow is a cow that lives at the slaughterhouse. The staff takes great care of the Judas cow.
Her function is to meet the other cows coming off of the cattle cars, down the ramps and into the pens outside of the slaughterhouse. From there, the Judas cow settles the other cows down, and leads them calmly into the slaughterhouse. The staff, of course, lets the Judas cow through and out the other side. The rest of the cows, naturally, become dinner and boots.

So what does this have to do with economics and finance? Well, it has to do with considering the source of information. A few weeks ago, the National Association of Realtors published a glowing, bullish report on the future of the housing market.

Of course they’re bullish! (no pun intended!) The National Association of Realtors represents the real estate industry! Specifically, they represent agents who don’t get a commission unless houses are sold. When people are optimistic, they buy houses, and drive home prices (and commissions) up.  When people are pessimistic, they tend to wait. Deals don’t close, and realtors don’t get paid. Meanwhile, house prices fall on the deals that do go through, so realtors get hit with a double whammy: Falling volumes and falling commissions.

Let’s go back a few years: The National Association of Realtors actually had a staff economist, David Lereah, who was acting as the Judas cow for real estate investors. The National Association of Realtors called him an economist. But that wasn’t his job. His real job was in PR and Marketing. His real job was to sell the dream of homeownership and real estate investing, come Hell or high water.

And Lereah was a very efficient employee for the National Association of Realtors – lending an economists’ veneer of credibility to the positive marketing spin, publishing enthusiastic, bullish reports on real estate in the mid to late 2000s, even as the wheels were coming off. His dogged adherence to the NAR party line earned him rueful comparisons to Baghdad Bob, the hapless spokesperson for the Hussein regime who comically assured news viewers that American forces were being slaughtered in the desert even as U.S. tanks were overrunning the airport in Baghdad in 2003.

Lereah was the Judas cow of the housing crisis. And when he was no longer useful to the NAR, he made an exit to head his own firm, Reecon Advisors, to be replaced at NAR by Lawrence Yun. 

Curiously, once Lereah was no longer on the NAR payroll, his analysis took a much more bearish tone. Yun, of course, has consistently maintained that now is a perfect time to invest in real estate, all through the decline.

Of course, at some point, he’s bound to be right.*

Here’s what you need to know:  Lereah was not the only Judas cow out there. The practice of dressing PR shills up as economists or “analysts” and trotting them out before the cameras is common in the financial services industry. It’s even routine. Before Lereah, there was Mary Meeker and Henry Blodget, touting Internet stocks at any price, back in 1999 and 2000, hawking these stocks to the public even as they were confiding to each other that these earnings-less Internet stocks were far, far overpriced. Before them it was biotech. Before them it was the Nifty Fifty, and radio stocks. And so it goes back to the tulip bulb bubble of the 17^th Century in Amsterdam and beyond.

These financial Judas cows are everywhere – and they regularly infest the talking head news programs on TV. And precious few journalists are equipped to see through them. (If they were any good, most of them wouldn’t be journalists for long!)

That’s why we believe strongly in the value of fee-only financial planning. At Vaerdi, we receive no compensation from any outside interest. We don’t get a higher commission for steering you in or out of any investment. We have only one obligation: To give you the best, most unbiased financial advice you can get. Our job is to help you spot the Judas cows on TV and in the print media.

 *Incidentally, if you’re wondering, we’re neutral about whether it is, or not. Most of the time, personal and local factors are a much bigger part of that equation than any national projection for real estate asset prices. Direct ownership of real estate is so property specific, and person-specific, that we take each case one at a time, and broad national projections don’t factor much into it.

Fiscal Vs. Monetary Policy – and What It Means For You

This is an election year (in case that you hadn’t noticed). Which means the rhetoric is flying on both sides. And both sides have historically twisted the facts about monetary policy – and who benefits from what kinds of policies – in their favor.

To vote intelligently, though, you need to be able to see through the campaigning and make your own assessment based  on the actual economics – and not the veneer the campaigns put on it.

The twin engines of economic policy-making

The government has two basic avenues for economic policy: Fiscal policy and monetary policy. Let’s talk first about how they differ:

Fiscal policy is the policy the government makes through its spending decisions, but also through changes in the tax code. Congress – with the Constitutional “power of the purse,” directs fiscal policy, though the executive branch – under the President – also has  substantial ability to tinker with fiscal policy at the margins, through regulatory changes.

If the government spends more money than it takes in, and it doesn’t maintain significant sovereign reserves (the U.S. does not have a huge sovereign reserve fund, in practice), then the government must borrow the difference. That is, it must issue bonds.

