What's the big deal, right? If a gay couple can't marry, does it really matter? Do they lose out on more than the chance to register for gifts? Do single, gay folks face different financial issues than single, straight ones? Well, yes, they do.
Consider this: If a married person dies, the couple's assets pass seamlessly to the surviving spouse. If the deceased was in a same-sex relationship, though, and not married, there's a good chance that the surviving partner will be socked with inheritance taxes. In Maryland, for example, there would be a 10% hit, while in Pennsylvania, it's 15%. Imagine having to pay $75,000 on a $500,000 "inheritance" when your spouse dies.
Meanwhile, you might think that domestic partnership arrangements can fill most of the needs of same-sex couples, but they're actually not enough. And the way they work may surprise you, too. When companies extend benefits to domestic partners, it doesn't work the same way as with married spouses. The benefits received are treated as taxable income. So while you may be happy to receive health insurance from your partner's employer, you may be facing a hefty tax bill on a sizable benefit. A few employers recognize this disparity and go as far as "grossing up" the affected employee's income to cover the cost of the tax bite. For example, Discovery
Here's another danger facing partnered gay employees. They may have designated their partners as the beneficiary for their 401(k) accounts, but there's a good chance that their partners will be forced to take the entire amount as a lump-sum distribution, which can put them in a higher tax bracket and end up costing much more than if they were able to stretch out withdrawals over time. Employers now have the ability to permit beneficiaries to open an IRA and transfer 401(k) funds to it, but not all employers are aware of this or offer it. One safeguard against this, if you leave your job, is to roll over the 401(k) assets into an IRA instead of leaving them in the 401(k) plan. In some situations, you may be permitted to roll over the assets while still employed.
Some estate-planning solutions for gay couples include trusts. Life insurance policies may be moved into irrevocable trusts in order to keep estates smaller, but they can be complicated, too. Irrevocable trusts can be risky, as some relationships end in break-ups.
Financial planners Joseph Kapp and Nicholas Burkholder, authors of "A Guide to Serving the Estate and Financial Planning Needs of Gay Men, Lesbians, and Same-Sex Couples," note that, "A potentially more flexible and simple alternative is to structure cross-ownership of policies whereby each partner is the owner and beneficiary of a life insurance policy on the other. This allows the death benefit of the policy to avoid inclusion in the decedent's gross estate for estate tax calculation purposes." (Read their article, if you wish.) They advise having an attorney draft ownership agreements for the policies, and they also note that it's (again) not so simple for a same-sex couple to get life insurance on each other. It can usually be done, but only after jumping through additional hoops.
Interested folks can learn more at the Human Rights Campaign's 7 Steps to a Better Financial You.
Relevance for straight couples
Meanwhile, many of you might be thinking that all this doesn't apply to you because you're straight, but think again. For example, if you live with a partner to whom you're not married, you face some similar issues. (Though unlike most gay couples, you have the option to marry.) If you buy your non-spouse a new $20,000 car, you face tax implications, because you're giving someone more than the $12,000 maximum gift tax exclusion. Giving a spouse a $50,000 car would be OK, though, because you're married.
The bottom line is that whoever you are, it's important to give some thought to how you've structured your life and your finances, and to do some estate planning. This is especially critical for gay couples, who will likely find that they should put all kinds of things in writing to protect themselves and each other.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Best Buy is a Motley Fool Inside Value and Motley Fool Stock Advisor recommendation. Try our investing services free for 30 days. The Motley Fool is Fools writing for Fools.