Estate Planning

A New Financial Reality for Same Sex Couples

A New Financial Reality for Same Sex Couples

It has now been some time since the Supreme Court’s landmark ruling granted same-sex couples the constitutional right to marry. Today, nearly half (49%) of all cohabitating same-sex couples are legally married,1 providing approximately one million Americans not only with equal rights and protections under the law, but also a number of previously unavailable financial benefits and opportunities.

For many couples, the ability to claim “married filing jointly” or “married filing separately” tax status may help lower joint tax liability thanks to the ability to combine income and deductions, as well as potential eligibility for previously unavailable tax credits and income exclusions. If you were married but resided in a state that failed to recognize same-sex marriage prior to the court’s ruling, you will want to talk to your tax attorney about filing amended state income tax returns. Amended returns typically must be filed within three years of the original return filing date.

Perhaps one of the most impactful financial changes is that same-sex married couples now qualify for spousal and survivor Social Security benefits. This means that if you or your spouse should die, the survivor will be eligible to receive the larger of the two benefits thereafter. And once you have been married for ten years or longer, even if you eventually get divorced, you will still be eligible for full spousal benefits. Spouses who earn considerably more than their partner may therefore want to consider delaying the onset of their benefits to build a higher monthly payment that will span both lives.

Legal recognition of same-sex marriages has also yielded many workplace benefit opportunities including eligibility for spousal coverage under employer medical plans, as well as the continuation of healthcare under COBRA law. Same-sex spouses are now eligible for pension continuation benefits (if the spouse with the pension chooses that option) and defined contribution retirement plan survivor benefits.

With marriage equality, however, also comes a dilemma for some same-sex couples who currently are receiving domestic partnership benefits from their employers. In light of the Obergefell v. Hodges ruling, many employers are quickly phasing out domestic partner benefits, forcing same-sex couples to choose between getting married or losing those partner benefits.

Estate planning made simpler

The unlimited marital deduction for estate tax purposes eliminates what was once a difficult estate planning challenge. With domestic partnerships, there was no efficient means of transferring assets to a partner without incurring estate taxes. Now, however, same-sex married couples can avail themselves of the unlimited marital deduction that allows assets to be passed tax-free to a spouse.

Rather than having to start immediately taking distributions from an inherited IRA, spousal beneficiaries have the option of retitling those assets in their own name and delay taking distributions until age 70 ½. For younger spouses, this affords both an opportunity to continue tax-deferred growth as well as to avoid paying taxes on additional income.

Legal marriage provides same-sex spouses with “next-of-kin” status when it comes to making emergency medical decisions for their husband or wife. It greatly minimizes the likelihood of a successful probate challenge to their spouse’s estate by his or her family members; and it solidifies custodial rights regarding any minor children.

While nobody in good conscience would ever advocate for a marriage based on financial benefits, there’s no question that marriage equality has eliminated a great many of the financial hurdles that same-sex couples have traditionally faced. The battle was hard-fought and the benefits long overdue. Make sure you take time to sit down with your advisor and adjust your financial and estate plans to take full advantage of these new opportunities

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1 Gallup Tracking Data, June 2016

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