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Marriage Equality: What It Means for Financial Planning

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By Grace S. Yung, CFP

On June 26, the U.S. Supreme Court came to an historic decision in legalizing same-sex marriage nationwide. This ruling, which instituted marriage equality in all 50 states, is considered to be the most significant decision ever in favor of LGBT rights. It also means that changes are on the way in terms of how LGBT couples will plan for the future.

Given this new Supreme Court ruling, same-sex couples who have tied the knot will now be able to move forward with their financial, tax, and retirement planning in a whole new way.

Retirement Planning

First, legally married same-sex couples are now allowed to share in each other’s Social Security and other retirement benefits. For example, when one spouse passes away, the surviving spouse is able to receive Social Security spousal benefits.

Being married also makes it much easier to take advantage of some of the Social Security benefit-maximization strategies that allow couples to access one spouse’s benefits early while deferring the other’s and building up that spouse’s delayed-benefit credit.

For example, using the “file and suspend” method, one spouse can file for their Social Security retirement benefits when he or she reaches full retirement age, and then immediately suspend them, while at the same time having the other spouse file for their spousal benefits—which will provide that spouse with a benefit of up to 50 percent of the primary earner’s benefit amount. Then, when the first spouse reaches age 70, he or she can begin taking their benefits, after having earned a delayed-benefit credit of 8 percent each year on the amount of their monthly retirement earnings.

It is important to note that only one of the spouses can file and suspend their Social Security benefits. Typically, it is best to have the spouse who has the higher amount of earnings do this, while having the lower-earning spouse initially file for the spousal benefits.

Legally married same-sex couples are now allowed to share in each other’s Social Security and other retirement benefits.
Legally married same-sex couples are now allowed to share in each other’s Social Security and other retirement benefits.

As a legally married spouse, an individual is able to more easily inherit the other spouse’s IRA or 401(k) benefits. In this case, the survivor can roll over his or her deceased spouse’s funds into their own retirement account, and taxes will continue to be deferred until the surviving spouse starts making withdrawals.

This can be incredibly valuable, as same-sex spouses can now choose to roll the money from a deceased spouse’s IRA or retirement plan into their own IRA so as to defer taxes and continue earning compounded growth.

If there is a significant age gap between the two spouses and the younger surviving spouse needs the money, then the survivor can put the funds into a beneficiary IRA and access the funds prior to age 59½ without penalties.

Income Taxes

There can also be some benefits in the area of income taxes—especially when one
spouse earns more than the other. For example, if one spouse earns considerably less, or opts
to be a stay-at-home mom or dad, then filing taxes jointly will likely lower your income-tax burden.

If, however, both spouses earn roughly the same amount of income, then filing jointly as a married couple could actually be a drawback. This is particularly true if each spouse is in a higher income bracket.

Property and Asset Transfer

There may also be some differences in the way that property and assets are transferred upon death. For example, in the state of Texas, if a traditional opposite-sex couple lives together for six months or longer, they are considered to have a “common law” marriage.

States that recognize common-law marriages will typically provide for a surviving spouse by allowing the spouse to take a stated percentage of the deceased spouse’s probate estate.

At this time, it remains to be seen whether or not Texas will recognize same-sex common-law marriages. Such recognition by the state could have a significant impact on how LGBT couples plan—even if they haven’t gone through a legal marriage ceremony.

Other Financial-Planning Considerations

There are other factors to consider, too, in terms of the additional benefits that legally married couples may be eligible for. For instance, because getting married can increase your overall household income, there’s a chance that you could now be ineligible for various programs such as college financial aid or Medicaid for future long-term care expenses.

This being the case, it can make sense to look into alternate forms of payment in certain instances. For example, if you have young children who plan to attend college in the future, you should look into setting up a tax-advantaged college savings plan that will help pay for some or all of the costs. And rather than spending down assets to qualify for Medicaid, consider a long-term care insurance policy to protect savings by covering future care expenses.

In this case, though, married same-sex couples will now be able to qualify for spousal discounts that are offered on insurance plans such as long-term care policies. Same-sex spouses can also qualify for joint income on variable annuities—which can help to ensure that both partners will have a guaranteed source of retirement income coming in, regardless of how long they live.

It is also important to be mindful of other financial situations if your tax-filing status is revised from single to married. For example, if your income as a single individual qualifies you to contribute to a Roth IRA, but you get married and your joint income is over the limit (in 2015, the limit phases out between $183,000 and $193,000), then you may no longer be allowed to contribute to this type of account.

Making Strides

Other steps are being taken in the right direction. In July 2015, The Equal Employment Opportunity Commission has ruled that the existing Civil Rights Act of 1964 prohibits employers from discriminating based on sexual orientation. And in Houston, the Equal Rights Ordinance passed in May 2015. [Editor’s note: On July 24, enforcement of this ordinance was suspended by order of the Texas Supreme Court, pending the outcome of a citywide referendum on the November ballot.]

Taking the Next Step

Going forward, there will likely be many more changes to federal and state laws. With that in mind, as you develop your financial, tax, and legal plans, it is best to work with a professional who is well versed in these areas and who has a specific focus and experience in working with the LGBT community.

Personal finance-related questions may be emailed 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.

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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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