Financial planning for same-sex couples has changed immensely since 2015 Supreme Court marriage ruling

Updated December 14, 2023 

On June 26, 2015, the U.S. Supreme Court ruled that the Constitution guarantees a right to same-sex marriage, thus requiring all 50 U.S. states to grant and recognize same-sex marriage.  

Before this landmark ruling, arriving at a similar financial result for same-sex couples as their married heterosexual counterparts called for a high degree of financial wizardry. Many a financial advisor had to resort to complicated workarounds, but thankfully, that’s no longer the case.  

“It removes a huge amount of complexity,” says Lorraine Johnson, wealth consultant at LifeTime Asset Management. “You used to have to go around your elbow to get to your thumb.” In this article, InvestmentNews delves deeper into the impact of this SC ruling on financial planning for gay couples. This covers personal finance, estate planning, and retirement planning.  

Understanding the rights of a gay married couple 

When it comes to financial planning for LGBTQ couples, having same-sex marriage validated by state laws is only half the work. Gay couples still need assistance with financial planning, especially now that they earn more and have more assets. They could use professional help with estate planning, retirement planning, family planning, and other personal affairs.   

All this requires financial advisers and their clients to get familiar with their legal protections and benefits that can be impacted by their state and/or changes in the laws.  

For instance, many financial benefits and legal protections are in place for legally married couples. This includes spousal rights under qualified retirement plans, state intestacy laws (rules on someone dying without leaving a will), and benefits provided by Social Security.  

Gay couples who are legally married has these rights and benefits are available to them.  

However, if a same-sex couple is not legally married, then they’ll need to do the paperwork that ensures they get as many of the protections and benefits available to them. Here are a few suggestions.  

1. Decide on medical directives 

Gay couples who live together cannot use the “next-of-kin” status for each other. So, in case of a medical emergency where one of them is incapacitated, they may be considered strangers to each other. This means that the partner will be bypassed by medical staff; they will contact a relative who will be considered as the default surrogate decision maker.  

In the event of a medical emergency, it’s vital for both parties to write their own medical directives and keep them on file.  

Important Medical Directives to Prepare 

• living wills (aka advanced directive) – this is a legal document that details the medical care that a person wants or does not want if they become medically incapacitated 
• health care proxy – a document that lists a trusted person to function as an agent or proxy. A proxy’s job is to express the subject’s wishes and make health care decisions on their behalf, should they be incapable of doing so. A doctor must certify that they are incapable of making decisions before a health care proxy steps in.  
• health care power of attorney – this legal document appoints a person to make medical decisions for the person in the event of incapacity (temporary or permanent) to make health care decisions of a financial nature. 

Same-sex couples should include all wishes in these medical directives, including any restrictions they want imposed. They should these on file with their primary medical provider and take copies whenever they travel.  

2. Assign a power of attorney for financial decisions 

It would be wise to have a properly drafted power of attorney. This is crucial, since not even a spouse or next of kin can handle bank accounts or investments in case of an emergency.  

In most emergencies, nothing short of a court order can grant them access to their spouse or next of kin’s assets.  

What’s the difference between a power of attorney and a health care power of attorney?  

3. Make out a last will & testament 

While it sounds macabre, this is a necessary step in making sure the surviving partner inherits their spouse’s assets.  

A will lays out specific wishes regarding the distribution of assets. In the absence of a will, state intestacy laws will apply. Should that happen, the surviving partner may lose any assets their spouse would have wanted them to inherit. The assets could go to qualified heirs (the deceased’s relatives) instead.  

Having a will is especially crucial for the surviving partner to continue residing in the shared residence. It’s also important if the deceased had assets and no children to inherit them, apart from their partner.  

The will can also be used to assign executors or personal representatives who will be responsible for administering the estate. Without a will, anyone interested in the estate can compel the courts to appoint them as such.  

4. Put up a trust for estate planning 

If there is a sizable estate or assets of significant value, these can also be placed into a trust so the partner avoids a hefty tax bill. A trust also keeps its terms and administration private, as opposed to a public, time-consuming process of a will.  

There are also potentially costly probate fees if only a will was used to administer assets. 

A trust can instruct when and to whom the assets are transferred, either over a long period of time or immediately after death. 

5. Draft a domestic partnership agreement 

LGBTQ couples who live together without getting legally married bear the risk of not having any legal protections for their assets, especially if their relationship ends. To mitigate this risk, gay couples can consult a financial adviser to draw up a domestic partnership agreement (aka cohabitation agreement) that outlines their financial expectations.  

They may also draft a separation plan detailing how their assets would be divided if they separate. Such agreements can result in income tax or gift tax penalties. Not all states allow such agreements between unmarried couples. So, an expert tax planner’s advice is invaluable here.  

6. Name beneficiaries 

For items like Social Security benefits, life insurance, retirement savings accounts, or even bank or investment accounts, one’s partner can be assigned as the main beneficiary. Naming them as a beneficiary takes priority over conditions in a will or other instructions.  

It’s crucial to review which people are designated as beneficiaries of which assets.   

7. Do family planning well in advance 

Unmarried, same-sex couples planning to raise children should know that this is more costly for them. This is especially true when the couple resort to surrogacy procedures if they prefer to have biological children. The least expensive option is adoption through the foster care system, which can of course take longer.  

However, it’s not all gloom-and-doom for LGBTQ couples who choose to adopt; there are incentives for raising children this way. Unmarried same-sex couples who have a child can get tax breaks like the earned income tax credit (EITC) and/or the child tax credit (CTC).  

There’s also a maximum credit allowed for qualified adoption expenses, which is $15,950 for 2023, an increase from the previous credit of $14,890 for 2022. 

Tax implications and financial planning for same-sex couples 

Given that the Supreme Court ruling leveled the field for LGBTQ couples, what are the taxes like for them then?  

Although counted as legal relationships on the state level, domestic partnerships and civil unions are not marriages. While the 2015 ruling upheld the validity of same-sex marriages, this does not confer unmarried same-sex couples the benefit of filing federal taxes as a married couple. The marriage designation for tax filing remains available only to gay couples who are legally married. 

 
But despite all that, the good news for most married same-sex couples is that they can expect a lower tax bill. However, those with too little or too much income must realize that this may not apply to either of them. It’s more likely for those at opposite extremes of the income spectrum to become worse off tax-wise if they decide to formally tie the knot.  

When it comes to financial planning, especially for gay couples, it’s always a wise move to consult financial planners. That way, they can see what their financial health could be like as a married couple or domestic partners. Then after weighing the pros and cons, they can make informed wealth management decisions and choose what’s best to secure their happiness.  

As a financial adviser, what would you recommend to gay couples: get married or stay in a domestic partnership? Why or why not? Let us know in the comments!