For same-sex couples, financial planning poses unique challenges

All couples in long-term relationships must learn how to tackle financial decisions together. But gay and lesbian couples face additional challenges thanks to confusing and ever-changing laws.

Same-sex couples have to be more proactive when it comes to financial and estate planning, especially if they plan to get married and live in a state that doesn’t recognize same-sex marriage. Here are six of the most important financial questions same-sex couples should ask each other when planning their futures together.

What is our current financial situation?

Ron Stone is a CPA in Los Angeles whose firm, LGBT.tax, focuses exclusively on financial issues and taxes for the LGBT community. Stone recommends all couples start by addressing big-picture financial issues with each other. Get a good grasp on each other’s debt situation: How much do each of you owe and to whom? How much do you spend and how much do you save? Getting on the same page is key for a happy relationship and makes it easier to start creating financial goals together.

What does retirement look like for us, and how can we start preparing?

Due to murky laws, the LGBT community has retirement planning challenges, such as whether people are eligible for Social Security benefits after their partners die.

Jim Mahaney, vice president of strategic initiatives at Prudential Financial, says it’s important to understand whether you have Social Security coverage for yourself and your partner so you can plan for retirement accordingly. The Social Security administration currently looks to state laws, so if a couple is legally married and lives in a state that recognizes the marriage, Social Security benefits (including survivor benefits) are available to them.

If you are not in a state with marriage recognition, you can’t count on it and may want to consider purchasing life insurance, Mahaney says. If you’re not legally married, it’s likely you’ll also need to save more for retirement, he adds.

But individuals might be able to receive some Social Security survivor benefits in non-recognition states if they can prove they had a partnership.

Anita Roberts, a 44-year-old woman in San Antonio, lost her partner of 21 years, Kim, in the fall of 2014. Despite living in a state that wouldn’t let them marry, Roberts found that she qualifies for at least 50% of Kim’s benefits if she could prove their partnership. She had to provide evidence such as proof of buying a house and car together and having a joint checking account.

Josh Stoffregen is director of global communications at Prudential Financial and works with Mahaney on LGBT initiatives. He says same-sex couples should also think about where they want to retire, since there are unique legal considerations.

If you’re married, it’s key to consider if it will be recognized in the state where you want to retire in since this will affect your taxes and Social Security. However, this could all soon be a moot point if the Supreme Court rules in June that same-sex marriage bans are unconstitutional.

Should we get married?

The decision to get married is highly emotional, but there are also important financial factors to consider before tying the knot.

LGBT.tax’s Stone says couples should be aware that when they’re unmarried, there is more flexibility in how they report income on taxes. And another factor to consider is what’s called the marriage penalty.

“If both people work, it can cost a lot of money depending on what you earn,” Stone says.

If both partners work, especially if they are high-income earners, they would have to pay much more in taxes than if they remain unmarried. But if a couple has a single source of income — say, for example, one spouse earns a lot of money and one is a stay-at-home parent with no income — or if one partner doesn’t make as much as the other, they’ll pay significantly less in taxes being married and filing jointly than if they file as single.

Another reason to hold off on marriage is if one partner has a child nearing college. Stoffregen says if a couple is legally married, both incomes must be declared on the FAFSA, and that may reduce how much financial aid the student can receive.

Despite these drawbacks, getting married does offer some financial perks. Mahaney says receiving eligibility for Social Security could be a reason to consider marriage.

Stone says that another issue to consider that’s not often discussed is gift tax, which is where you can’t give someone more than $14,000 per year without paying a tax on the money. That is, unless the couple is married.

So if a couple shares a joint checking account and one person deposits more than $14,000, that could be considered a gift. The same goes for writing a check to the partner for more than $14,000.

“If the IRS audits and decides they want to look at things a certain way, they could argue it’s a gift and you could be subject to a tax,” Stone says.

When couples are legally married, though, money can be shared freely with each other.

What happens to our money and assets when we die?

Be sure to discuss what you want to happen to your money and belongings when you die, in addition to your wishes if you become incapacitated. Karen Loewy, a senior attorney at Lambda Legal, a legal organization focused on LGBT rights, says a will and a power of attorney are the most basic and critical protections a couple can get.

It’s a misconception that wills are only for people with tons of money, Loewy says. “You can leave your books, your cat, your music collection — it’s about you being in control of the things that are special to you and ended up with the person you want them to be with,” she says.

Loewy says it’s important to remember that if you don’t have a legal relationship, there’s no automatic safety net. According to the law, your estate goes to a blood relative. “A will is the way you have to make sure your wishes are being respected after you’re gone,” she says.

She also recommends both partners get a power of attorney. This legal document has different names in different states, but it allows you to designate who will make your decisions for you if you are physically or mentally unable to. 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 ensured they were fulfilled. But they didn’t plan as carefully with money.

“We didn’t talk about financial issues, and Kim didn’t have a will, which would have made the process much easier,” Roberts says. “Over the years we discussed wanting certain people to have certain things, but nothing was in writing.”

Because of this, Kim’s adult daughter from a previous marriage inherited everything by default. Fortunately, the daughter respected their relationship and made sure Roberts was taken care of. “Had her daughter not been as gracious or as close to us, things could have been really different for me financially,” Roberts says.

Couples should also ensure they have the correct beneficiaries on all of their financial accounts, such as life insurance, 401(k)s and IRAs. Whenever you have a major life event, such as a marriage or new child, make sure to update your beneficiaries.

What happens if we break up?

Unmarried same-sex couples in it for the long haul may want to create a cohabitation agreement. This lays out the division of domestic and financial responsibilities of your relationship while you’re together, and what the plan will be if you break up.

While it’s not commonly thought of this way, Loewy says divorce provides an orderly system with protections. Since unmarried same-sex couples can’t take advantage of the divorce system, they could benefit from a cohabitation agreement.

Although not every state may consider it an enforceable contract, “it’s a really good guide to what your intentions were,” Loewy says. 

If we have or plan to have kids, how can we ensure they are financially and legally protected?

If one of you has children from a previous relationship, or if you want to adopt or have a child together, it’s important to discuss the financial and legal aspects of having kids. For example, who will take care of the children if something happens to one or both of you? How can you plan to make sure the child has money for college? If there is another parent in the picture, how will you split financial obligations with them?

Another important consideration: If one or both parents are not biological, should they adopt?

“Adoption wherever possible is the strongest possible protection for a parent/child relationship if the relationship isn’t established by law or biology,” Loewy says.

She says it’s critical for couples to educate themselves on their state laws regarding parental rights and adoption. If your state does not allow co-parent adoption (which allows both of you to be parents), look into a co-guardianship or co-parenting agreement, Lambda Legal recommends.

Some protections mentioned above, such as having a will and indicating beneficiaries on accounts, are especially important if you have children — particularly if you want to leave something to a non-biological child you haven’t adopted.

Further resources

Same-sex couples should consider meeting with a financial planner to help with these decisions. Look for someone with Accredited Domestic Partnership Advisor designation, which means they have been trained on financial planning for LGBT couples. Wells Fargo has its own certification program for advisors trained in this area, and Prudential is starting training on LGBT issues for its advisors, so it’s getting easier to find experts who know how to help you.

If you do get married and live in a state that recognizes it, we recommend usingPrudential’s checklist of financial considerations for same-sex couples from 2014 and its 2015 update. Mahaney wrote these guides to create clarity after the United States v. Windsor decision, which gave same-sex couples more rights.

For even more information on protecting your family, explore Lambda Legal’s free “Take the Power” toolkit, which features financial and legal planning advice for the LGBT community.

Image via iStock; illustration via Enrico M Limcaco.