Jake and Sam each have annual taxable incomes of $120,000. If they were filing as single individuals (in 2015), they would each be in the 28 percent tax bracket. Now required to file as married, they are in the 33 percent bracket since they are effectively required to combine their household income. As a married couple if they choose to file separately, the problem still exists. Although Congress has greatly reduced the marriage-penalty problem, couples finding themselves in that trap may pay more for being married.
PROTECTING PROPERTY
One of the most important but least understood benefits of marriage is the ability to protect your assets from future creditors. In some states and the District of Columbia, married couples may take title to assets such as their home in a way that prevents creditors from taking those specially titled assets. This is particularly helpful when, for example, one member of the couple has to file for bankruptcy because of an illness, a failed business, or being upside-down in a big mortgage. This special titling is called “Tenants by the Entirety” (“TBE”). Once a couple is married, they may title some or all their assets as TBE. The creditors of either member of the couple individually cannot take the assets titled as TBE to the married couple. If the couple owned the assets simply in a “joint tenancy,” a creditor of either may be able to take some or all of the jointly titled property.
YOUR STUFF, MY STUFF, OUR STUFF
While a married couple may be able to protect assets from some creditors, you may not be able to protect assets from each other. Marriage is a contract, and the laws of your state of residence determine your responsibilities to each other. For example, unless you have a valid prenuptial agreement, saying “I do” is like giving away half of your property. Many states require Equitable Distribution, meaning generally that your marital assets are divided in half upon a divorce. Additionally, in certain circumstances even with a prenuptial agreement, a divorced spouse may automatically receive a portion of your retirement assets, such as a federal pension. This could be both a surprising and a costly result of marriage. A benefit of marital responsibility comes with control when one member of a couple is sick or dies. Where same-sex marriage is recognized, gay and lesbian couples enjoy the peace of mind that they are in charge of making decisions for a sick spouse and will be in control of the spouse’s estate at death, absent other arrangements. However, because marriage equality is not universal, there is no substitute for creating a financial and estate plan – getting your documents in order – even if you are married.
EMPLOYMENT, BENEFITS, AND STATE LAW
Your residence may determine what benefits marriage brings to you and your same-sex spouse. While the majority of states now recognize marriage equality, laws still remain on the books that may be detrimental to same-sex couples. The benefits afforded to married couples – and the costs of those benefits – vary widely from state to state. For example, although you may be able to get married, your state may not protect you from getting fired for being gay. Public nuptials may have consequences in states where local laws are still discriminatory. Thankfully, champions of marriage equality have cases pending in courts throughout the land to change these and other archaic laws. If your employer recognizes same-sex marriages and offers spousal benefits such as health insurance, same-sex couples may be able
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to “benefit shop” to find the best healthcare and other benefits – and not pay income taxes on those benefits. The advantage of marriage in this situation is that the value of those benefits (paid by the employer on behalf of the employee) is not taxable income. For unmarried domestic partners who receive the same employee benefits (if the employer offers them to domestic partners), the value of the benefits is taxable income to the employee. However, if the same-sex married couple lives in a state without marriage equality, those benefits may be taxable at the state level. A negative by-product of marriage equality is that some employers may be less likely to recognize non-marital relationships now. In the past, since our relationships were not recognized, progressive employers allowed same-sex couples to declare their economic dependence in a simple affidavit, qualifying them for certain benefits. Today, however, some employers have become stricter, not offering benefits to non-marital relationships where a legally recognized status exists.
RETIREMENT AND SOCIAL SECURITY
In retirement, there are several benefits to marriage. For example, while planning for retirement, you may be able to contribute to your spouse’s Individual Retirement Account (IRA) even if he or she has little or no taxable compensation. This is helpful, for example, if one spouse stays at home to care for other family members. As the primary beneficiary of an IRA, a surviving spouse may roll over the account into his or her own IRA. This allows the spouse to withdraw the assets based on his or her own life-expectancy (thus possibly delaying some income tax liability). Additionally, the IRA is protected from most creditors of the surviving spouse. Unmarried partners cannot avail themselves of these advantages. A same-sex couple may also consider the potential Medicare and Social Security benefits available with marriage – and where they choose to retire. Even now, this area of the law is not entirely settled – and could change quickly with a definitive ruling on marriage equality laws from the United States Supreme Court this year. Even the Social Security Administration’s own advice is vague, but they encourage all who are in a same-sex marriage or a non-marital legal relationship to apply for benefits “right away,” even if you are not sure that you qualify. What is certain is that a married same-sex couple living in a marriage equality state will receive all marital benefits, such as a spousal increase in Social Security benefits when a spouse dies. For some couples marriage could mean more financial security when a spouse dies. On the other hand, for those receiving Supplemental Security Income (SSI), a spouse’s income and resources will be counted, so being married may affect eligibility.
GET ADVICE
Planning is simply knowing all the facts before making the decision. With the opportunity to marry later in life or after amassing personal wealth, gay and lesbian couples may find themselves more concerned with the economics of marriage than picking out china patterns. While one cannot reduce the emotional decision to marry to a frigid economic analysis, it is better to know what lies ahead financially when making a life-changing decision. One thing is certain: there is wisdom in getting good, coordinated advice from your legal, tax, and financial advisors. Max Barger is a Senior Wealth Planner at PNC Wealth Management and serves on the Planning for Same-Sex Couples National Practice Group. Before joining PNC, he practiced law for 18 years, focusing on estate planning, administration, and taxation. He is a board member of the Gay Men’s Chorus of Washington. Barger’s views should not be construed to be the position of PNC Bank or its affiliates.