Financial planning is always a complex process, with each market segment having specific needs and considerations. Financial matters for many lesbians and gays changed greatly following the Supreme Court decision in the case of Obergefell v. Hodges in 2015. This court ruling made marriage equality the law of the land in the U.S.
Although marriage is now a right guaranteed by law, it also poses additional financial planning opportunities and complexities for same-sex couples. Many of these same opportunities and complexities also pertain to heterosexual married couples; however, same-sex couples have had little experience with them until recently.
Legalizing Same-Sex Marriage: Welcome Opportunities and Thorny Challenges
Further complicating the issue is the fact that many states still have laws on the books that allow employers to fire people for being gay. In addition, some gays and lesbians have a deeply ingrained reluctance to be completely “out,” especially to their workplace colleagues. These factors have led some gays and lesbians to confide personal and financial information only to those whom they trust completely. The recipients of this trust frequently were not their employers’ benefits administrators.
Another factor in the same-sex population segment is that its members generally have a significant level of affluence. Over the years, gay individuals have tended to be well-educated, childless and not affected by hits to their assets from costly divorces. Lesbians may not have taken time off from a career to raise children, and thus may have enjoyed more seniority and salary increases at their work.
Even though many gay or lesbian couples are childless, that is changing. Starting a family is becoming more commonplace, with two moms or two dads are showing up at PTA meetings. And although starting a family under any conditions is expensive, same-sex couples likely have the additional cost of sperm donors, egg donors, surrogacy or adoption, and the legal contracts associated with each. Legal arrangements must be made for guardianship and support of children in the event of a marriage — or a death or divorce. Couples who were in a long-term relationship before they were married, and may have adopted children individually, now have more at stake.
Because marriage recognized at the federal level is so new, gay couples frequently are unaware of Social Security survivor benefits that married couples can take advantage of. When your client applies for Social Security, the spouse is entitled to a spousal benefit — a monthly check that could be equal to 50 percent of the monthly check. This could add significant retirement income. If your spouse predeceases you, you may collect a survivor benefit each month.
Spousal and survivor benefits can now be a part of a same-sex couple’s retirement plan. Before same-sex marriage was recognized at the federal level, partners had no right to these benefits.
Do Your Homework
The same-sex community has special concerns that financial professionals must be prepared to address. For example, make sure you get off on the right foot when you’re meeting with same-sex clients. Make sure you’ve done your fact-finding and that you avoid language such as “husband and wife” with a gay couple. Just ask them if they prefer “spouse” or “husband/wife.” And it’s also important to keep in mind that just because same-sex marriage is legal, not every gay couple is married or wants to be married. Don’t make assumptions.
If a same-sex couple is not married, they need to be aware of the laws pertaining to individual retirement account rollovers, a lack of automatic inheritance rights, the need for medical powers of attorney and many other issues.
Beyond having a will, same-sex married couples may need to consider creating trusts in order to distribute assets after one spouse’s death. For example, each partner in the marriage may want assets to go to various family members instead of automatically going to the surviving spouse, who may prefer to leave their estate to their own side of the family.
A case in point would be, for example, a spouse with a $1 million life insurance policy. If they die without having created a trust, the $1 million death benefit would go to the surviving spouse, possibly to distribute exclusively to their own side of the family.
Regarding taxes, getting married is now a bigger decision for same-sex couples, because marriage frequently throws a couple into a higher tax bracket than each spouse might have enjoyed when they filed singly at a lower income level. Take the example of a couple — one of whom is an assistant professor, the other a partner in a law firm — who may have a substantially higher joint income. Marriage also phases out many deductions that people are entitled to when filing singly.
For example, a combined adjusted gross income of $311,300 begins to phase out your itemized deductions. Before same-sex marriage was legal, each individual could have an adjusted gross income of $258,250 before phase-out, giving the household $516,500 in income. There’s also a “marriage penalty” in the tax brackets for couples making more than approximately $170,000. For further information and specifics, it would be wise to consult a tax advisor.
If couples choose not to get married, they’re exposed to estate taxes and tax on the transfer of retirement assets. For example, there’s an unlimited marital deduction to surviving spouses, so you have to be married in order to take advantage of that. If you’re not married, your partner would have to pay an estate tax on the inheritance. For example, in New Jersey, where I live, the estate tax threshold is $675,000 — lower than the cost of many homes in some parts of the country. There are also states with an additional “inheritance tax” for non-blood relatives.
In addition to being denied Social Security benefits, the surviving member of an unmarried couple could be exposed to challenges from the decedent’s blood relatives if the predeceasing member died intestate (without a will). Couples should meet with their legal professionals in order to create documentation of their wishes — wills, trusts, powers of attorney, health care proxies, etc.
A Respectful and Inclusive Environment
Perhaps most important, like all customers, gay clients want to know they can receive the individualized financial guidance they need in a safe, sensitive and respectful environment. That begins by fostering a corporate culture of diversity and inclusion as an integral part of your practice’s core values.
Let same-sex clients know about your commitment. Include some kind of inclusive message in your literature and on your website.
Financial professionals should further demonstrate support of the community by holding educational meetings or workshops (which also showcase financial professionals’ knowledge and experience), and by being involved in LGBT-sponsored activities and professional organizations in the communities where both your clients and your employees live and work.
Whether they realize it or not, most financial professionals will likely have at least one gay client. If you do an excellent job for these individuals, they will most likely refer friends and family to you because of that extra level of trust.
Regardless of their status, same-sex couples of all ages need to prepare for and specify their future financial plans to help create a dignified retirement and to help ensure that their beneficiaries receive their intended legacies.