Same-Sex Couples and
Marriage: Financial Planning
Implications
Johanna
Schulman, MBA, ChFC, CFP™ is a Financial Advisor with American Express
Financial Advisors based in Cambridge, Massachusetts and can be reached at Johanna.X.Schulman@aexp.com
One of her specialties is
comprehensive financial planning for gay and lesbian individuals and couples.
Johanna Schulman has a website that
can be found at http://gayfinancialadvisors.com/Massachusetts.htm
The headlines have been filled recently with the ongoing debate over the
legality and recognition of same-sex marriages. In
the U.S., the battle in
the courts and at the local,
state and federal levels over
same-sex marriage rights is likely to continue for some time. The
financial planning implications of same-sex marriage are as complex as the issue
itself. Couples need to understand
everything from the tax ramifications to the emotional consequences of making
this important decision. Financial
planning professionals can add value by providing information, support and a
comprehensive planning perspective as they work with gay and lesbian couples.
Same-sex
couples are at a financial disadvantage.
The following are some of the
“penalties” they could be
facing without the benefits of legal civil marriage.
Fewer Job Benefits
Companies
subsidize benefits for employees’ spouses and kids. Unmarried workers are not compensated in another form to make
up the difference. Furthermore,
benefits for spouses are tax-free. On
the other hand, for domestic partners, benefits are taxed, if they even exist.
Higher Unemployment but Lower Social Security and
Unemployment Benefits
Unemployment
for unmarried people with children under 18 was 9.1% in 2002.
It was only 3.8% for married workers with kids.
Many married people can collect unemployment benefits if they quit their
job to move in with a relocated spouse, but domestic partners can’t.
Everyone
pays taxes, but surviving spouses can collect half of a deceased worker’s
benefits, whereas domestic partners cannot collect anything.
Social Security benefits, which in some cases can be tapped by a
surviving spouse, are essentially untouchable by a surviving domestic partner.
Higher Taxes, No Estate-Tax Breaks and Transfer Taxes
Unmarried
partners can’t file joint returns, and receive smaller capital-gains breaks
when they sell their homes. Married people can leave spouses everything,
tax-free. But estates of unmarried
couples worth more than $1.5 million are taxed
at 18% to 48%. Furthermore, transfers of
property to a spouse are not taxable, while transfers to domestic partners are.
Fewer Family Discounts
Most
country clubs, health clubs and auto clubs allow a spouse to join free or to
take advantage of a discount. Unmarried
partners must pay for two memberships and cannot use family discounts.
No Victim’s Rights Protection or Marital Status Redlining
If
a drunk driver kills a married person, the surviving spouse can sue for wrongful
death. Unmarried surviving partners
have no legal recourse whatsoever.
In
addition, many insurance companies generally put married drivers into a low-risk
category and unmarried drivers in a high-risk category.
Credit and Housing Discrimination
Unmarried
joint applicants are sometimes offered credit on less favorable terms than their
married counterparts. Many states do not ban marital status discrimination in
rental housing, allowing landlords to refuse to rent to unmarried tenants.
Lack of Citizenship Rights
Fifteen
countries recognize same-sex couples for immigration.
However, U.S. citizens in relationships with same-sex foreigners cannot
sponsor their partners.
Unavailable
Rights
Other
rights not available to unmarried couples include the right to roll-over one’s
spouse’s IRA or 401(k) plan, the right to take advantage of joint &
survivor annuity benefits, as well as access to an orderly and equitable legal
system in the event of divorce.
Financial Implications
As
of May 17, 2004, same-sex couples in Massachusetts have had the right to civil
marriage. As more and more same-sex
couples take advantage of this, it will be increasingly important that they work
with their advisors to address the many financial planning implications of this
decision.
Personal
financial planning is multi-faceted and includes establishing-cash reserves, as
well as insurance planning, income tax planning, retirement planning, investment
planning, estate planning, and employee benefits planning.
Each financial decision an individual makes can potentially affect every
other aspect of his or her financial life.
The role of the CPA, accountant, attorney, tax advisor, financial advisor
or Certified Financial Planner™ practitioner is to try and help couples
anticipate and understand the change that marriage will have in their financial
lives.
Tax Considerations
At
the very least, tax filing will become more complex.
Same-sex marriage is not currently a recognized status at the federal
level or by the IRS.
