Some Financial Planning Tips for LGBT same-sex couples
It’s a new year and just like losing weight, many of us are hoping to become better savers in 2015—or perhaps better spenders, whichever way you want to look at it. As a Financial Advisor, my clients tell me every January that they want to create a better budget; they want to prepare their taxes early; they want to begin saving more aggressively for retirement; because after all, who wants to work forever? While these are all common goals, it’s important to note that for gay and lesbian couples, there are still a lot of gray areas when setting up a financial plan.
Despite the federal recognition achieved in 2013 with the Windsor v. United States ruling, same-sex couples need to make sure they weigh the legal and financial differences of getting married versus opting out of marriage. For those of us in the LGBT community who are wondering if marriage makes financial sense after the Windsor decision, an essential first step is to have your financial situation reviewed by a Financial Advisor with experience in advising same-sex couples. I’d like to clarify the impact of same-sex marriage with regard to a couple’s financial plan, whether they are married, legally single, or in an alternative union such as a registered domestic partnership.
In 2013, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act which meant that same-sex LGBT married couples could begin enjoying the 1,138 federal benefits allotted to different-sex married couples. On January 16th 2015, the Supreme Court announced that it will review current state bans on same-sex marriage. In June 2015, the Supreme Court will decide whether or not states must allow same-sex marriages and if they must recognize same-sex marriages that were legally licensed and performed in a state that did recognize the union. Certainly, having access to federal benefits and being so close to nationwide recognition has not been reason enough for many couples to rush into marriage.
For many of us in the LGBT community, the concept of same-sex marriage is new; not just because of the Windsor decision, but because we thought it would never be a reality. Often there is a different mindset about “marriage” and “the future” among the LGBT community; and for some of us, marriage still isn’t a reality depending on the state of residence. Same-sex marriage is currently recognized in 36 states plus the District of Columbia; and according to the Williams Institute, a national think tank at UCLA Law that conducts research on sexual orientation law and public policy, more than three-quarters (75.8%) of same-sex couples in the U.S. are living in these states. However, the majority of my gay and lesbian clients who are in committed relationships became clients without having any legal partnership and thus had endless financial liabilities. Same-sex couples wait longer to get married (if at all). In fact, the Williams Institute recently found in a 2013 survey that out of 690,000 same-sex couples in the United States, only 124,000 were married.
Social, cultural, and political factors aside, let’s consider some of the financial consequences of marriage. One of the first benefits of marriage that same-sex couples think of is filing joint tax returns. Prior to the Windsor decision, LGBT married couples had to file two sets of tax returns each: married state tax returns (assuming their state recognized same-sex marriage) and individual federal returns. Now that some LGBT married couples can file joint taxes on both the state and federal level, it’s important to know the potential “marriage penalty” taxes when spouses have similar income. When a married couple (LGBT or not) has two high-income earners, filing joint tax returns can actually result in higher taxes than if they were to file as unmarried, single individuals. It’s only when incomes are dissimilar amongst married couples that filing joint tax returns proves to be beneficial.
An option to marriage for same-sex unmarried couples who are on the fence, is to become registered domestic partners (hereinafter RDP’s) as a way to avoid a higher federal tax bracket. In California, RDP’s still get the benefit of filing joint state tax returns, but they must file separate federal returns (just as married couples had to file before the Windsor decision). This means that same-sex couples have more room to be creative with their taxes if both earn incomes that are higher than average. Aside from being able to avoid the marriage penalty, RDP’s who have very different incomes can file state taxes as “Head of Household” and “Dependent,” opening the door to higher state tax savings.
Retirement planning can also present same-sex couples with both advantages and disadvantages depending on their marital status and income. Married couples have many more rights when it comes to inheriting retirement assets. For example, if one spouse passes and leaves behind her IRA account, the surviving spouse can choose to roll that IRA into her own IRA and continue to enjoy the tax benefit of deferring capital gains taxes until cashing out in retirement. On the other side of the token, an unmarried partner (or RDP) who inherits her partner’s IRA will not be able to combine it with her own IRA. Instead, the surviving partner would have to create a separate Beneficiary IRA and be forced to take taxable withdrawals either annually for the rest of her life, within five years, or immediately upon receipt of the IRA assets (which could create a huge tax bill if the IRA is large). This goes the same for employer-sponsored retirement plans such as a 401k or 403b.
Another advantage that spouses have over unmarried couples is the “spousal IRA,” which is a type of IRA that allows a working spouse to contribute to a nonworking spouse’s retirement savings. The main advantage to unmarried couples when it comes to retirement planning involves eligibility for the Roth IRA and its tax free distributions at retirement. For 2014, individuals who file taxes as “Single” may contribute the maximum to a Roth IRA until their modified adjusted gross income (MAGI) reaches $114,000. For married couples, however, the ceiling is much lower because they can only have a combined MAGI of $181,000 before becoming ineligible to max out a Roth IRA. Similar to the marriage penalty with income taxes, married couples who are both high income earners have less likelihood of being able to contribute to a Roth IRA than unmarried couples or RDP’s.
There are many other financial and legal issues that same-sex couples need to consider such as Social Security, Medicaid (known as Medi-Cal in California), capital gains taxes, as well as gift and estate taxes as they relate to shared property—this is exactly why you should be consulting a Financial Advisor at Gerber Kawasaki who specializes in working with the LGBT community. Whether you are ready to get married or not, neglecting to know your options could result in a huge financial burden for you and your loved ones.
By: Robert Castillo, ADPA®
Robert Castillo, ADPA® is a Financial Advisor at Santa Monica, CA based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $300 million in assets under advisement. Robert is also an accredited domestic partnership advisor and has been specializing in financial planning for LGBT same-sex and unmarried couples since 2009. To contact Robert, please email him at Robert@GerberKawasaki.com Twitter: @RCastilloLA
Disclaimer: This article contains general information and is not intended as legal or tax advice. Every case must be reviewed independently with an attorney or tax advisor.
Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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