While many states have passed laws barring housing, credit and employment discrimination against lesbian, gay, bisexual and transgender couples and individuals, these state laws often aren’t always in alignment with Federal law. And despite all the back and forth in the courtroom over the legality of same-sex marriage, civil rights moves have not removed the many financial penalties that LGBT couples face directly and indirectly.
Slow progress, but mixed messages from the IRS. The U.S. Internal Revenue Service (IRS) announced in May 2010 a change in its treatment of income earned by registered domestic partners (RDPs) in California. The IRS now will apply California’s community property laws to California RDPs to reflect “income-splitting” for community property—these laws have long been applied to heterosexual married couples in California who file their federal income tax returns separately. And more recently, the IRS has confirmed that this change will apply similarly to same-sex spouses in California and RDPs in Washington and Nevada.
This represents a step in the right direction: treating same-sex couples who have formalized their relationship under state law the same as married hetero couples. The change is welcome progress towards our community’s goal of full legal equality for same-sex couples, even though it makes preparation of tax returns more complicated for many couples during the period of change. In addition, although the change likely will result in higher income taxes for some same-sex couples, it is anticipated that many more couples will see a decrease in their income taxes.
Government lags behind the corporate sector. While the U.S. government doesn’t provide employee benefits to same-sex couples, the majority of Fortune 500 companies now offer health insurance and other forms of benefits to LGBT employees and their same-sex partners. However, LGBT couples still pay federal taxes on employer-provided benefits. (Married heterosexual couples don’t.)1
Extra $ for basic protection. Once straight people marry, they count on certain legal and financial protections. In states that don’t recognize same-sex marriage or civil unions however, it is much more involved and expensive for gay and lesbian couples to realize these same assurances.
A recent Chicago Tribune article illustrated the difference in Illinois: a gay couple with two children paid $10,000 to a lawyer to create two revocable trusts, powers of attorney and wills that would approximate the legal, medical and financial protection conveyed to straight spouses by a $40 marriage license.2
Retirement planning challenges. While gay couples pay equally into the Social Security system, no spousal or survivor benefits can be granted to them under federal law. (That’s because of the 1996 Defense of Marriage Act signed into law by President Clinton.) Many pension plans don’t allow survivor benefits to a same-sex couple either.1,2
This has prompted many gay and lesbian couples to look into long-term income-producing investments for retirement, and to adopt a long-range growth investing approach as a sudden loss of SSI or pension benefits may raise the risk that they will one day tap into their principal. Younger gay and lesbian couples who recognize this potential retirement hazard can maximize contributions to IRAs, 403(b)s and 401(k)s in the present and consider converting traditional IRAs to Roths for tax-free growth.
Estate planning differences. Same-sex couples do not get the tax breaks the IRS gives to married heterosexual couples. This makes for some heavy-duty estate planning. Multiple powers of attorney may be needed per person; privacy waivers permit same-sex partners to access each other’s medical records in an emergency. Trusts may need to be created for real property and life insurance policies.
For 2010, Colorado and Wisconsin have passed laws that include estate planning protections for same-sex couples.3
Eldercare planning & nursing home care. Long-term care planning is especially wise for the gay or lesbian couple. When the need for nursing home care arises, all couples fear the possibility of spending down their assets to the point that they need Medicaid. Yet federal law is crueler in this circumstance to domestic partners. If one of two straight spouses enters a nursing home and applies for Medicaid, the other spouse can stay in the couple’s jointly-owned residence without fear of losing the home. Yet if domestic partners own a home jointly and one applies for Medicaid, the healthy partner must buy out the ill partner’s ownership share to remain in that home.4
How George W. Bush gave gay couples a tax break. As a closing note, here’s an interesting financial wrinkle. When President Bush signed the Worker, Retiree and Employer Recovery Act of 2008, an opportunity that was once merely allowed became legally required. As of January 1, 2010, a surviving partner of a same-sex couple can roll over lump-sum inherited retirement savings from an employer-sponsored retirement plan to an IRA without a tax penalty. Before 2010, companies could prohibit this kind of rollover. Now, all employer-sponsored retirement plans that pay lump sums to non-spouse beneficiaries must provide the option.5
The good news: There is help available to you in sorting through and keeping up with the laws and what you need to do to ensure you have the same benefits as different-sex couples. Have you and your partner, husband or wife considered the amount of money you’ll need for the future? Have you taken time to look at your options in terms of protecting yourself from financial risk? Making sure that you have the right steps in place to protect yourself is something you owe yourself and your partner, and not something worth procrastinating.
Rose Greene, CFP ® is an independent representative with LPL Financial, Member FINRA/SIPC. She has been a certified financial planner and owner of Santa Monica-based Rose Greene Financial Services, a mom and mom financial planning firm with her wife of 18 years, for 26+ years. She may be reached at (310) 399-1200 or firstname.lastname@example.org. Her website and blog are www.rosegreene.com and www.moneymattersblog.com.
1 businessweek.com/debateroom/archives/2008/04/_pro_preempting.html [4/08]
2 chicagotribune.com/news/chi-gays-pay-more-18-jan18,0,2205178.story [1/18/10]
3 outinamerica.com/home/news.asp?articleid=33842 [1/26/10]
4 edgeboston.com/index.php?ch=business_finance&sc=finance&sc2=news&sc3=&id=101539 [1/22/09]
5 coloradoindependent.com/18531/bush-signs-law-requiring-same-sex-couples-to-enjoy-retirement-tax-break [12/30/08]