The recent Supreme Court decision on same-sex marriage opens the door to many gay and lesbian baby boomers to finally get to say “I do,” and enjoy the same legal benefits as married couples.
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Along with marriage comes many rights and protections afforded by the law, and also perhaps some unintended consequences. What effects could this ruling have on same-sex boomer couples’ financial futures and retirement plans?
I spoke with Catherine McCabe, senior managing director at TIAA-CREF, and Colleen Carcone, wealth planning director at TIAA-CREF, about some things boomers need to think about before entering into a same-sex marriage. Here is what you need to know:
Boomer: Does the ruling change things for same-sex couples, when it comes to financial planning?
Carcone: Yes. With the Supreme Court’s historic ruling on marriage equality, many of the longstanding obstacles that same-sex couples have faced in financial, estate and legal planning have been lifted. What’s new is that many same-sex couples did not have the same legal rights and protections that opposite-sex couples have enjoyed. But even with the expanded rights that come with being married, all couples still need to focus on creating a solid financial and estate plan that reflects the goals of both partners. This kind of strategic planning—best carried out with the guidance of financial and legal professionals—can help you build a financially secure future according to your wishes and ensure your priorities in the event of a health emergency or death.
Boomer: After they marry, what changes with same-sex couples’ tax returns? Should they continue to file separately?
McCabe: Same-sex marriages are recognized for federal tax purposes, including income and estate taxes. Legally married couples must file their income taxes as either married filing joint or married filing separate. Your choice is affected by the available personal and dependent exemptions, the standard deduction, Individual Retirement Account (IRA) contributions, and earned income tax credit or child tax credit eligibility. If you and your spouse each have relatively high incomes, together, you may face the so-called “marriage penalty,” in which your combined tax bill is higher than if each of you filed separately (if you were not married). However, by jointly itemizing deductions you may be able to offset how much tax you owe. Many couples have not thought through the impact that marriage may have on their income tax liability. Couples considering marriage should consult their financial or tax advisor to make sure they don’t get any surprises when it is time to file taxes.
Boomer: And how about changes regarding Social Security benefits?
Carcone: Until now, the Social Security Administration had been limited to extending spousal benefits only to same-sex spouses residing in states that recognized their marriage. The Court’s ruling in Obergefell will effectively extend these benefits to all married couples. There are certain eligibility requirements in determining whether you will be eligible to receive Social Security benefits based on your spouse’s record. Subject to those requirements, some of the Social Security benefits that are available to married couples include:
Spousal retirement benefit: You may be able to collect Social Security benefits based on your spouse’s earnings record rather than your own. Typically, you will be eligible to receive the greater of either your own benefit or an amount equal to 50% of your retired spouse’s benefit. One common strategy is for the spouse with the higher earnings record to file for benefits upon reaching full retirement age and to suspend his or her claim. The spouse would then claim a reduced spouse’s benefit. This “file and suspend” strategy can be somewhat complicated and should be discussed with your financial or tax advisor.
Spousal disability benefit: If your spouse is disabled and receiving Social Security disability benefits, you may be able to collect a monthly benefit based on your disabled spouse’s benefits.
Lump-sum death benefit: Following your spouse’s death, there is a one-time lump-sum death benefit of $255 available to a surviving spouse, or, if none, to a minor child.
Surviving spouse benefit: As a surviving spouse, you are entitled to receive the greater of your own retirement benefit, or, your deceased spouse’s benefit. You could also consider delaying receipt of your retirement benefits while you collect the survivor’s benefit based on your spouse’s earnings record.
Boomer: What are some of the estate planning considerations newly married couples will want to think through?
McCabe: Estate planning is important for all couples, even married couples, to make the management or transition of assets during a difficult time more seamless, and to ensure that the persons you want to receive or manage your assets actually get them. If you lack a well-executed estate plan, the laws of the state in which you reside determine who has certain rights in the case of your death or incapacity. For example, if you become incapacitated, absent a valid durable power of attorney for health care, state law will determine who can make your health-care decisions. In some cases, these laws may also determine who has the right to visit you in the hospital. If you do not have a valid durable power of attorney for financial matters, your spouse or partner may not be able to access your financial accounts—to meet your family’s expenses or to even manage assets. If you die without a valid estate plan, your estate will be distributed per your state’s laws of intestacy, which may go against your desired plans.
One of the most important, and most often overlooked, aspects of an estate plan is the manner in which assets are owned and beneficiary designations are structured. It is imperative that asset ownership and beneficiary designations be coordinated with your overall estate planning objectives in order to make sure that the provisions of your estate plan are met. For example, your estate plan could implement tax planning and could create a trust for the benefit of your spouse, but if your assets are owned jointly with right of survivorship, the assets will pass directly to your spouse, and will not be used for tax planning.
It may also be important to consider estate tax planning as part of your estate plan. In 2015, each taxpayer can shelter $5,430,000 from federal estate tax. In addition, married couples may take advantage of “portability,” which essentially allows couples to combine their federal estate tax exemption amounts. Also, there is an unlimited federal gift and estate tax marital deduction, allowing you to transfer assets to your spouse without gift or estate tax consequence. You will want to consider the impact of state estate or inheritance tax on your planning, if your state has a separate one.