On the morning after the demise of the Defense of Marriage Act, Vikki Lenhart of Hart & Patterson Financial Services conducted a financial assessment for one of her same-sex married clients and realized they were entitled to $36,000 in additional Social Security income.
"This couple are ages 69 and 67 and are a few years away from retirement,” Lenhart explains. “Both are high earners so the plan all along was to have them defer collecting Social Security benefits until 70, when their benefit amount would reach its highest amount. We were thrilled to let them know that after the DOMA ruling, there was a better option for them to implement. We informed them of the strategy that allows one of them to begin collecting spousal benefits immediately, while their future benefit amounts based on their own earnings records continue to defer.”
Lenhart estimates that this change would generate $14,500 a year for the next two and a half years until the younger spouse turns 70, when she would then switch to her own higher benefit amount. “This is $36,000 in additional income they hadn’t planned on…that previously wasn’t available and there is no downside to them. There are so many stories like this -- so many options for same-sex married couples that many people aren't aware of,” according to Lenhart.
Hart & Patterson Financial Services, an all-women Amherst, Mass.-based advisory firm, which works largely with same-sex couples, was founded two decades ago by Lorraine Hart and Cheryl Patterson, who were married in 2004, the year that same-sex marriage became legal in Massachusetts, the first state in the United States to do so. Today, the firm consists of 10 female employees, half of which are gay. The firm advises 230 households around the U.S., a majority of which reside in Massachusetts and 35% of which is gay/lesbian. "We are incredibly fortunate to work with employees who are truly like family to us, and to work with clients whom we respect and enjoy. Gay, straight, young and old makes up our client base, and we are thankful every day for their relationship with us. It gives us great personal pleasure as a couple married in Massachusetts in 2004 and who will celebrate 25 years as life partners to witness and be part of this historic change,” Patterson told Financial Planning.
Here are specific ways Lenhart and Patterson say the DOMA ruling has impacted the advisors at their firm, and how the decision has the potential to change the lives of hundreds of thousands of same-sex clients in the U.S.
- Advantage of annuities and other guarantees: “Peace of mind comes from knowing that everything is in order for our loved ones in case of a disability or incapacity or death,” Lenhart says. “Prior to the historic changes that occurred this week regarding the changes to DOMA, our married gay clients were at a distinct disadvantage regarding the ability to leave assets and income streams as efficiently to their surviving spouses as was the case for married heterosexual clients. Now, for gay married couples who reside in states where gay marriage is legal, annuities that offered spousal guaranteed income options were without exception offered to married heterosexual couples but very few offered that opportunity to married gay clients.”
- Social Security: Same-sex couples who are married in a state where marriage is legal are now entitled to spousal and survivor benefits which can amount to thousands of dollars in additional income over a lifetime. Regarding spousal benefits specifically, there are a number of planning strategies that are now on the table and will allow couples to maximize their collective benefits. The ‘file and suspend’ strategy is one of many. To name just a few of the other benefits, for couples who have minor dependent children, the child may also be eligible for benefits at the time one spouse claims benefits. In addition, same-sex couples who end up divorcing would be eligible for benefits based on their ex’s record as long as their marriage lasted at least 10 years, they are not currently married, they are 62 or more, and their ex is entitled to retirement or disability benefits.
- Entitlement to government and military pension and health care benefits: Same-sex couples who are entitled to a pension through their military service or government employment will have the peace of mind that this income stream will continue to their spouse when they pass away. Prior to this change, married same-sex couples often spent a great deal of money on life insurance policies in order to provide a lump sum to their spouse because they knew their spouse would be denied spousal income benefits. Going forward, many gay couples will be able to significantly reduce or eliminate this coverage for this purpose. In addition, the spouse would have access to health care benefits, worth thousands of dollars of savings.
- Ability to file joint federal tax returns: Prior to the Supreme Court’s decision in United States vs. Windsor, when the court struck down Section 3 of DOMA, same-sex couples married under the law of their resident state were not allowed to file a joint federal return. The impact of any general credits and deductions were reduced because only one spouse could claim part of the credit or deduction. Aside from the simplification of preparing only one set of returns rather than being forced to file as different statuses, the Married Filing Jointly status will allow same-sex couples to share rather than the divide available credits and deductions. A couple in which one spouse earns a great deal more than the other will likely see a deduction in the total tax due.
- Federal estate taxes: The impact of the Supreme Court’s Windsor decision will be most useful to same-sex couples in the area of estate and gift taxes. A married couple is considered one economic unit; assets can be passed back and forth between the spouses without any gift tax consequences and all assets left to a surviving spouse are exempt from estate taxes. Prior to the court’s determination that DOMA is unconstitutional, any movement of assets between same-sex spouses were taxable if it was above the annual gift tax exclusion amount and assets left to a surviving spouse were taxed at the regular estate tax rate.
- Family and Medical Leave Act: Same-sex married couples residing in states that recognize gay marriage will have the benefits of the Family and Medical Leave Act extended to them from large companies and public agencies. These benefits include up to 12 weeks of unpaid leave for the birth or adoption of a child and caring for an ill parent or child.
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