Financial Problems With Unique Challenges for Same-Sex Couples
All couples in long-term relationships must learn to make financial decisions together. But gay and lesbian couples face additional challenges from convoluted and ever-changing laws.
This post was originally posted on NerdWallet.
Same-sex couples need to be very active when it comes to financial and estate planning, especially if they are planning to get married and live in a state that does not recognize same-sex marriage. Here are six of the most important financial questions that same-sex couples should ask each other when planning their future together.
What is our current financial position?
Ron Stone is a Los Angeles-based accountant whose firm, LGBT.tax, focuses exclusively on LGBT finance and taxes. Stone recommends that all couples start by solving common financial problems with each other.
Get a good idea of each other’s debt situation: how much does each of you owe and to whom? How much are you spending and how much are you saving? Similarity on the same wavelength is the key to a happy relationship, which makes it easier to start creating financial goals together.
What does a pension look like to us?
Unclear laws make it difficult for the LGBT community to plan for retirement , such as whether people are eligible for social security benefits after the death of their partners.
Jim Mahani, VP of Strategic Initiatives at Prudential Financial, says it’s important to understand if you have insurance coverage for yourself and your partner so you can plan your retirement accordingly. The Social Security Administration currently monitors state laws, so if a couple is legally married and lives in a state that recognizes marriage, Social Security benefits (including survivor benefits) are available to them.
If you’re not in a state that has marriage recognition in effect, you can’t count on it and might want to purchase life insurance, Mahani said. He adds that if you are not legally married, you will likely have to save more for retirement as well.
But people may be able to get some Social Security benefits for the loss of a breadwinner in states not recognized as such if they can prove they had a partnership.
Anita Roberts, a 44-year-old woman from San Antonio, lost her 21-year-old partner Kim in the fall of 2014. Even though she lived in a state that would not allow them to marry, Roberts found that she was eligible for at least 50% of Kim’s benefits if she could prove their partnership. She had to provide proof, such as proof of a joint purchase of a house and a car and a joint checking account.
Josh Stoffregen is Director of Global Communications at Prudential Financial and works with Mahani on LGBT initiatives. He says same-sex couples should also consider where they want to retire, as there are unique legal considerations.
If you are married, it is important to consider whether your union will be recognized in the state in which you want to retire, as this will affect your taxes and social security. However, this could soon become a moot point if the Supreme Court ruled in June that the ban on same-sex marriage was unconstitutional.
Should we get married? And how will taxes work?
The decision to get married is very emotional, but there are important financial factors to consider before tying the knot.
LGBT.tax’s Stone says couples should be aware that when they are single, there is more flexibility in how they report tax income. And another factor to consider is the punishment for the marriage.
“If both people work, it can cost a lot of money, depending on what you make,” Stone says.
If both partners are employed, especially if they have a high income, they are likely to pay a lot more taxes than if they were single. But if a couple has one source of income – for example, one of the spouses makes a lot of money and the other is a housewife with no income – or if one of the partners earns less than the other, they will pay significantly less taxes if they are married and serve together. than if each of them were single.
Another reason not to get married is if one of the partners has a child going to college. Stoffregen says that if the couple is legally married, both income must be reported to the FAFSA, and this could reduce the amount of financial aid a student can receive.
Despite these disadvantages, there are some financial benefits to getting married. Mahani says getting social security eligibility may be a reason to consider marriage.
Another issue to consider, says Stone, is the gift tax: you can’t give someone more than $ 14,000 a year without paying tax on money, unless you are married to that person. So if an unmarried couple has a common checking account and one person contributes more than $ 14,000, it can be considered a gift. The same goes for issuing a check to a partner for more than $ 14,000.
“If the IRS does an audit and decides they want to look at things a certain way, they might argue that it’s a gift and you could be taxed,” Stone says.
However, when couples are legally married, money can be freely shared with each other.
What happens to our assets when we die?
Be sure to discuss what you want to do with your money and property after death, in addition to your wishes in the event of a disability. Karen Lowy, senior attorney at Lambda Legal, an LGBT rights law firm, says probate and power of attorney are the most basic and important remedies a couple can get.
Lowy says it’s a misconception that wills are only for people with a ton of money.
“You can leave your books, your cat, your music collection – it’s about being in control of what is special to you, and ultimately with the person you want them to be with,” says she.
Lowy says it’s important to remember that unless you have a legal relationship, there is no automatic security system. By law, your estate goes to a blood relative.
“A will is a way to make sure your wishes are honored after you leave,” she says.
She also recommends that both partners obtain a power of attorney. This legal document has different names in different states, but it allows you to specify who will make your decisions for you if you are physically or mentally unable to do so. These decisions can affect your finances. An estate planning attorney can create these forms for you and your partner.
Roberts’ partner, Kim, had an advanced health care directive, so she knew what her medical wishes were and made sure they were met. But they didn’t plan so carefully with money.
“We didn’t talk about financial matters, and Kim didn’t have a will that would make the process much easier,” says Roberts. “Over the years, we’ve discussed that we want certain people to have certain things, but there was nothing in writing.”
Because of this, Kim’s adult daughter from a previous marriage inherited everything by default. Fortunately, the daughter respected their relationship and took care of Roberts. “If her daughter hadn’t been so kind or close to us, things might have turned out differently for me financially,” says Roberts.
Couples also need to make sure they have the correct beneficiaries in all of their financial accounts like life insurance, 401 (k) s and IRAs. Whenever you have an important life event, such as a wedding or the birth of a child, be sure to communicate your beneficiaries.
What happens if we break up?
In it, unmarried same-sex couples for a long time may want to conclude an agreement on cohabitation. It outlines the separation of household and financial responsibilities in your relationship while you are together, and what your plan will be in case you split up.
While not usually thought about it, Lowy says divorce provides an orderly system with protection. Since unmarried same-sex couples cannot take advantage of the divorce system, they can benefit from a cohabitation agreement.
While not every state may consider this to be an enforceable contract, “it’s really good guidance as to what your intentions were,” says Lowy.
How can we provide financial and legal protection for our children?
If any of you have children from a previous relationship, or if you are looking to adopt or have a child together, it is important to discuss the financial and legal aspects of having children. For example, who will take care of the children if something happens to one or both? How can you plan for your child to have money to go to college? If the picture shows a different parent, how do you share financial obligations with him?
Another important consideration: If either partner is not the biological parent of the child, should he or she legally adopt the child?
“Where possible, adoption is the strongest safeguard for the parent-child relationship if the relationship is not established by law or biology,” says Lowy.
It is very important for couples to know the laws of their state regarding parenting and adoption, she says. If your state does not allow single-parent adoptions (which allows both of you to be parents), consider entering into a co-foster or co-parenting agreement, Lambda Legal recommends.
Some of the protections mentioned above, such as having a will and listing the recipients on the accounts, are especially important if you have children, especially if you want to leave something to a non-biological child who has not been adopted.
Additional Resources
Same sex couples should consider meeting with a financial planner to help with this decision. Find someone with accredited home partnerships counselor status, which means they have completed financial planning training for LGBT couples. Wells Fargo has its own Consultant Certification Program trained in this area, and Prudential is beginning to train its LGBT consultants, so it is becoming easier to find experts who know how to help you.
If you are married and live in a state that recognizes it, we recommend using the 2014 Prudential Financial Considerations Checklist for Same Sex Couples and its 2015 update . Mahani wrote these guides to clarify after the United States vs. Windsor decision, which gave same-sex couples more rights.
For even more information on protecting your family, check out Lambda Legal ‘s free “Take the Power” toolkit , which provides financial and legal planning tips for the LGBT community.