MoneySmart: Retirement

Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
by Grace S. Yung

Due to the federal Defense of Marriage Act of 1996, the word “marriage” only refers to a legal union between one man and one woman as husband and wife. And although several states have allowed same-sex unions over the past several years, these married domestic partners are still not considered to be legally married for federal tax and inheritance purposes.

What this essentially means is that a majority of retirement-related benefits that are readily available to legally married couples are not open to those who are in domestic partnerships—even if they reside in a state that allows same-sex marriages.

Therefore, the spousal benefits that are typically obtained through Social Security, pensions, and other retirement income-generating sources are in effect unheard of in a domestic partnership situation. Because of this, alternative forms of retirement income planning must be undertaken.

The Annuity Solution

As a single individual, the retirement income that is generated from Social Security, a 401(k) plan, and other similar types of vehicles will typically not allow for a continuation of that income to a surviving domestic partner. In many cases, this can leave long-term partners unintentionally destitute in their senior years—even after a lifetime of commitment to a significant other.

The purchase of an annuity, however, can open up more options in terms of a reliable retirement income, and in some cases can even offer an income that cannot be outlived. Annuities can be funded either with a single lump-sum deposit or with regular deposits over time, while the funds inside of an annuity are able to grow on a tax-deferred basis until they are withdrawn.

There are two primary types of annuities. A fixed annuity provides its holder with a guaranteed rate of return. Although the low interest rates on fixed annuities are comparable to those of bonds and CDs, these products do offer safety of the principal that is in the account.

The other type of annuity is a variable annuity. For more details on how variable products could suit one’s unique circumstances and risk tolerances, please consult with a qualified financial advisor.

Predictable Lifetime Income

Upon reaching retirement, many annuity holders will convert their annuities from the “accumulation” phase to the “payout” phase. One way to receive a payout is to annuitize a contract. Annuitization will then begin providing a regular income stream based on the life expectancy of the annuitant (the individual receiving the payments), as well as to a second individual, if the “joint and survivor” option is chosen. Although annuitization may not always be the answer, it is certainly one option.

When planning for future retirement income, domestic partners may want to take a close look at annuities with a joint and survivor payout option upon annuitization. This type of payout is based on both partners’ ages, and it can allow for a specific amount of income to be regularly received by the partners—even after one passes away—regardless of whether or not they are a legally married couple.

In addition, annuities typically avoid the probate process because they are a contractual agreement, and therefore will pass to a survivor by contract. This can help in bypassing a situation such as the contesting of the first decedent’s will by family members who may disapprove of the domestic partners’ relationship.

The Bottom Line

This outline highlights just some of the areas that need special attention when planning for domestic partners. Because all situations are unique, it is always a good idea to discuss the implications of taxation—especially those having to do with non-married partners—with a professional tax advisor.

It is also imperative to work with a financial professional who is not only up-to-date on federal and state tax laws, but also one who has an in-depth knowledge regarding wealth generation and asset protection methods specifically for domestic partners and the LGBT community.

Editor’s note: This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Grace S. Yung has over 18 years experience as a certified financial planner and is a principal at Midtown Financial Group, LLC, in Houston.



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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