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Working around the denial of your government benefits
by Grace S. Yung
According to the 1996 Defense of Marriage Act, “the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband and wife.”
Based on this, a report put out by the U.S. Government Accountability Office states that there are over 1,100 federal statutes in which marital status is a factor in determining or receiving federal benefits, privileges, or rights.
What this means is that same-sex partners who are married under state law are not recognized as such by federal law. Only those who are legally married to someone of the opposite sex may take advantage of federal benefits. However, with alternative planning, there are ways to help ensure that partners and other loved ones are not left out in the cold.
Paying for Benefits That May Not Be Received
Throughout one’s career, an individual is typically required to pay Social Security (FICA) taxes. Typically, just over 12 percent of a worker’s salary goes to the Social Security system, while another 2.9 percent goes to Medicare.
In most cases, half of these percentages are automatically deducted from an employee’s paycheck, while the other half is paid directly by the employer. However, for those who are self-employed, the entire amount is due.
Although these taxes are deducted from workers’ pay regardless of their sexual orientation, not all benefits are paid out equally. For example, a few of the government benefits that are allowed for a legally married spouse but not to a domestic partner include:
• Social Security Spousal Benefit. A spouse is entitled to benefits that are based upon the other spouse’s work history, both while the other spouse is alive, as well as after his or her death;
• Surviving Widow(er) Social Security Benefit. A surviving widow(er) is entitled to a one-time $255 death benefit when his or her spouse passes away;
• Spousal Disability Social Security Benefit. A legally married spouse is also entitled to benefits from Social Security if the other spouse becomes disabled and qualifies for such benefits with regard to the disability.
In fact, within certain guidelines, even divorced heterosexual spouses are entitled to Social Security benefits that are based on their former spouse’s work history (provided that the marriage lasted at least ten years and that the potential benefit recipient does not remarry)!
Another of the government’s programs, Medicaid, is a needs-based medical assistance program that is funded by both the federal and state governments. The qualifications for receiving benefits are also established by both federal and state law.
In order to be eligible for Medicaid nursing home assistance, for example, an individual must pass medical, income, and resource tests. Essentially, one must be at their state’s poverty level to qualify for such benefits.
In a situation with legally married spouses, this system has special rules in place that protect the healthy spouse from becoming impoverished, and allowing them to keep a certain amount of resources that will not affect the ill spouse’s eligibility for benefits. These rules, however, do not apply to the domestic partner of the benefit recipient.
Designing Possible Strategies
Because domestic partners are not allowed to participate in spousal-related federal benefits, it becomes even more important to plan for potential situations that could have an impact on one’s financial situation.
While all situations will be different, just some of the possible strategies may entail:
• Designing a disability and/or long-term care insurance policy that pays income benefits to the insured partner while alive;
• Setting up an annuity that pays income benefits to both partners, even if one should pass away;
• Purchasing a life insurance policy with one’s partner as the beneficiary, so as to provide a lump-sum death benefit to help in supporting the survivor should the insured pass away. In this case, even if the partners separate, as long as the partner in question remains the beneficiary, and the premium continues to be paid, benefits will be paid. As long as an “insurable interest” existed when a life insurance policy was purchased, the partner-beneficiary will still be eligible to receive the policy proceeds, even in the event of the partners’ separation. This can be especially beneficial if one partner is the primary income earner while the other has focused more on duties at home. In these cases, it is important to have all of the details regarding titling and policy ownership set up in the proper manner.
All situations will call for an overall plan that uniquely fits with an individual or partners’ goals. Therefore, in order to best prepare for your financial needs, all planning should be done through a qualified professional who is well-versed in these types of issues. To help ensure the outcome that you desire, it is best to have an accountant or CPA, as well as your financial professional, working together in order to pursue the very best results.
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.
See other MoneySmart columns:
Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act
Protecting your Wallet and your Heart (October 2012 OutSmart)
How and when to keep assets separate—even when you’re madly in love
Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home.
Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?
Protecting the Things that Matter (July 2012 OutSmart)
How those in the LGBT community can use life insurance planning strategies
When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement
Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?
The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price
Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning
Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t