Gay Money Matters (part 2)

GayMoneyMatters_2Protecting your assets . . . even when the rules don’t

by Grace S. Yung, CFP

Planning your financial future involves many different rules and risks. For example, there are rules on how much you can contribute to your IRA and 401k plan each year, rules on sheltering your assets from estate taxes, and rules on how much you and your family members can receive from government retirement programs such as Social Security.

Along with these investment rules come certain investing risks. There is market risk, economic risk, interest rate risk, and inflation risk, just to name a few.

Oftentimes, people enlist the help of a financial advisor to help coordinate their retirement savings and estate planning efforts, ensuring that they follow the rules and avoid as many risks as possible.

But what if you follow the rules, avoid the risks, and build up a nice nest egg, only to discover that there is another set of rules that disqualify you from many of the programs and financial benefits that are available to most other people? If you are in a same-sex relationship, there are indeed rules that can undermine your financial security.

Although all investors face many similar issues, same-sex domestic partners face an additional set of challenges when it comes to saving, transferring, and passing on assets. Same-sex couples need to do a lot of financial and legal work in order to protect themselves and their assets as effectively as opposite-sex married couples do. In fact, according to the American Civil Liberties Union, there are over 1,000 federal and state benefits offered only to legally married couples. The legal definition of marriage prevents same-sex couples and domestic partners from enjoying the same tax, inheritance, and employment benefits as legally married couples.

For example, Social Security spousal benefits allow an individual receiving retirement benefits to claim a larger payment, based on the qualifications of an opposite-sex spouse who has a higher income history. These benefits are even available to divorced opposite-sex spouses if their marriage lasted at least ten years. However, no matter how long they have been partnered, same-sex couples are denied this benefit. In addition, spousal disability and veteran’s benefits are not available to same-sex domestic partners.

Tax laws and other regulations of 401(k)s and pensions discriminate against same-sex domestic partners, potentially costing the surviving partner tens of thousands of dollars per year, and possibly over $1 million during the course of a lifetime.

In federally recognized marriages, any estate taxes are deferred until the second spouse dies, because the couple is considered a single economic unit. However, if a partner in a same-sex domestic partnership wills assets above the estate tax threshold, the surviving partner will owe these taxes within nine months of their partner’s death. And, on top of that, estate taxes may then be due again on the same money after the second partner passes away.

Because the federal government refuses to recognize same-sex marriages, domestic partners are disadvantaged in their ability to pass on their wealth to their partners and their children. In fact, federal law currently allows opposite-sex married couples to shelter an additional $3 million in capital gains when their partner dies.

In spite of these unfavorable laws, however, there is good news. You can still protect your assets, provide for retirement, avoid discriminatory penalties, and ensure that you and your partner enjoy and share what you’ve earned together—provided that you are knowledgeable about the ins and outs of financial planning for same-sex domestic partners. There are options available to you.

Grace S. Yung has over 15 years experience as a certified financial planner and is senior vice president at Old Course Investment Partners, LCC, in Houston.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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