4 questions for same-sex couples to consider

Review these options if you plan to transition from a partnership to a marriage.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

Key takeaways

  • Legally married spouses can now claim Social Security benefits on their spouse's work record.
  • US citizens who are legally married can also leave an unlimited amount of assets to each other without triggering federal estate taxes.
  • With marriage equality, some employers have stopped offering domestic partner benefits for same-sex and/or opposite-sex couples.

Some same-sex couples have tied the knot, while many others still haven’t considered marriage in earnest.

To be sure, marriage is a big emotional decision. But understanding its potential impact on your financial situation is also important, particularly in light of the sometimes complex changes in the tax law and employee benefits that marriage can bring.

Here are some of the key questions that same-sex couples should be asking when contemplating marriage. As always, it is important to consult an attorney or tax advisor before making any financial or estate planning changes.

Do domestic partnerships and civil unions still exist?

Domestic partnerships and civil unions were created by various states essentially as a compromise in light of existing state law prohibitions of same-sex marriage. The state of Vermont first legalized civil union in 1999 as a way to provide to same-sex couples the same state benefits, civil rights, and protections of the law available to "traditional" married couples.

The Supreme Court's 2015 decision (known as Obergefell v. Hodges1) did not invalidate these state-sanctioned unions for state law purposes. The Court held that same-sex couples have a fundamental right to marry in all states, and that there is no lawful basis for a state to refuse to recognize a lawful same-sex marriage performed in another state on the grounds of its same-sex nature. Some states have passed laws converting existing civil unions into marriages, and others have permitted conversion to marriage at the request of the partners.

So, exactly how the Court's ruling may affect these various domestic partnerships and civil unions in all 50 states may take some time to become clear—another reason same-sex couples should be cautious before making changes to their financial and estate plans.

In September 2016, the IRS issued final regulations clarifying the definitions of husband, wife, and spouse for federal tax purposes. The final regulations now define those terms as anyone lawfully married to another, and "husband and wife" as any 2 persons lawfully married to each other, regardless of their gender. These final regulations adopt the "state of celebration" rule, recognizing for federal tax purposes any marriage that is lawful in the US state, possession, or territory where that marriage took place.

Tip: With marriage equality, some employers have stopped offering domestic partner benefits for same-sex and/or opposite-sex couples. If you fall into this kind of situation and want to keep those employee benefits, weigh the pros and cons of marriage.

What impact will marriage have on taxes?

Joint filing: Same-sex couples who choose to marry can file their federal taxes jointly. Doing so will likely lower their tax-preparation costs and make filing simpler. But there are other consequences. "Filing jointly tends to be beneficial if one spouse earns most of the income," says Terri Lyders, vice president, estate planning specialist, with Fidelity's Wealth Planning and Personal Trust. "But it may be detrimental if both spouses have roughly equal income."

This is because married couples may lose eligibility for tax credits that phase out above specific income levels. For example, the beginning credit phaseout for the Child Tax Credit increases in 2018 to $200,000 ($400,000 for joint filers). The phaseout also applies to the new $500 credit for other dependents. Similar rules govern federal income tax credits for child and dependent care and adoption.

When both members of a couple earn a high income, they are especially at risk for higher taxes when they file jointly. Single tax filers hit the top 37% federal income tax bracket at $500,000 in income in 2018, meaning an unmarried couple with equal earnings could make up to $1 million in 2018 before reaching this highest tax bracket. Married couples reach the top bracket at $600,000 in 2018. Thus, getting married and filing jointly could result in a significant tax increase.

How will getting married affect government and workplace benefits?

Social Security: When one member of a married couple retires, they can claim either their own Social Security payment or a spousal benefit that can be worth up to half the spouse's benefit. And when one spouse dies, the survivor can claim the greater of the 2 spouses' benefits. The larger the difference between spouses' incomes, the more advantageous both the spousal and survivor benefits are likely to be. Also, if you are married for at least 10 years and then get divorced, you may be able to claim benefits on your ex-spouse's work record.

Health insurance: In the case of married couples, legal spouses may be covered by their spouse's employer's health plan and other health benefits. Additionally, even if open enrollment has ended, a recent marriage is a qualifying life event that generally allows for a special enrollment period.

401(k) and other workplace savings plans: An employee can now take hardship distributions (if permitted by the plan) from their 401(k) or other workplace savings plan for certain expenses (postsecondary education, medical, and funeral) of a same-sex spouse, and the retirement plan account can be split using a qualified domestic relations order (QDRO) in the case of divorce. On the other hand, as with opposite-sex couples, an individual who wants to designate someone other than their spouse as the beneficiary of their retirement savings account would now need to obtain the spouse's written consent.

