Specify your wishes and designate the people you trust to carry them out.
- Financial and estate planning can be complicated for LGBTQ+ couples.
- It's best to put a plan in place that specifies your wishes and designates the people you trust to carry them out.
- Legal marriage may offer potential long-term financial benefits.
It has been 6 years since the Supreme Court's Obergefell v. Hodges decision granted Americans universal marriage rights, and a year since the Supreme Court granted equal employment protections to the gay and transgender community. But that freedom has not yet eliminated all the financial planning complications for LGBTQ+ couples.
Chief among the issues is that while there are now certain protections at the federal level, there are still many states that have not equalized benefits or put in place anti-discrimination laws that affect health care, housing, and access to credit. There are also different rules across America about parental rights, adoption, and other family financial planning options.
Because of the ongoing COVID-19 pandemic and political uncertainties, there's a pervasive need for people to face their own fragility and put their affairs in order. "LGBTQ+ folks live with the very real fear that any legal gains we make can be overturned. Marriage is definitely an example that is top of mind," says Cate Ashley, Fidelity's LGBTQ+ Employee Resource Group's Global Co-Chair.
Protections that matter
In order to safeguard your finances, it's best to put a plan in place that specifies your wishes and designates the people you trust to carry them out. Prior to the 2015 Supreme Court decision, LGBTQ+ couples had to use very convoluted plans to accomplish these goals, but now the process is more streamlined.
"There are certain documents that all couples should have to make certain that their wishes are carried out, in life or death. And given everything that is happening right now, there is a greater sense of urgency to get these documents put in place," says Terri Lyders, Vice President of Advanced Planning at Fidelity.
Here's where to start:
Medical directives: LGBTQ+ couples who have not legally married will not be afforded "next-of-kin" status for each other, and in the instance of a medical emergency may even be treated as legal strangers. If you are incapacitated, that could mean your significant other would be bypassed at the hospital and a relative would be called instead, even if you are not close with your family. Possessing (and traveling with) medical directives (also referred to as living wills, health care proxies, and medical powers of attorney) is important—even for couples who are legally married—in order to protect their rights and ensure that their medical wishes are followed.
Power of attorney for financial decisions: For financial matters, even your spouse or next of kin would not be able to step in immediately and handle your money in the case of an emergency without a court order if you do not have a properly executed power of attorney.
Wills: A will is critical in that it lays out your specific wishes regarding the distribution of certain types of assets. The absence of such a document may trigger your state's "default" distribution plan, which usually directs the assets to a legal spouse or, if none exists, to your blood heirs (however, these rules vary state by state). Thus, a will is especially important if you're unmarried and have a personal residence that you wish for your partner to continue living in after your death, or if you have assets with no assignable beneficiary that you want to leave to a partner.
Trusts: Putting assets into a trust can help heirs avoid probate, which can be a time-consuming and costly process in some states. A trust can also help to protect the privacy of your beneficiaries and can help you direct when and to whom the assets are distributed, either immediately upon your death or long term.
Beneficiary designations: Beneficiary designations on certain assets (such as life insurance, retirement accounts, and even bank and investment accounts) take precedence over wills or other instructions. That's why it's so important to review these beneficiary designations to make sure that you have named beneficiaries and that they reflect your current wishes.
Titling: Ensure that the title to your assets, particularly property, is coordinated with your will. For instance, a house titled "Joint Tenants with Rights of Survivorship" will pass directly to the surviving owner when an owner dies, rather than through your will. Assets titled in an individual's name (absent a beneficiary designation) or as "Tenants in Common" will pass according to your will.
Domestic partnership agreements: Unmarried clients often do not have any legal protections for their assets if their relationship ends. Domestic partnership or cohabitation agreements and separation plans may help outline financial expectations during the partnership as well as how assets are divided if the relationship ends (keeping in mind that this may cause adverse income tax and gift tax consequences). Note: Not all states allow for agreements by unmarried couples.
Custody issues: Having children is a huge financial consideration, especially if you are considering fertility treatments, adoption, or surrogacy. State laws vary greatly with respect to the parenting rights of LGBTQ+ couples and access to services. Some states may require additional adoption procedures if one parent is a biological parent to a child but the other isn't.
Reach out for help
Take the time to understand the implications of any action you are considering and talk with a qualified professional before making any decisions. You may need help with taxes, financial planning, and legal issues.
The financial advantages of marriage
Income taxes: There had long been a so-called "marriage penalty" where couples filing jointly paid more than singles at certain higher income levels, but after a series of tax law changes that started in 2018, that difference has been reduced.
Social Security: You are guaranteed Social Security spousal and survivor benefits, which also apply if you get divorced after at least 10 years of marriage.
Health insurance: Legal spouses may be covered by their spouse's employer's health plan and other health benefits. Additionally, even if open enrollment has ended, a recent marriage is a qualifying life event that generally allows for a special enrollment period. The expenses of an employee, their spouse, or the spouse's children are eligible for reimbursement from a health savings account (HSA) or flexible spending account (FSA) tax-free, provided the money is used to pay for qualified medical expenses. There are also dependent-care FSAs that can be used for day care expenses of dependents.
Retirement: Retirement savings accounts like 401(k) plans require the spouse to be the beneficiary unless they give written consent to designate someone else. Also, the retirement plan account can be split using a qualified domestic relations order (QDRO) in the case of divorce.
Retirement plan rollovers: An inheriting spouse can roll over inherited assets to their own IRA and defer required minimum distributions until they are 72 years old. Generally, under the SECURE Act, a nonspouse inheriting an IRA must withdraw the entire balance within 10 years of the IRA owner's death.
Military benefits: LGBTQ+ spouses of military members may be some of the greatest financial beneficiaries of marriage equality, because a legal spouse is eligible for a wide range of military benefits, from pension survivor benefits to health care to housing.
Gift tax: Gifts of more than $15,000 annually to nonspouses eat into the giver's lifetime federal gift and estate tax exclusion, whereas married couples can make unlimited gifts to each other. Legally married spouses may also take advantage of "gift splitting," which allows a married couple to split the total value of a gift to a third party and have it treated as though each spouse contributed one-half of the amount to the recipient.
Estate tax: A married person can leave an unlimited amount to a legally recognized U.S. citizen spouse at death without triggering federal estate taxes. Assets passing to anyone other than a spouse can trigger an estate tax if the value of the assets exceeds the federal estate tax exclusion amount of $11.7 million per person for 2021. Additionally, the tax liability can be even higher in states that have separate state gift, estate, or inheritance tax. A surviving spouse may also be able to take advantage of portability—the ability to make use of a deceased spouse's remaining unused exemption.