In a nutshell: Deficit spending, all things being equal, is pro-jobs and pro-growth. It tends, also, to be pro-inflation – which means that foreign investment tends to fall and money has an incentive to leave the country – so deficit spending is only pro-growth to a point.  If world investors believe the U.S. cannot control its spending, they become worried that the U.S. will either default on its bonds, eventually – or inflate the currency so much that Treasury holders will lose money. Then the U.S. has to spend more money in interest payments to attract investors.

We’re seeing the beginning of this phenomenon with S&P’s downgrade of U.S. debt from AAA to AA last summer. However, that doesn’t hurt too badly yet – European sovereign debt looks even worse! American bonds are still buoyed by money fleeing the euro. Continued expansion of Asian economies, together with their huge savings rate of 30 percent plus (Americans, in contrast, save around 4 percent of their incomes, if that) also helps support U.S. bond prices – and keep yields low.

If Asia slows down, or if Asian consumers begin spending their money instead of banking it (all those savings have to go somewhere!), and if Europe gets its act together and starts  attracting “safe money” investors again, demand for U.S. debt may well fall – and interest rates will rise, which is really saying the same thing.

Monetary policy, on the other hand, seeks to control the overall money supply.

Here’s the dirty secret – which isn’t a secret: Congress does not directly control monetary policy – nor does the president, nor any other elected official. Instead, since 1913, monetary policy has been under the purview of the Federal Reserve – currently under the chairmanship of Ben Bernanke, in concert with a less well-known board of governors.

Originally, the Federal Reserve was founded in 1913 to take the edge off of the severe booms and busts that plagued Americans following the Civil War and through the turn of the century. These radical inflationary and deflationary cycles were wreaking havoc on workers, laborers, farmers and bankers alike. The Federal Reserve came about with a mission to act as a counterweight – moderating runaway growth cycles, and helping to stimulate the economy  during down times.

So how does the Fed do it? Mostly by controlling the money supply:

Buying and Selling Treasuries

Inflation is the result of too much money chasing too few goods.  If the Fed senses inflation, they can take money out of the economy by selling Treasury bonds. Any money they receive is essentially retired from circulation.

Similarly, if the Federal Reserve wants to stimulate the economy, they can increase the money supply – by buying Treasury bonds. The Reserve then credits the sellers’ balance sheets – and allows them to lend money against those reserves – magnifying the infusion of cash, and increasing the money supply.

This, in turn, makes it easier for borrowers to get credit.

The Federal Reserve has lately been increasing the money supply on a massive scale, in response to the fallout from the mortgage crisis. Normally, this is inflationary. But the Federal Reserve did so in order to prevent (they think) a massive deflationary cycle as a result of the collapse of the real estate and mortgage world.

Bank Reserve Requirements

The Federal Reserve can also encourage more or less lending by increasing bank reserve requirements. For example, the Federal Reserve could slow lending down – while shoring up bank stability – by requiring them to have six cents on hand for every dollar loaned out instead of four.

There’s a cost for this, though: If it gets too difficult to borrow, businesses don’t get opened, cars and homes don’t get financed, and workers lose their job.

The second major mechanism the Fed uses to impact monetary policy is setting the rate at the discount window. This is the rate the Fed charges banks to borrow overnight to maintain their reserve requirements – and it affects the Reserve Rate, which is the rate banks charge each other to provide overnight loans.

The lower the reserve rate, the easier it is to borrow – and the more banks are willing to lend, all else being equal. But if they get too willing to lend, then inflation heats up. If inflation rises above interest rates, it doesn’t pay to save.

The result is a massive transfer of wealth from savers to borrowers – which ultimately discourages investment and slows down the economy.

The Federal Reserve, then, is constantly walking a tightrope between trying to encourage reasonable growth and a very modest rate of inflation, without restricting too much and sending the economy into recession.

So Who Benefits? Borrowers vs. Savers

When it comes to monetary and fiscal policy, where you stand depends a lot on where you sit.

If you’re a net borrower – that is, if your balance sheet consistently shows you have borrowed more cash than you have on hand in financial instruments – you benefit from “easy money.” That is, you benefit from low interest rates, and policies that encourage growth even at the expense of accepting inflation.

This isn’t limited to credit card users and irresponsible borrowers. If you borrow a lot to finance your farming operation, or you borrowed to fund college, or real estate, or a small business, you’re in the same boat. Inflation lets you borrow today’s big dollars, and pay back smaller dollars tomorrow. If inflation is higher than your interest rate, you win,

If you’re a net lender, on the other hand, the opposite is true. Low interest rates hurt the returns you get on your savings – and allowing inflation to eat away at your wealth. High interest rates, however, go into your pocket – ideally to reinvest! This is true of anyone who lends, saves or invests more than they borrow.

And neither party is a reliable ally. For either of you.