Health savings and flexible spending accounts: The expenses of an employee, their spouse, or the spouse's children are eligible for reimbursement from a health savings account (HSA) or flexible spending account (FSA) tax-free, provided the money is used to pay for qualified medical expenses. There are also dependent-care FSAs that can be used for day care expenses of dependents of same-sex married couples.

Military benefits: Same-sex spouses of military members may be some of the greatest beneficiaries of marriage equality, because a legal spouse is eligible for a wide range of military benefits, from pension survivor benefits to health care to housing.

Tip: Designating beneficiaries on investment accounts, retirement accounts like IRAs or 401(k)s, and life insurance policies is important. That's because beneficiary designations on these accounts and policies will take precedence over wills or other instructions. It's a good idea to review beneficiary designations every so often to make sure they are up to date.

How will getting married affect estate planning?

Unlimited marital deduction: A married person can leave any amount of assets to a legally recognized US citizen spouse without triggering any federal estate taxes. In comparison, unmarried couples do not have the same advantage of tax-free transfers to one another. Assets passed to anyone other than a spouse can trigger an estate tax if the value of the assets exceeds the federal lifetime gift and estate tax exclusion amount of $11.4 million per person for 2019.

Additionally, the tax liabilities can be even higher in states that have a separate state gift, estate, or inheritance tax.

A surviving spouse may also be able to take advantage of portability—the ability to make use of a deceased spouse's remaining unified exemption. "Having access to the unlimited marital deduction and portability may call for different estate planning strategies than were employed before a couple was legally married," says Lyders. "Married couples should review their existing documents with a qualified estate planning attorney to see whether any changes are necessary."

Gift tax: Gifts of more than $15,000 annually to nonspouses eat into the giver's lifetime federal gift and estate tax exclusion. Therefore, gifts between unmarried partners require careful tracking, as they must be netted against the giver's lifetime exclusion. For example, for unmarried couples, adding a partner (nonspouse) as joint owner to the deed of a million-dollar house will reduce the donor's exclusion by $485,000 (the $500,000 gift less a $15,000 annual exclusion). The use of the exclusion is tracked by filing a gift tax return. Legally married spouses may also take advantage of "gift splitting," which allows a married couple to split the total value of a gift to a third party and have it treated as though each spouse contributed one-half of the amount to the recipient.

Transfer of money to a partner: In January 2017, the IRS issued a Notice that gives relief to same-sex couples who were married under state law and used the gift, estate, or GST (generation-skipping tax) exemption for transfers to their spouse. That spouse may be able to file a new or amended IRS Form 706 or IRS Form 709 return that may allow them to recalculate the gift, estate, or GST exemption amounts applied to transfers. Limitations to the type of relief offered may apply, depending on whether the statute of limitations has run out. See your tax advisor for more details.

Retirement plan rollovers: An inheriting spouse can roll over inherited assets to their own IRA and defer required minimum distributions until they are 70½ years old. Generally, a nonspouse inheriting an IRA has to either start taking required minimum distributions no later than December 31 of the year after the IRA owner died or withdraw the entire balance within 5 years of the IRA owner's death.

Wills: The laws governing the right to inherit assets are determined at the state level and vary widely. For unmarried couples, a will is critical, because the absence of such a document may trigger the state's "default" distribution plan, which usually directs the assets to a legal spouse or, if none exists, to the blood heirs of a decedent. In addition to having a will, all couples (married or not) should revisit the titling of accounts ("tenants in common" vs. "joint tenants with rights of survivorship") and beneficiary designation forms to ensure that assets will pass in the intended manner.

Living wills, health care proxies, and disposition of remains documents: Same-sex couples who have not legally married will not be afforded "next-of-kin" status over each other, and in the instance of a medical emergency may even be treated as legal strangers. However, possessing (and traveling with) a living will, health care proxy, and other documents is important—even for same-sex couples who are legally married—in order to protect their rights and ensure that their medical wishes are followed. As seen in the Terri Schiavo case in Florida, a spouse does not have an automatic legal right to be the sole decision-maker unless appointed. Lastly, consider establishing a durable power of attorney (POA) for finances that can let a spouse become an "agent" to make financial decisions and pay bills in a worst-case scenario.

Tip: Where to keep these important documents can be an issue for any couple. A secure virtual safe, such as FidSafe®,2 is a good option.

In conclusion

Any judicial change of this magnitude brings with it a certain degree of legal uncertainty, particularly in the short term, as those states that did not recognize same-sex marriage comply with the Supreme Court's decision. Take the time to understand the financial implications of any action you take, and talk with a qualified tax or financial professional before making any decisions.

Next steps to consider

See how we can help you grow and protect what matters most.

Time to file jointly? See strategies for investing, saving, and estate planning.

Learn how to manage a range of crucial decisions.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.

Your e-mail has been sent.

Sign up for Fidelity Viewpoints®

Get a weekly email of our pros' current thinking about financial markets, investing strategies, and personal finance.