Until recently, many of the typical spousal retirement planning strategies used by married couples were not available broadly to LGBTQ couples. With the recognition by states of same-sex marriages, LGBTQ couples are now looking at retirement with new eyes, and in many cases with new opportunities. Married couples can pass money back and forth without raising any red flags or causing tax problems. This makes a few tax saving strategies a bit easier to accomplish and makes financial planning easier as the retitling of assets and the funding of individual retirement accounts on each other’s behalf allows for a more mutual style retirement strategy. Often one partner will make significantly more than another or may have disposable assets the other does not have. Now that LGBTQ spouses can freely pass money between each other, one spouse can help indirectly fund the others retirement account. This can dramatically increase the total amount saved between the couple, and reduce their over-check owed to the IRS.
Some of the best strategies for couples to reduce their potential federal tax exposure are the simplest. For example, a wage-earning spouse who meets certain income requirements can make a tax-deductible IRA contribution on behalf of her non-working spouse. Because simple strategies like this are new to many in the LGBTQ community, they are providing new opportunities for same-sex couples to think differently and more proactively about retirement.
If one spouse passes away, his or her IRA can be adopted by the surviving spouse as a non-taxable event. Another option would be to roll it over into an existing IRA. Prior to this, an IRA would have to be taken out in a condensed time frame, potentially pushing the deceased spouse’s income up to dramatically higher tax rates, and leaving less money for the surviving spouse to live on. With legally-recognized marriages, same-sex couples now have additional estate planning benefits that may add increased security to their retirements.
A non-working spouse is entitled to at least 50% of the benefit of a working spouse which provides another benefit to LGBTQ couples from legal recognition. On a similar note, a spouse with a smaller benefit can “step up” to a higher benefit if their spouse passes before them. This area of financial planning is quickly evolving, so make sure to discuss the current laws and statuses at length with an advisor familiar with LGBT planning.
Couples who choose not to get married should consider these 5 key estate planning tools necessary to protect your assets and the legal powers of your relationship status:
Powers of Attorney (2): A Financial Power of Attorney allows you designate to access and control your financial assets if you are incapacitated. Medical Power of Attorney is similar but deals with the medical side of things; if you are not able to make decisions about your health then the Medical Power of Attorney that you have designated will make these decisions on your behalf.
Living Will: Through a living will, you tell people what you want to be done if you need life-sustaining medical treatment. There is an area in this document that can talk about being a donor and what you would like to have done with your body after passing if it includes a Last Remains Designation.
HIPAA Release: Your HIPAA Release document is permission for the physician to release your medical condition to the person who has the HIPAA. This allows your doctor to work directly with your partner for the benefit of your care in the case of any kind of health situation.
Living Trust: A Trust is a contract that holds title to and controls your assets. This can be a crucial part of planning for LGBT partners. The main focus of this document is to make sure your assets go where you want. It also protects your privacy; it remains confidential and does not become a matter of public record. If your estate would go to court in a probate process without a living trust, a judge would decide where everything would go and looks to family (blood relations) first.
Money can be a top cause of friction between spouses. Work together with the help of a trusted advisor to develop a comprehensive plan to help you both reach your specific financial goals. This plan will also hopefully help you keep more of the money you’ve earned, which may make some of your financial goals closer to be achieved than you thought. As your income combines and climbs, various tax planning strategies and tax deferral from a retirement account may become even more valuable.