Financial Planning Checklist For LGBTQ Families

June 26^th of this year will mark the eighth anniversary of the landmark Supreme Court Obergefell v. Hodges decision to legalize same-sex marriage. Financial planning for the LGBTQ community has become less complicated with marriage equality. However, there are still areas that need special attention and are often overlooked. Taking a proactive approach will help ensure that LGBTQ couples’ finances are handled in a way that supports their lifestyle, family, and values.

Below are some important considerations to discuss with your financial and tax advisors to ensure that your family has the proper planning in place.

To Wed or Not to Wed? While now legally able to marry, some in the LGBTQ community choose not to. There are finance planning implications for this personal decision.

LGBTQ couples who do get married are governed by the numerous laws and regulations applicable to married couples. For example, marriage automatically protects one’s right to things like Social Security and military spouse benefits. Another advantage of getting married is the ability to freely pass money and assets back and forth without worrying about gifting limits. An unmarried couple who moves more than the $17,000 annual gift tax exemption between partners may encounter problems from a tax perspective.

A potential personal finance drawback to getting married is the so-called “marriage penalty.” This is the tax increase that many couples face once they combine their incomes and file as married filing jointly. Couples should assess their joint tax liability and explore ways to reduce their taxable income, such as utilizing tax advantaged retirement saving plans.

Domestic partnership agreements: Couples who do not marry will not have any legal protections for their assets if their relationship ends. A domestic partnership or cohabitation agreement may help outline financial expectations during the partnership and how assets should be divided if the relationship ends. It’s important to note that these arrangements may have unfavorable income tax and gift tax consequences, which should be considered when drafted. Additionally, not all states recognize agreements by unmarried couples, so it’s imperative to speak with an attorney who is familiar with the state law.

Spousal Benefits: There are some LGBTQ clients today who had different lifestyles earlier in their lives. It is not rare for some to have been in a heterosexual relationship for a period of time. In that scenario, if they had been married for 10 years prior to divorcing then they may be eligible for Social Security spousal benefits. That stream of income can be important when planning for retirement.

One does not have to be on good terms with their former spouse, nor does one even need to know the person’s social security number, to apply for these benefits. Furthermore, the ex-spouse is not notified about such inquiries by the Social Security Administration. If eligible, Social Security will notify you of the benefit. Claiming the spousal benefit may be sufficient for your cash flow needs, which may allow you to defer claiming your own earnings benefit. Allowing your own benefit to accumulate to age 70 can result in a much larger payout during your retirement years.

Family Planning: Deciding to have kids always comes with high expenses. This is particularly true for LGBTQ clients, where the process itself may be more costly. The least expensive option for LGBTQ folks to have a child is usually through the foster care system and adoption. The fertility process for biological children may be far more expensive, with procedures ranging from under $5,000 for Intrauterine Insemination (IUI) up to $40,000 or more for in vitro fertilization (IVF). Gay men who want a biological child may experience even higher costs, possibly well into the six-figure range.

It’s important for a client to reach out to their HR department at work to determine what type of benefits are offered for this process. Insurance often does not cover most of these costs, so planning should begin years in advance to develop a sufficient cash cushion.

Healthcare Power of Attorney: It’s important to have a healthcare power of attorney, which gives your partner the power to make healthcare decisions on your behalf. While this is technically only necessary for unmarried individuals, it is a good practice for all couples. Unfortunately, people encounter unscrupulous doctors or hospital staff who decide not to recognize their marriage due to discrimination. Having a healthcare power of attorney requires them to respect your wishes.

Utilizing Trusts: A revocable living trust is a useful planning vehicle, especially for LGBTQ families. Unlike wills, revocable trusts are not in the public domain. This helps keep your estate private from nosy friends and neighbors and can also help minimize offending other family members.

Revocable trusts can be flexible, allowing them to be changed while someone is alive and becoming irrevocable upon death. This is important because, unlike wills that can be successfully challenged, trusts cannot be contested by others, including family members who are antagonistic towards your lifestyle choices.

Estate Planning: Passing away without an estate plan could result in inadvertently leaving money to the wrong people. If you’re unmarried, your assets would likely not go to your partner without a well-defined estate plan. The same is true for any children that are not natural heirs, which is sometimes the case for same-sex parents. In these scenarios, or for anyone without children or whose partner doesn’t survive them, proper estate planning allows you to clearly determine to whom your assets go. Without a will, your state intestacy laws would dictate where your property goes. It could all pass to family members with whom you may have an estranged relationship or who you might not have spoken to in 20 years. Doing periodic estate planning reviews are essential to ensure your assets will pass according to your wishes.

Some same-sex couples have been together well before 2015. They may have some estate planning documents that predated their getting married once it became legalized. In this case, it’s imperative to review all estate planning documents to ensure that it accords with their current intent and the current laws.

Review Beneficiary Designations: Certain assets, like retirement accounts and life insurance policies, can pass to the beneficiary on file without the need for a will and without going through probate. The named beneficiary takes precedence over a will, meaning whoever is listed as beneficiary will get those assets regardless of what a will might state. It’s easy to overlook these designations, but they should be reviewed periodically and after any major life event. Last thing anybody wants is to have their insurance proceeds and retirement nest egg go to an ex-spouse because they never updated beneficiary designations.

Jonathan I. Shenkman

https://www.forbes.com/sites/jonathanshenkman/2023/03/13/financial-planning-checklist-for-lgbtq-families/?sh=5567dae57faf