All couples in long-term relationships must learn how to tackle financial decisions together. But same-sex couples face additional challenges thanks to confusing and ever-changing laws.
The legalization of same-sex marriage by the Supreme Court on June 26, 2015 meant that no state could prevent same-sex couples from getting married and that all states had to recognize the marriages. But even though federal laws recognize same-sex marriages, the availability of some benefits to same-sex spouses are not as clear.
Although the Supreme Court just ended workplace discrimination across the board, civil rights legislation that protects the LGBTQ+ community from discrimination in areas like housing and credit can vary on a state-by-state basis. That’s why same-sex couples must have frequent conversations about their financial concerns—the earlier in the relationship, the better.
Every successful future begins with a solid foundation, and having honest conversations about money early on can help avoid uncomfortable surprises. Below, you’ll find seven essential financial questions that same-sex couples should discuss.
1. Should We Get Married?
Although the majority of cohabitating same-sex couples have married in the years since the Supreme Court decision, 42% remain unmarried. As a same-sex couple, your relationship status will affect your financial situation, including health care, employee benefits, taxes and Social Security.
There’s no one-size-fits-all solution, so learning to ask questions early on will help you and your partner make the best decisions for your shared goals. Deciding to marry isn’t purely a financial decision, but it will have a financial impact on your lives together.
Health Care and Employee Benefits
As you decide how to commit to one another, explore options with your employer to see if you and your partner can enjoy benefits without legal marriage. You and your partner can ask your company’s benefits administrator what benefits they offer for domestic partnerships and civil unions and how they differ from those provided to married couples. You may find that you are already eligible for health care coverage without a legal marriage. By asking questions about coverage, you and your partner can identify the better plan and lowest premiums and determine whether you have to be married to enjoy the benefits.
When you’re unmarried, you have more flexibility in how you file your taxes. When you legally marry, you’re restricted to filing jointly or separately—which can be a benefit or drawback, depending on your income levels. Meeting with a tax professional before you decide to tie the knot can help you understand how your relationship status will impact your tax obligations.
For example, if both partners in a marriage are high earners, marriage might mean you both land in a higher tax bracket. Filing jointly also can mean that you potentially lose some deductions. However, if one partner has a higher income and the other a significantly lower income, you could find that you’re saving money by filing jointly after you marry.
With Obergefell v. Hodges, a huge roadblock to Social Security benefits was removed for same-sex couples. However, same-sex couples married in their state before the Supreme Court decision will need to alert the Social Security Administration (SSA) of their marriage to receive those benefits. The SSA recognizes a valid marriage as of the date of marriage, even if it occurred before Obergefell v. Hodges; it also recognizes some nonmarital legal relationships (such as civil unions and domestic partnerships) regarding entitlement for Social Security and Medicare benefits.
Unfortunately for older same-sex couples where one spouse died before the couple got a chance to marry, the remaining partner can’t claim their spousal benefits. There’s a lasting impact for people who lost spouses and would have been beneficiaries but didn’t have the opportunity to have that because marriage equality didn’t exist.
Same-sex couples can use the SSA’s retirement benefits estimator to get a clear picture of potential benefits during retirement. Once you have your benefits estimate, you can work with a financial planner to help schedule and maximize your benefits. If you have more questions about how your partnership or marriage will impact your Social Security benefits, the SSA has an entire FAQ dedicated to answering questions for the LGBTQ community.
2. What Happens to Our Money and Assets When We Die?
With the seemingly ever-changing laws and unique pressures you may face from family members, it’s important for same-sex couples to have a comprehensive estate plan, including your wishes if you become incapacitated.
It’s important to remember that if you don’t have a legal relationship, there’s no automatic safety net. Although laws vary by state, your estate could likely end up with a blood relative, even if that’s not what you would have wanted. A comprehensive estate plan will help make sure your wishes are being respected after you’re gone.
Couples should also ensure they have the correct beneficiaries on all 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, as they supersede a will or trust. You might even want to consider creating a written financial inventory of all retirement accounts and life insurance policies for each partner. Then, go down the list to name or update the beneficiaries for each account. This gives both partners full visibility into the other partner’s wishes, too.
