Now that DOMA is crumbling, married same-sex couples have some new opportunities to simplify their lives, reduce their taxes, and boost their incomes. There is still some unfinished business around whether or not same-sex couples will receive the full umbrella of federal recognition if they reside in a state that doesn’t recognize their marriage, but this article assumes that will be the case. For couples that wanted marriage equality for symbolic reasons only, I recommend taking a closer look at the financial benefits of marriage. Here are my top three pointers for living in a post-DOMA world.
Sharing your stuff just got a whole lot less complicated. Married same-sex couples can file joint tax returns (fewer headaches for your CPA and lower costs for you). Wealthy spouses can spoil their not-so-wealthy spouses rotten without having to worry about such actions turning into a taxable gift. For example, marriage means that adding a partner’s name to an investment account or to a home will not require filing a gift tax return.
In California, an extra perk exists for federally recognized marriages. If the current homeowner wants to have his partner buy into the house, he can potentially receive the money as a tax-free gift if the transaction occurs after the marriage. If the current owner decides he wants to maintain full ownership of the house, but they opt to sell the house a few years after the marriage, the capital gain exclusion may have just gone from $250,000 to $500,000. Lastly, there may be a full step-up in cost basis if one partner dies in cases where the home is owned as community property with rights of survivorship (CPROS).
2. Social Security
A couple should think about two “windows” well before retirement. In both cases, the strategy is the same. Waiting until age 70 to collect retirement benefits may have a huge positive impact on the total amount of income the couple receives during their lifetimes.
Window 1: When both partners are at retirement age (roughly age 66)
If the partners are close in age, the partner who is expecting a lower social security retirement benefit can collect a “spousal benefit” for the small window between normal retirement age (NRA, currently 66) and age 70. The other partner can then file for benefits but “suspend” them so she’s not actually receiving anything. The spousal benefit will be equal to 50% of whatever the other partner’s age 66 retirement benefit would have been.
Window 2: The death of one partner
Each partner waits until age 70 to collect the much larger retirement benefit. This in itself will usually put more money in a person’s pocket over his or her lifetime than starting at age 66. Now the cherry on top: If the first partner to die was getting a larger retirement benefit, the survivor can switch over to a “survivor benefit” for life that will be 100% equal to what her partner was collecting.
Example: Let’s say that the wealthier partner earned a nice six-figure salary during her career. She and her partner turn 66 and her partner collects a spousal benefit for up to four years. At age 70, they start collecting their retirement benefits. In 2013, that could be as much as $40,000 per year. If the lower-income partner was only eligible to receive, say, $18,000 in annual retirement benefits, she will now be able to collect $40,000* per year for life in “survivor benefits” at the death of the partner – an extra $22,000 per year!
Social Security planning is highly complex and there aren’t general rules to follow. Make sure you have your exact situation analyzed by a competent financial planner before making irrevocable decisions.
3. The Estate
At this point, all married couples need to have over $10.5 million in assets before they have to worry about owing any estate taxes at the death of the second partner. The laws can change at any time, but that’s where we are today. Couples who have wealth exceeding $5 million would most certainly benefit financially from marriage with regards to estate tax, assuming each partner’s intention is to leave his or her partner most or all of the wealth after death.
All same-sex couples that are in a state-recognized union or marriage should consult with their professional team (CFP, estate attorney, CPA) so they can see how they are affected, and determine if changes are needed. And couples that are considering marriage should also be aware that some of the financial consequences (taxes) might be negative, depending on unique circumstances. Bank and brokerage account beneficiary information may also need to be updated since spouses enjoy certain rights as beneficiaries that non-spouses don’t get. In other words, get professional help before you act. I love Google as much as the next guy, but you’ll get what you pay for.
The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.