New Financial Planning Essentials for Same-Sex Couples
Five steps for gay and lesbian partners, in light of today's Supreme Court ruling
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.
And today's landmark Supreme Court decision overturning the Defense of Marriage Act, or DOMA — defining marriage as a union between a man and a woman — could have an enormous impact on their financial lives.
Under DOMA, Social Security doesn’t recognize same-sex marriages, which can deal a significant financial blow in retirement.
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 until today same-sex marriage was not recognized under federal law.
It will likely take time for the dust to settle to see exactly how the Supreme Court's ruling will impact access to federal benefits for married gay couples in all states. Since marriage is defined by whether a couple is legally married in a state and same-sex marriage is not legal in all states, time will tell how the ruling will be interpreted and handed down to the states by the federal government.
Same-sex marriage is currently recognized in 13 states — California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington — as well as the District of Columbia.
While the court's ruling is likely to help many married same-sex couples gain access to federal and spousal benefits, same-sex partners in their 50s and 60s should still consider taking these steps 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.
Prior to the ruling, if you hadn’t named a beneficiary on these accounts and you didn’t have a will, you’d be letting your state decide what to do with your assets. In many cases, that means the accounts would default to the immediate bloodline family of the deceased. With the ruling, a married spouse has more power to inherit assets regardless of having no named beneficiary or a will. Remember though, how this plays out will depend on the federal government's interpretation of the ruling.
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. Married individuals may now be able to be listed as a "married" person (in the legal sense) and may now be encouraged by their employer to take the benefit payout option with a spousal feature.
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.
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. The Supreme Court ruling makes it more likely that the word "spousal" in the retirement account documents will cover non-traditional spouses.
3. Consider a Roth IRA. Prior to the court's ruling, choosing a Roth IRA rather than a traditional IRA made a big difference in how your retirement money was taxed during retirement and after your death. A traditional IRA imposed a heavy one-time tax burden on your partner after death, as your entire traditional IRA was taxable immediately. Now though, you can most likely set up a beneficiary IRA, stretching the tax payments over your spouse's lifetime.
4. Look into life insurance. A life insurance policy is the best way for same-sex couples to cross-insure each other. Prior to the ruling, life insurance helped compensate for missing out on spousal death benefits, and it may still do that depending on how the court's decision is implemented. Life insurance is still an excellent tool for same-sex couples to protect each other. 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. This may not be as important as it was for same-sex couples who gain access to spousal benefits now.
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. With the overturning of DOMA, these taxes may no longer be higher than they are for a heterosexual married couple, since same same-sex couples may now be 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, even after today's Supreme Court ruling. 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.