"The gay market is not well-served in financial planning," said Harold Lustig of American Express Financial Advisors Inc. in San Francisco.
One common problem is that gay couples may rush into joint ownership of a home when they are not legally protected in a breakup like a straight married couple. Another typical issue: If a gay partner dies, how can the surviving partner keep assets from b eing lost to the deceased's family, which may frown on the relationship? And lastly, what's the best way to insure one's self against HIV and AIDS?
Lustig said another issue for any couple, gay or straight, is the tendency of most people to put off making important financial decisions until a crisis or emergency hits.
"Denial and procrastination are the main roadblocks to getting ahead financially," Lustig said. "I tell clients to think of their financial plan as a blueprint, and to think of me as their business partner. What are their long-term and short-term goals? By the time they walk into our office, they're ready to rock 'n' roll."
American Express Financial Services and its advisors are earning a solid reputation for serving the lucrative gay market. But keep in mind that the company, formerly known as IDS Financial Services in Minneapolis, makes money from investing your retireme nt money. The firm manages $115 billion in clients' money in mutual funds, life insurance, pensions, limited partnerships and U.S. Treasury securities.
Lustig said each financial plan drawn up by advisors goes through "very rigorous" review by district managers. "We have very high ethical standards," Lustig said. "Cowboys get fired."
The clients
John is a 46-year-old teacher who makes $35,000 a year. Jack, a 44-year-old computer consultant, earns $65,000 a year. In addition to their home, John inherited a duplex worth $500,000 that he rents out. He wants to sell it as soon as possible.
Their goals
Insurance: Lustig recommends life insurance policies of $200,000 each for John and Jack.
A "variable universal life" policy is probably best. It would allow John and Jack to change their coverage and premium payments as their circumstances change, while also letting the cash value of their policy be used for investments. The insurance compan
y guarantees a minimum-death benefit, but policyholders must eat the investment losses.
Many use this insurance as added retirement income, Lustig said. One strategy is to use pension and 401(K) money in the early years of retirement, then use the insurance income in later retirement. To cover the possibility of HIV or AIDS, Lustig suggest s that John and Jack buy long-term care insurance for nursing care at home or a nursing facility. Nursing costs an average of $150 a day, or $54,000 a year, and is rising at 8 percent a year - twice the rate of inflation. Lustig said it's wise to lock in today's premium costs. For 46-year-old Jack, the insurance would cost $2,000 a year.
Rental real estate: To avoid capital-gains tax on the sale of his duplex, John should put his property in a charitable remainder trust. The trust will pay an income to John and Jack, with the tax-free balance going to a charity after they die.
In this case, the trust can sell the duplex for $500,000, then invest the money at an 8 percent rate of return. If John sold the property on his own, he would receive an income of only $28,000 a year. By using a charitable trust, he'll enjoy $40,000 a yea r. Using a trust, John and Jack also can take income tax deductions. "Some very creative tax-planning strategies can be done here," Lustig said.
Retirement: John and Jack wish to retire as soon as possible. They'd like to live in a beautiful home, not a cramped condo or apartment. They'd also like to travel and keep their current lifestyle. With only $60,000 in their pension and 401(k) ac counts, they need to gun their investment engines.
Most of their cash is in savings accounts and certificates of deposit and weak stocks and bonds. Lustig suggests a brawnier portfolio of large U.S. company stocks (33 percent), global stocks (21 percent), smaller company stocks (17 percent), riskier growt h stocks (12 percent), tax-deferred vehicles such as IRAs (15 percent) and bonds (2 percent). Any partner can be named as beneficiary on an IRA or life insurance policy. But if a partner dies, the gay beneficiary cannot make tax-deferred payments into t he IRA until age 59-1/4, as can married beneficiaries. Rather, the IRA must be redeemed and the income is taxable.
Estate planning: John and Jack want to avoid legal challenges from family members who may be unhappy about their gay "marriage." To protect their assets, Lustig said they should use financial vehicles that allow beneficiaries or have "transfer-on -death" provisions. Mutual funds, IRAs, annuities and life insurance contracts are some examples. Their wills should state clearly that the surviving partner ought to receive the property as the other joint tenant.
"Stating this in a number of legal documents shows the courts that it really was your intention, and not something done accidentally or casually," Lustig said.
John and Jack also should see a lawyer to draw up living wills, durable power of attorney and durable power for health care documents. Lustig strongly suggests that all legal documents and insurance contracts should be in place before illness strikes.
"You want as many layers of protection as possible," Lustig said.