Same-Sex Couples and Financial Planning


President Obama has become the first President to publically support gay marriage and I am sure this will now become an election year issue.  Exactly how this will play out in this year's Presidential election is anyone's guess.

I t could be that his support will be mostly symbolic or it could signal for the beginning of the end of the Defense of Marriage Act (DOMA).  DOMA, as many of you probably know, is a federal law which prohibits the recognition of gay marriage at the federal level. Aside from all the emotional implications this law has, DOMA causes very real financial challenges for married same-sex couples, especially when it comes to income tax returns and retirement planning.

Interestingly, just because DOMA prohibits the recognition of same-sex marriages at the federal level does not mean that states have to prohibit them.  Currently seven states and Washington, D.C. recognize same-sex marriagaes.  Obama's announcement supporting same-sex marriage came the day after North Carolina voted to prohibit same-sex marriages as well as civil unions.

It is this disconnect between state law and federal law that creates many financial challenges (and possibly higher costs) for married same-sex couples as compared with their heterosexual counterparts.  Very often same-sex couples have to engage in additional estate and financial planning to get to fulfill their overall goals and objectives.

Filing income taxes may be more expensive for married same-sex couples who generally must file two sets of returns in order to comply with various state and federal laws.   In addition, for same-sex couples, the inability to file a joint federal tax return also means two married individuals with a disparity in income are ineligible for certain tax breaks and deductions.

Tax complications also extend to the sharing of assets. For opposite-sex couples, a transfer of assets between two spouses is not taxed. For same-sex married couples, though, a similar transfer of assets can be taxable without proper planning.  When a same-sex spouse grants a partner something worth an amount in excess of $13,000, the IRS considers it a liability under gift tax rules.  In addition, when a same-sex partner dies, that deceased partner would not be able to take advantage of favorable tax rules for passing property to a surviving spouse and deferring or avoiding an estate tax.

Aside from the tax issues, gay couples entering retirement may also lose out on Social Security benefits. For an opposite-sex married couple, if a spouse passes away, the living spouse can choose whether to keep receiving his or her own Social Security benefit or inherit the benefits due the deceased, which are sometimes higher. That same choice is not currently extended by the federal government to gay couples.

Beneficiary designations also need to be carefully reviewed.  Benefits are not automatically paid to the surivor of a same-sex couple who is denied certain benefits that are available to surviving spouses of opposite sex married couples.

What all this means is that even though President Obama has now signaled his support for same-sex marriages, planning is still essential to achieve your desired results.