Retirement planning tips for LGBT couples
We are updating this article in light of the recent Supreme Court decision on DOMA. Please check back soon for updated content.
Retirement planning isn’t easy for most couples, but it’s particularly complicated for lesbian, gay, bisexual, and transgender (LGBT) couples who face a host of challenges. Whether it’s a lack of Social Security survivor benefits when a partner passes away or the inability to file federal tax returns jointly, a slew of financial complications arose for same-sex couples following the 1996 passage of the Defense of Marriage Act (DOMA), which defined marriage on the federal level as a union between a man and a woman.
Twelve states and the District of Columbia have legalized same-sex marriage since 1996 and three more are on the verge of doing so. Additionally, the Supreme Court has agreed to hear two cases challenging laws against same sex marriage, including DOMA.
In the meantime, there are steps LGBT couples can take to prepare for retirement.
If you have a pension plan at work, whether it’s a defined plan or a 401(k), you’ll need to investigate if and how you can name your spouse or partner as a beneficiary. Some employers recognize same sex marriage or other partnership arrangement for various purposes, and some don’t. Non-spouse beneficiaries, including employees’ partners that are named beneficiaries, are permitted to roll their inherited retirement benefits directly into an inherited individual retirement account or annuity. Check with your employer and tax advisor regarding these rules. As your needs require, make sure your other benefit programs and policies, including life insurance, IRAs and annuities, name your partner as beneficiary when permissible under applicable law.
Because the federal government currently doesn’t recognize same sex marriages, LGBT couples don’t have the advantage different-sex or even divorced couples have of being able to claim spousal-related Social Security benefits.
Pension Survivor Benefit
Under federal law, companies with traditional defined benefit pension plans must offer employees a spousal survivor benefit option, which allows spouses to continue collecting annuity payments after the employee’s death. Normally, the employee must accept a lower monthly pension payment in return for spousal protection.
A 2012 study by the Human Rights Campaign Fund found that about three-quarters of corporations offer a survivor option for same sex spouses or domestic partners. If you participate in a defined benefit pension plan, you should check with your employer to determine whether and to what extent the plan offers survivor benefit options in your situation.
If you want to leave your estate to your partner, you’ll need to be very specific about it in your will or trust, particularly if you live in a state that does not recognize same sex marriages and even in some states that have domestic partner laws. Check the estate laws in your home state to see how they apply to your situation and talk to your legal advisor about your needs.
Same sex couples are subject to a maximum 40 percent federal estate tax rate on inheritances over $5.25 million (in 2013), whereas heterosexual couples can bequeath unlimited sums to surviving spouses. Check the laws in your home state to see how they apply to your situation.
The application of state and local estate and inheritance tax laws to same-sex couples varies depending on the particular jurisdiction. Talk to your tax and legal advisor about your specific situation.
One potential solution for minimizing the impact of estate and inheritance tax costs is to purchase a life insurance policy that provides a benefit to fund such costs. Another is to start a gifting program that slowly shifts assets over a period of years from one spouse to the other. Federal law permits tax-free gifts up to $14,000 (in 2013). Again, check with your tax and legal advisors about your specific situation and what solutions may be best for you.
LGBT couples that buy long-term care insurance together should ask the insurance company about their requirements for recognizing your marriage or partnership.
In states that don’t recognize same sex marriage or lack domestic partner laws, same sex couples need to obtain a medical power of attorney if you want your partner to make medical decisions, have access to your medical information, and, even in some cases, visit you in the hospital.
Medicaid pays for long-term care for people of less means that meet certain requirements, including seniors with few assets. The federal qualification rules include “spousal impoverishment protections” aimed at preventing a healthy spouse from having to give up a home or retirement savings to qualify a spouse for protection.
Those rules generally don’t apply to same sex couples. However, because Medicaid is a joint federal and state program, some states, in particular those that recognize same-sex marriage, are extending the protections in some cases. Check with your state’s Medicaid office to clarify your particular situation.
Many of the retirement planning issues same-sex couples currently face may change should the Supreme Court rule DOMA unconstitutional later this year. You should keep this is mind as you plan and as you consult with your tax and legal advisors.
This material includes a discussion of one or more tax-related subjects and is for informational purposes only. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent legal and tax professionals. Please understand that New York Life, its subsidiaries, agents and employees may not provide legal or tax advice. Please consult your own legal and tax professionals before making any decisions. Retirement planning isn’t easy for most couples, but it’s particularly complicated for lesbian, gay, bisexual, and transgender (LGBT) couples who face a host of challenges.