8 Financial Planning Benefits for Same-Sex Couples: The Story of Jane and Josephine

Budgeting | Retirement Planning | Savings | Financial Planning | Personal & Family Finances | InspireHer: Plancorp Women’s Initiative | Careers | Family Finances | Retirement Tax Planning

 Plancorp team By: Plancorp team

In 2015, Jane and Josephine had been together as a couple for ten years and, the U.S. Supreme Court just declared that same-sex couples have the fundamental right to marry. Like every couple, Jane and Josephine had a lot to consider before deciding to get married or not. The first thing that they thought of is all of the wonderful financial planning opportunities they could now access as a legally married couple, right? Probably not, unless Jane and Josephine were financial planners, but this is definitely a subject worth discussing before tying the knot.

There are over 1,000 legal benefits that come with being married. Jane and Josephine want to learn more about some of these benefits and how they can utilize these benefits to fulfill their financial goals.

  1. Taxes

Jane works full time and is a higher income earner. Josephine works part time. Since Jane earns most of the couple’s income, filing taxes as “married filing jointly” will potentially reduce their overall tax bill, especially since the 2017 Tax Cuts and Jobs Act.

Additionally, as an unmarried couple, Jane and Josephine are subject to gifting restrictions. If Jane were to give Josephine more than the annual exclusion gift amount in a year ($15,000 per person in 2020), there could be gift tax implications, or a portion of Jane’s lifetime gift tax exclusion amount would have to be used. Legally recognized spouses, however, have unlimited gifting allowances between one another. As a married couple, Jane and Josephine can exchange or gift money to one another with no restrictions or gift tax implications.

  1. Employee Benefits

Because Jane works full time, she has access to her employer provided group medical, vision and dental plans. Josephine has always relied on the marketplace to obtain her medical coverage which has historically been very expensive. As a married couple, Josephine will be able to join Jane’s employer plan as a spouse. Life insurance is another employee benefit that is often available only to employees and spouses. So, Josephine could become eligible for spousal life insurance through Jane’s group benefits.

  1. Retirement Plans/Accounts

Jane has a pension plan through her employer. As a legal spouse, Josephine can be a survivor beneficiary to Jane’s pension plan. The ability to pass on the pension benefit could be especially important for Josephine’s financial future. Since Jane is the primary income earner, she would likely want to insure Josephine’s financial stability in the event of her death. If Josephine were not eligible to be a survivor beneficiary, additional and often costly life insurance policies may be necessary to provide the same protection.

Josephine has an IRA. Jane could take advantage of the distribution benefits of a spousal inherited IRA if she were to ever inherit Josephine’s account. As of 2020, this allows Jane to take over Josephine’s IRA account as if it were her own and take distributions starting at age 72 based on her life expectancy (a provision only applicable to spousal beneficiaries). If she were not inheriting the account as a spouse, she would be subject to a 10-year rule for distributing the account.

  1. Social Security

As a married couple, Jane and Josephine may be eligible for spousal and/or survivor Social Security benefits in the future. Jane’s Social Security benefit will be significantly more than Josephine’s, so it is likely that Josephine’s spousal benefit would be higher than her personal benefit based on her own earning record.  Also, if Jane were to die before Josephine, Josephine could then take the increased survivor benefit of Jane’s full retirement age benefit amount as a surviving spouse, assuming Josephine had also reached her full retirement age. These benefits would otherwise not be available to couples not deemed legally married.

A couple of caveats come along with Social Security rules and the federal legalization of same-sex marriage. In the case of Jane and Josephine, they have been together for over ten years, but the date of their legal marriage will not reflect the true length of their relationship. It is unlikely that this would be an issue for Jane and Josephine but, spousal and survivor benefits are only eligible to those who have been married for at least nine months. Further, if Jane and Josephine were to marry and then divorce within ten years, they would not be eligible for divorced spousal or survivor benefits despite their relationship actually being much longer than ten years.

  1. Estate Planning

Jane and Josephine jointly owned their home in Texas, a community property state. For unmarried couples, only half of the home would receive a step-up in basis upon the death of either of them, which could result in significant capital gains for the survivor should they need to sell the home to downsize or subsidize their future financial needs. If Jane and Josephine were to marry, the whole property would receive a step-up in basis, potentially a huge benefit (significant tax savings) for the survivor should they need to liquidate it.

Neither Jane nor Josephine currently have any estate planning documents. This leaves them at risk of dying without a will, or intestate. Without a Last Will and Testament, the state laws would dictate the distribution of their assets and these laws rely on the legal relationship of marriage. This would likely leave the surviving spouse with no right to the decedent’s property, which could be financially devastating. If Jane and Josephine were married, the intestate succession laws would be more in the survivor’s favor. Of course, having properly drafted and executed estate planning documents is the preferred solution, married or not.

The complex financial planning strategies once needed for same-sex couples to achieve similar results as their married, heterosexual counterparts have been largely eliminated with federal marriage equality. However, there are still unique financial planning considerations for same-sex couples.

  1. Combining Finances

Same-sex couples, especially those who have been together long before they were able to legally marry, often keep their finances separate pre-marriage. It is hard to imagine keeping everything separate for so long and then combining finances just because you are married. This is a decision that will be different for every couple. This financial checklist is a great way to make sure everyone is aligned and moving towards the same financial goals.

  1. Planning to Have Children

Deciding if or when to have children is certainly a huge financial decision for any couple. For same-sex couples, planning to have children often involves some very expensive options. Same-sex couples often rely on adoption or surrogacy to start a family. These avenues can become increasingly more expensive than having a child naturally and planning for these expenses is crucial for financial success. Luckily, there are a couple of specific tools to help plan for these expenses. Due to the passage of the SECURE Act, withdrawals from IRAs are now allowed, penalty-free for a qualified birth or adoption. Each “qualified birth or adoption distribution“(QBOAD) is limited to $5,000 per individual for each birth or adoption. Additionally, there is an adoption tax credit for qualified adoption expenses, subject to MAGI limits.

  1. Gender Pay Gap & Employment Discrimination

Unfortunately, women are still earning less than men, about 81 cents for every dollar. It may not be obvious, but this could have a huge impact of the financial success of women and in particular, female couples. Additionally, there are still many states where you can be fired by a private employer for being a member of the LGBTQ+ community. These combined inequities could be devastating to a couple like Jane and Josephine and should be addressed and possibly mitigated though the financial planning process. The best first step is to make sure emergency savings are set up to handle any unexpected life events.

Although Jane and Josephine are fictional characters, their story is very real for many same-sex couples. Regardless of sexual orientation, every couple considering marriage should discuss these topics with each other and a trusted financial professional in order to address their unique circumstances and goals.

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Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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