It
is important that married same-sex couples keep good tax records.
Any tax-related decision should be discussed with a qualified tax
professional who is familiar with the unique considerations facing same-sex
couples.
Joining Finances
Unlike
legally married couples, same-sex
partners don’t inherit a default set of assumptions about their financial
affairs when they enter into a committed relationship.
Many couples have forged their own brand of financial
interdependence, whether through joint finances, entirely separate finances, or
some combination thereof. The
majority of same-sex couples tend to favor joint finances.
In fact,
in the late 90’s, American Express Financial Advisors conducted research on
this very issue, and found about 80%
of same-sex couples pattern their financial relationship on the traditional
marriage model. In such relationships assets are owned jointly, income is
pooled, and expenses are treated as joint obligations.
The advantage to this structure is that it has a very comfortable feel to
it – for most people, it’s the model they were familiar with growing up, so
it seems the natural way for a household to manage its finances. The drawback of
this approach is that as long as the relationship does not enjoy any of the
legal benefits that come from marriage, it does not enjoy any of the protections
inherent to a legal divorce. Without a domestic partnership agreement in place
to spell out how joint finances should be unwound; challenging issues must be
addressed under extremely draining circumstances. Similarly, without a solid
estate plan and supporting legal documents such as wills in place, the marriage
model can pose drastic and sometimes unexpected hardships for the survivor if
one partner dies.
Even with
the advent of marriage rights, many advisors who work with same-sex couples
still recommend putting these extra plans in place. Marriage rights for same-sex couples are still uncertain, and
a protective stance is likely to be the most prudent.
A Combined Approach
Increasingly,
same-sex couples want to understand the approaches available to them in handling
their personal economies, and in making intelligent and informed choices about
what’s best for them. Some couples take a proportional approach to
structuring their personal economy. Under this model, joint assets and joint
expenses are managed in proportion to each partner’s relative contribution.
Thus, for example, if one partner has an income of $100,000 and the other earns
$50,000, they would divide things two-thirds/one-third. Or, perhaps partners
have contributed unequally to the down-payment or monthly payments on a house;
in that case, they might agree that ownership interests in the property should
reflect these proportional contributions. Again, arrangements like these always
should be spelled out in a properly drafted domestic partnership agreement and
acknowledged in the terms of a will or trust.
Note that there can be adverse tax and other consequences if these types
of arrangements aren’t drafted carefully, so couples should be advised to
first consult with an attorney or tax advisor, as well as a financial advisor.
Going
Solo
Finally,
some couples prefer to maintain an independent approach to their money. Joint expenses can be shared either evenly or proportionally
to income. Often, people who adopt this approach maintain separate bank
accounts, and either contribute to a joint account for joint expenses, or simply
send two checks, for example, to the mortgage company each month.
The
advantage of this approach is clear: each party retains complete control over
his or her own financial affairs, and there are fewer opportunities for messy
entanglements in the event the relationship ends. Nevertheless, even couples who
opt for the independent approach to joint finances should have domestic
partnership agreements and wills or trusts to confirm their intentions with
respect to any assets they own jointly. Newly
married same-sex couples who have long maintained financial autonomy may need
extra assistance as they explore the financial implications of marriage and the
notion of combining finances.
Seek Advice
Same-sex
couples have only had the right to marry for a few months in this country.
Many legal and legislative battles lie ahead.
Good record-keeping will assist couples and their advisors in navigating
the choppy waters of social change. Couples
will need to enter into marriage mindful of the financial advantages -- and
disadvantages -- of such a decision. One
of the best ways to serve same-sex couples who are considering marriage is to
understand and respect their relationships, and help them plan their financial
lives within the broader context of a comprehensive financial plan.
Johanna Schulman, MBA, ChFC, CFP™ is a Financial Advisor
with American Express Financial Advisors based in Cambridge, Massachusetts and
can be reached at Johanna.X.Schulman@aexp.com.
One of her specialties is comprehensive financial planning for gay and
lesbian individuals and couples.
Johanna Schulman has a website that can be
found at http://gayfinancialadvisors.com/Massachusetts.htm
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This
information is provided for informational purposes only. The information is
intended to be generic in nature and should not be applied or relied upon in any
particular situation without the advice of your tax, legal and/or your financial
advisor. The views expressed may not be suitable for every situation.
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