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What Same-Sex Couples Should Know About Financial Planning

Insights & Ideas Team •  January 7, 2016 | Your Finances

Same-sex couples cheered the Supreme Court ruling1 that prevents states from banning same-sex marriage. The ruling means same-sex couples can now legally marry. From a financial planning and legal perspective it means more certainty, yet some questions still remain when it comes to child custody and whether the ruling is retroactive.

The good news for same-sex couples is that if you get married, you now enjoy the legal benefits that come with that. Those benefits include:

1. Estate2 and gift3 tax marital deductions. These deductions allow one spouse to pass along/give the other an unlimited amount of money, property and personal possessions without paying taxes.

2. Dying without a will. It’s always a good idea to have a will. But if a person dies without one, nearly every state favors a surviving spouse for the purpose of distributing assets.

3. Making decisions when incapacitated. When an incapacitated person can’t make decisions about finances and health, family members must ask a court to appoint a conservator or guardian. Most courts give priority to a spouse in this situation.

4. Paying the marriage penalty—or not. Generally speaking, married couples with two incomes filing jointly pay more in tax than single-income married couples earning the same amount. It’s called the “marriage penalty.” Fortunately, there’s also a “marriage bonus” that enables some couples to pay less tax. A tax professional can help you understand the implications for your situation.

5. Spousal Social Security benefits. Spouses are able to receive either their own benefit or one-half of their spouse’s benefit, whichever is higher. In addition, the surviving spouse in a marriage can receive survivor benefits based on his or her deceased spouse’s record.

6. Gaining veteran and military benefits. The Veterans Benefits Administration offers a variety of benefits and services to spouses of service members and veterans who are deceased or totally and permanently disabled by a service-connected disability.

7. Becoming the automatic beneficiary of a retirement plan. Under the Employee Retirement Income Security Act (ERISA), the spouse must be named beneficiary unless the spouse agrees to allow the participant to name a different beneficiary.4

8. Increasing IRA contributions beyond the maximum. In a marriage in which only one spouse works, the couple can maximize annual individual retirement account (IRA) contributions by opening a spousal IRA, which is a separate IRA opened in the nonworking spouse’s name.

9. Getting covered under a spouse’s health insurance. If one spouse works full time and has company-sponsored health insurance, the other spouse can typically be added to the policy. Such coverage can provide a huge financial benefit.

Despite the Clarity, Not Everything Is Certain Yet

While the Supreme Court decision was a major cause for celebration among same-sex couples, there is still much to be considered, and likely litigated, in the years ahead.

1. Children. There is no ruling on whether in all states both spouses can adopt a child or whether same-sex couples can become foster parents. It’s also not clear what happens in situations in which the marriage falls apart; for instance, can one former spouse deny the other custody and visitation rights?

2. Retroactive rights. As mentioned earlier, it’s better to be married when one person dies without a will. But what if a spouse died prior to the ruling? It’s not clear if the ruling should be applied retroactively to allow the surviving same-sex partner the right to inherit property. And what about past state income tax returns? Should same-sex couples amend previously filed returns to change filing status to married? 

3. Partner benefits. Employer-sponsored benefits for domestic partners are being questioned. Now that same-sex partners can choose to get married, will domestic partner benefits provided by certain employers disappear?

These issues and others will likely be addressed in the coming years. In the meantime, married same-sex couples can access financial planning techniques and strategies that heterosexual couples have used for years. The same disciplined approach to planning that many couples applied prior to the Supreme Court ruling should be maintained. Laws vary among states, and every marriage has differences. In collaboration with tax/legal advisors, a financial professional can help same-sex married couples navigate through their options so they can make more informed decisions.

1Obergefell v. Hodges :: 576 U.S. ____ (2015).  
2I.R.C. § 2010.
3I.R.C. § 2503.
429 U.S.C. § 1055.

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