…for same-sex couples with an age gap
by Grace S. Yung, CFP
While almost every couple struggles with financial issues at some point in their relationship, same-sex partners have traditionally faced a whole host of challenges that require specialized planning. Although the 2013 decision to overturn a portion of the Defense of Marriage Act with regard to federal benefits eligibility has opened many doors, many couples still need to plan their finances very carefully in order to accomplish specific goals.
Same-sex couples who have a significant age gap of 15 or 20 years can face potential issues that those who are closer in age may not even think about, such as planning for a long-term continuation of income, potential incapacity and care-giving responsibilities, and specialized gifting and asset-transfer strategies.
Assuring Ongoing Income
A majority of couples who are of the same generation may have dreams of retiring together and “pooling” their income when both spouses or partners stop working.
For many same-sex couples, annuities have provided a way to ensure ongoing retirement income for both spouses or partners—unlike many employer-sponsored pension plans that have often traditionally required the joint income recipient to be a legally married opposite-sex spouse.
By obtaining an annuity with a joint and survivor income payout, the payments continue throughout the lifetimes of both income recipients. Joint and survivor annuities will also avoid probate, and can therefore reduce the likelihood of a contest of a partner’s will.
There can, however, be a drawback to this strategy when it comes to couples with a large age gap. This is because the amount of the lifetime income payments from the annuity are calculated based on the joint life expectancies of the annuitants—meaning that the younger partner’s age may reduce the calculated benefit amount substantially. There is a way around this, though.
For example, there are many different riders that can be included with annuities that can add features such as a death benefit. Here, the older partner could purchase a single life annuity that has a death benefit feature and then name the younger partner as the beneficiary.
This type of annuity would provide income payments over a set period of time—even if the older annuitant passes away before the time period expires. By including the death-benefit rider, you would be able to prevent a complete loss of what was paid into the annuity if the older partner dies before the start of the annuity income payments, or prior to a set time after the income payments have begun. The funds from the death benefit could even be used by the younger partner to purchase another annuity that he or she can use for their own retirement income.
Planning for Potential Incapacity and Long-term Care Needs
Although many people don’t like to discuss it, the issue of long-term care has to be addressed, because it could eventually become a reality. Long-term care insurance should be considered for the older spouse or partner, as this coverage can help to pay for necessary care, as well as to protect assets for the younger partner going forward.
This may also be the time to consider appointing each other to handle personal, medical, and financial needs should incompetency occur. For example, a durable power of attorney will allow another person (or entity) to act on your behalf in making financial and/or medical decisions. A living will allows you to explain in writing what you do—and do not—want in terms of medical treatment such as resuscitation.
Getting these documents in place is important because even in states that allow same-sex marriage, it is never a good idea to assume that an incompetent person’s same-sex spouse or partner may be given first priority in making medical decisions.
Gifting and Asset Transfer Strategies
A great way to remove assets from estate taxation—and to potentially help a domestic partner financially at the same time—is to take advantage of some items that are exempt from gift taxation. These can include making direct payments that qualify for educational and/or medical exemptions.
These exemptions are unlimited in their amount, and they don’t count toward the annual exclusion. They can be made without regard to the relationship between the donee and the donor, so there is no requirement that the partners have to be married in order to take advantage of this particular strategy.
For example, payments can be made directly to a qualifying educational institution for an individual’s tuition. In this case, if the younger partner is attending school, the older partner could pay his or her tuition and reduce their taxable estate at the same time.
Likewise, a younger partner who wishes to reduce their taxable estate could essentially pay for an older spouse or partner’s medical expenses. As with the tuition, payments must be made directly to the individual or institution that provided the medical care—and the payments cannot apply to amounts that are paid for care that is reimbursed by a person’s health or long-term care insurance.
The Bottom Line
While there are solutions available for income, healthcare, and asset-transfer needs of couples who have a large age gap, it is always best to first discuss your situation—because each one is different—with a financial professional who specializes in working with the LGBT community.
Personal finance-related questions may be e-mailed to [email protected]
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 2014 September issue of Texas Monthly.