3. What Happens If We Break Up?
While it’s not commonly thought of this way, 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. 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. Although not every state may consider it an enforceable contract, it’s a really good guide to what your intentions were.
4. What Family Planning Challenges Will We Face?
When it comes to creating families, a study showed that same-sex couples are four times more likely to adopt a child and six times more likely to become foster parents. While these options offer same-sex couples more choice in their pursuit of a family, they can be quite expensive.
It’s true that foster parents who adopt can receive substantial tax credits that offset a large portion of adoption costs, but adopting a newborn through a private nonprofit agency still costs an average of $40,000. An artificial insemination cycle can run less than $1,000, while a round of in vitro fertilization (IVF) can easily top $10,000. (Neither guarantees success, of course.) For couples that go the surrogacy route, fees can run more than $100,000. That is on top of childcare, education and additional living expenses to raise a child.
In addition to those large expenditures, there may be challenges from states or agencies that don't allow same-sex couples to adopt or foster children. In those cases, couples often choose to incur the cost of going to another state, setting up temporary residency and getting matched with a birth family, agency and attorney there.
Unlike other financial goals (like owning a home), there may be a biological clock involved in the process, so the conversation around family planning may need to happen sooner rather than later.
5. How Can We Ensure Our Children Are Financially and Legally Protected?
It’s important to discuss the financial and legal aspects once you have kids. For example, who will take care of the children if something happens to one or both of you? Another important consideration: If either partner is not a biological parent of a child, should he or she legally adopt the child?
It’s critical for couples to educate themselves on their state laws regarding parental rights. Adoption, wherever possible, is the strongest protection for a parent/child relationship if the relationship isn’t established by law or biology. However, if your state does not allow co-parent adoption, look into a co-guardianship or a co-parenting agreement.
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.
6. Are We Prepared to Deal with Housing and Credit Discrimination?
If a potential landlord or creditor pulls your credit report and sees that you formerly went by another name that suggests you transitioned from another gender, or notes on your application that you have a same-sex spouse, that person may deny your request for an apartment or a mortgage. Remember, in a majority of states, LGBTQ people lack legal protections against this kind of discrimination.
A recent study found that same-sex couples applying for mortgages were 73% more likely to be denied than heterosexual couples with similar financial backgrounds. What’s more, those who were approved were charged 0.2% more in interest and fees.
As unfortunate as that reality is, you should be prepared to face challenges like these head-on. Do research to find an LGBTQ-friendly bank or loan officer before you apply for a mortgage. And if you’re turned away by one creditor, don’t assume you’ll be turned away by another.
7. What Role Does Long-Term Care Insurance Play in Our Financial Plan?
Medicaid qualification rules vary by state, marital status and the type of care received. Generally, Medicaid rules require elders to “spend down” their income and assets on long-term care (LTC) services until these financial resources are largely depleted. Under these rules, if one spouse needs LTC through Medicaid, the other spouse can keep the home, substantial assets and a living-wage income to help protect the “healthy spouse” from living in poverty.
Unfortunately, these spousal impoverishment protections do not apply to other types of family structures, including same-sex couples, families of choice (such as two friends who own a home together), or elder heterosexual couples who live together but are not married. This is why LTC insurance should be evaluated when LGBTQ couples prepare for the future. It covers care generally not included with health insurance, Medicare or Medicaid.
Build a Financial Team That Suits You
As with a great relationship, these financial topics are far from “set it and forget it.” Your finances need tending and updating as time goes on and your life circumstances and goals change.
It can be overwhelming to consider all these questions, but you don’t have to do it alone. Same-sex couples should discuss these and other unique challenges with their financial advisors so they can help draft financial plans that meet your long-term financial goals for retirement and beyond.
To help build your team, consider asking friends and other couples for referrals. Interview a few advisors. Learn about them, their background, their philosophies and how they work with their clients to find the perfect fit for you.
This information is not intended to be a substitute for a specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
CFP®, ChFC®; Series 7 Securities Registration,1 Series 66 Advisory Registration,† Insurance License As the key point of contact for the team, Dustin works with the Roundtable team of specialists and advisors to create, monitor and adjust your comprehensive wealth management plan. Before joining Wealth Enhancement Group, he created and implemented custom financial planning strategies at a Fortune 500 financial services company....Read More