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Financial Planning > Tax Planning

5 Questions From LGBTQ Investors in the Era of Marriage Equality

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It’s been five years since Obergefell v. Hodges, the Supreme Court’s landmark decision declaring same-sex couples have the fundamental right to marry. With that ruling, financial planning for same-sex couples took an enormous leap forward. For the first time ever, LGBTQ couples are on equal footing with their heterosexual counterparts, but these couples may not be fully aware of strategies to maximize their estate, financial and tax planning.

To celebrate the five years of marriage equality, here are five common questions and tips for LGBTQ investors in this new era:

1. Is marriage the right decision for us?

Obviously, financial planning shouldn’t be the primary reason to get married. But here are some important considerations when having the marriage conversation:

  • Taxes: If both partners are high earners, you may encounter the “marriage penalty,” which puts you both in a higher tax bracket. Conversely, if one partner has a substantially higher income, marriage may mean you pay a lot less in taxes overall.
  • Children: If you and your partner want children, marriage may be necessary to go through the process of adoption or surrogacy. On the flip side, if one partner has children from a previous relationship, there may be additional items to consider such as the financial and legal responsibilities they have and how that affects your goals.
  • Gifting: As a married couple, you can exchange or gift money with each other without any restrictions. If you are not married, it may subject you to taxes or more scrutiny if one partner were to be audited by the IRS.

2. What financial benefits do same-sex couples have now?

The Supreme Court’s decision had a major impact on LGBTQ planning, which allows couples to keep more money over the course of their lifetimes.

  • Spousal benefits: Married partners have the legal ability to claim Social Security and/or pension benefits from each other. With this, certain Social Security and pension maximization strategies are now available to same-sex couples.
  • Marriage exemption:  As mentioned above, married couples can freely pass money or assets back and forth without worry of gifting limits or taxes owed.
  • IRA inheritance: Previously, in the event of one partner passing, the other would have to exhaust the full IRA in a limited time frame. Now, the surviving spouse has the option to assume the IRA as their own, allowing for more tax-deferred growth and reducing taxes in the short term.

3. What if we haven’t gotten married yet but plan to?

If marriage is your ultimate goal, there is no reason to wait to begin building your future.

  • Start planning: This is the time to start planning your financial lives together. If the goal is to combine most of your assets, establish a joint checking, savings or brokerage account that you each contribute to. This is a great way to spend joint money on items like trips, dinners or an untimely joint expense. It is also a first step to building your financial marriage.
  • Cohabitation agreement: This might make sense if marriage is a few years away. With this agreement, the couple would essentially plan what would happen in the event of a breakup. Since there is no ‘divorce’ system for cohabitation, this is the best way to plan for the worst-case scenario.

4. What if we decide not to get married?

Couples that determine marriage isn’t the route for them should still consider proper planning steps, such as:

  • Wills and trusts: These important legal documents help ensure your assets go where you want them to go. In the event of death, without these documents your assets may become part of the public record, and a judge would ultimately decide what happens to them.
  • Powers of attorney: To plan for the unfortunate event of incapacitation, each partner should appoint a financial power of attorney to control your finances. Each partner should also appoint a health care power of attorney to make medical decisions on each other’s behalf. These documents provide peace of mind and put the person of your choice in control during a difficult time.

5. We’re married. How should we fine-tune our retirement plan?

Are you currently saving enough to retire? As a general rule of thumb, for every $1 million you have, you can expect to spend around $40,000 per year for a 30-year retirement plan. This may or may not sound daunting, but there are strategies to help get you there:

  • Low-Cost:  Are you paying too much for your investments? If you’re the typical investor in an actively managed fund, that may be the case. A lower cost strategy could save you thousands of dollars over the course of your lifetime.
  • Taxes:  Are you invested in tax-managed or tax-efficient funds? Are you maximizing the after-tax return of your investments? Be sure to take advantage of specific tax strategies to keep more of your money in your pocket.
  • Risk: Is your portfolio taking enough (or too much) risk to meet your retirement goal? It is important to take the right amount of risk and maximize your risk-adjusted return by investing in an evidence-based portfolio.
  • Retirement funding: If one spouse makes significantly more than the other, they can help fund the other’s retirement vehicles, which saves on taxes and increases overall retirement savings.

Whether or not you and your partner decide to marry, there are actions that should be taken to secure and maximize your financial lives together. It would be wise for same-sex couples to work with qualified professionals to ensure all of their comprehensive financial planning needs are being met.

Ryne Vickery, CFP, is a wealth advisor for Buckingham Strategic Wealth.


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