Financial Planning Essentials for Same-Sex Couples

Anyone on the cusp of retirement has a lot to consider, from where to live and what to do with your time to the finances that will carry you through the rest of your life. But same-sex couples have additional financial hurdles that make careful planning an even greater priority. 
 
For instance, Social Security doesn’t recognize same-sex marriages, which can deal a significant financial blow in retirement.
 
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Here’s an example of the difference in benefits for a heterosexual married couple (Frank and Sally) and a same-sex couple married under state law (Fay and Susan):
 
Assume that the monthly Social Security benefit for Frank and Fay is $2,000 each; Sally and Susan each receive $1,000. If Frank dies before his wife, she will be eligible for Social Security's spousal benefit, increasing her payment to $2,000. But if Fay dies, Susan's monthly check won't change because there is no spousal benefit for same-sex couples. She'll continue to receive $1,000, half of Sally's revised payout.
 
In my financial practice in Lititz, Pa., I work with many same-sex clients and often need to tell them that our tax code, Social Security system and estate laws are written under federal, not state, guidelines, and that same-sex marriage is not recognized under federal law.
 
So even if a couple has tied the knot in a state where same-sex marriage is recognized — Connecticut, Iowa, Massachusetts, New Hampshire, New York and Vermont, as well as the District of Columbia; Maine, Maryland and Washington legalized it in the November 6 election — they don’t have access to federal spousal benefits. (The Supreme Court is expected to eventually rule on the Defense of Marriage Act, which was passed by Congress in 1996 and signed into law by President Bill Clinton. It defines marriage as a union between a man and a woman.)
 
Here’s what I encourage same-sex partners in their 50s and 60s to consider doing so they can best manage their personal finances:
 
1. Make sure your partner is listed as the primary beneficiary on all your financial accounts. This will ensure that your stocks, bonds, mutual funds, bank accounts, retirement funds, annuities and life insurance policies will automatically pass to your partner if you die first. Not taking this simple, often overlooked step can create significant challenges for the surviving partner. 
 
If you haven’t named a beneficiary on these accounts and you don’t have a will, you’ll be letting your state decide what to do with your assets. In many cases, that means the accounts will default to the immediate bloodline family of the deceased.
 
If you do have a will that states you want your partner to inherit your assets, your partner would most likely be the beneficiary for financial accounts. But this scenario opens the door for your partner’s family to contest these distributions, particularly if family members are not entirely supportive of your relationship.
 
2. Analyze employer plan beneficiary options for retirement. At retirement, you may be allowed to choose a benefit option for your employer-sponsored savings plan that will provide a steady stream of income. As a “single” person (in the legal sense), you may be encouraged by your employer to take the single benefit payout option. But don’t get swayed into this choice if you want to protect your partner.
 
Instead, set up your benefit payouts to provide a steady stream of retirement income for yourself and your partner. Talk to your human resources department or retirement plan provider. Federal or state employees and public school teachers can discuss retirement income options with their retirement counselors.
 
(MORE: Estate Planning Essentials for Gay and Lesbian Couples)
 
This would also be a good time to look at any “orphaned” retirement accounts you have from previous jobs and consider rolling that money into an IRA that would guarantee a lifetime income for you and your partner. Be cautious if you see the word “spousal” in the retirement account documents, since that term may not cover non–traditional spouses.
 
3. Consider a Roth IRA. Choosing a Roth IRA rather than a traditional IRA can make a big difference in how your retirement money will be taxed during retirement and after your death.
 
A Roth IRA — as well as a Roth 401(k) and Roth 403(b) — can pass to your partner with tax-free earnings as long as you named him or her as the beneficiary.
 
There are two tax drawbacks to a traditional IRA for same-sex couples.
 
First, each of you will be taxed as a “single” person when the IRA money is withdrawn. This could effectively reduce your Social Security income more than for a married couple, due to the way these benefits are taxed. Up to 50 percent of Social Security benefits are taxed once your income hits $25,000 if you’re single; for married couples filing jointly, the threshold is higher: $32,000.
 
Second, a traditional IRA can impose a heavy one-time tax burden on your partner after you die. Your entire traditional IRA would be taxable immediately. By contrast, a traditionally married couple could set up a beneficiary IRA, stretching the tax payments over their lifetimes.
 
4. Look into life insurance. A life insurance policy is the best way for same-sex couples to cross-insure each other and compensate for missing out on spousal death benefits. It’s also an opportunity to provide tax-free income to the surviving partner.
 
Generally, I advise my same-sex couple clients to have more life insurance than traditional couples to help compensate for some of the lost spousal benefits.
 
5. If you own a home, make sure you’re joint owners. That way, the home will automatically pass to the survivor, who may then be able to avoid paying inheritance taxes. (If one of you owns a home alone, make sure that person's will says the partner has the right to inherit the property.)
 
You can use life insurance and bequests to your partner through your will to help pay for any inheritance taxes on the house. In many cases, these taxes may be higher than for a married couple, since you aren’t allowed to take advantage of the unlimited federal marital deduction.
 
Inheritance taxes vary by state, though, so it’s a good idea to research the rules where you live. I recommend you visit the Lambda Legal website for information on state same-sex laws. That might help you and your partner keep more of what you own.


Neither ING Financial Partners nor its representatives offer tax advice.