The Biggest Financial Issues for Same-Sex Couples

Same-sex couples won a huge victory last year, but the legal waters are still murky.

Wedding figurines for lesbian couple in front of a pink cake

A host of financial issues surrounding same-sex marriage remain unresolved.

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Taxes. Same-sex couples also encounter the “marriage penalty," which takes effect when spouses with similar incomes pay higher taxes than two equivalent-income single people. 

Gregory Rogers, a Brookline, Mass., certified financial planner with the Accredited Domestic Partnership Advisor designation, says filing taxes is often a shock for high-income, same-sex couples. Rogers says a married couple made up of two high earners will hit the highest marginal tax rate at a combined income of $457,000 in 2014, whereas if they were single, they could have $406,000 each before they hit the highest bracket. "Add some capital gains on top at the highest possible tax rate [23.8 percent], and you have a lot more in taxes," Rogers says.

But that's far from the only tax consideration. A big question is whether to file federal taxes jointly or separately. Holly Kylen, a U.S. retirement coach with ING Financial Partners who specializes in LGBT financial planning, suggests couples speak to a tax advisor to decide which option is better for them financially. 

State taxes are another story. When Brady went to the Pennsylvania Department of Revenue website, it explicitly read “joint income tax returns may be filed by husband and wife; and the spousal inheritance tax applies to husband and wife.”

Estates. The Windsor decision strengthened and simplified estate planning for same-sex couples. However, Alexander Popovich, a wealth advisor at JP Morgan Chase & Co., says couples should consult an advisor before making decisions about their estate. Because spouses previously didn't qualify for the marital deduction and were more likely to pay estate taxes, they often turned to insurance policies, which helped them create trusts that would offer some tax protection.

Clients in states that don’t recognize their marriages and have an estate tax should find out if their current plans protect on federal side and the state side, Popovich says. For example, widows and widowers could still be subject to state inheritance taxes in states that don’t recognize same-sex marriage.

Same-sex couples may wonder if an annuity with a guaranteed lifetime income will become void when a spouse dies in a state that doesn’t recognize their marriage. Robert Fishbein, vice president and corporate counsel for Prudential's tax department, says the likelihood is small because marital status is decided at issuance. 

Retirement saving. Same-sex couples now have survivor benefit protection for defined benefit plans, but there are questions about how retirement plans should handle same-sex spousal benefit rights for any transactions made before the Windsor decision, the Prudential report explains.

However, the retirement of widows and widowers will be much more financially stable than in the past. Now, a widow or widower inheriting his or her spouse's individual retirement account can roll it into their own IRA.

[See: 6 Steps to the Retirement Lifestyle You Want.]

Kylen says that change is one of the most important financial benefits for same-sex couples. “If I have $200,000 in IRAs, and if we have been married, that would come in a lump sum and you lose 30 to 40 percent of it [to taxes]. Now we can roll it into the spouse's IRA and take the minimum required distribution, and it lasts a lifetime,” Kylen says.

Older same-sex couples are in a particularly difficult situation, says Adams, whose organization focuses on older LGBT Americans. “They are more vulnerable and face more challenges. They need to make decisions about long-term care. They can’t wait two or three years for these questions to be resolved,” Adams says.

Despite the financial planning headaches, Brady says he doesn't mind swimming in paperwork now that he is able to enjoy marriage.

“On our wedding day, it might have been the first time in my life that I forgot I was gay,” Brady says. “The day after the wedding, I had the opportunity to experience something I never experienced before. I wasn’t thinking about the documents or what others thought, and instead I just thought to myself, ‘This is how other people live.’"