In honor of Pride Month, we’re taking a look at some of the unique financial planning considerations for same-sex couples.
Day-to-day finances may see like an area of life that is similar for everyone. The back-of-the napkin formula is simple—live within your budget, save money for retirement/big expenses, rinse and repeat. But people’s lives are filled with distinctive circumstances that require adjustments from that formula—and same-sex couples, particularly those in long-term relationships who are considering marriage, face some unique financial challenges.
Here are four specific financial issues to consider if you are part of a same-sex couple:
1. Asking for a prenup? Well, that’s awkward.
Having a “prenup” discussion with your loved one is always awkward, but it can take on several new layers of awkward for some same-sex couples. Why? Since, federal laws only recently changed (2015) allowing marriage in all 50 states, many same-sex couples have decades-long relationships and fully intertwined lives but are not married. Due to the law change, many are now taking the plunge.
But, one partner may feel that a prenuptial agreement is needed. Bringing this up after so many years as an established couple can be extra tricky. Many partners view this request as a no-confidence vote—so feelings may be hurt, particularly after years of togetherness.
In my opinion, a prenup is something every couple should consider. It’s not something that should be viewed negatively, but rather is something that allows you and your partner to clearly establish your wishes so there are no surprises later. If you are uncomfortable broaching this topic, it may be helpful to speak with an estate attorney or financial advisor who specializes in prenups, which may help both partners feel better about the agreement and the possibilities for many decades of wedded bliss.
2. On average, family planning can cost significantly more.
For all parents the costs of raising children are high. Last year, USA Today estimated the cost at $233,610, excluding college costs, based on U.S. Department of Agriculture data. Many same-sex couples can add several thousand dollars to those costs—up front—because they use adoption options, artificial insemination or surrogacy at a higher rate than heterosexual couples. These costs will impact long-term wealth accumulation, not to mention the immediate out-of-pocket costs.
For couples that include one biological parent, the other partner may need to pursue second-parent adoption to protect parental rights in the case of death of the biological parent, divorce, or in some travel situations.
These additional expenses can add pressure and take an emotional toll on couples if they have not fully explored, and planned for, the financial impact before they begin family planning.
3. Married filing jointly might have a nice ring, but…
Something called the “marriage tax penalty” can trip up established couples who have been accustomed to separate finances. A marriage penalty is a resulting higher total federal tax bill when a couple combines income, as compared to when they were each single and filing separately.
Typically, this penalty impacts couples who have similar incomes. Couples who have unequal incomes, such as if one partner works full time and the other doesn’t work outside the home, often benefit from a marriage bonus.
For particularly high wage earners, the top marginal tax rate presents another obstacle. In 2019, that rate was 37% and it applied to married couples filing jointly with taxable income of more than $612,350. For single filers, the 37% applied to incomes above $510,300. This means that an unmarried same-sex couple can make more than $1 million dollars, as two single taxpayers, before reaching the top federal tax level, but a married couple filing jointly will reach the top tax bracket at just over $600,000. Your decision to marry could result in a significant tax hit if your income is substantial.
Admittedly, taxes don’t score high on the romantic index, but having a conversation about them before making a marriage decision may be necessary.
4. Other financial adjustments may be needed.
Same-sex couples who are considering marriage may also need to examine various other areas of their financial life. For example, how will your work benefits change? Do your retirement accounts need adjustments? If one partner is collecting social service benefits, how will marriage impact those benefits? If you have a trust or other outside income, what changes will be necessary? The list of possible impacts is long and very individualized.
You may need to carefully consider all your income sources and your various benefits and then methodically review the impacts for each—seeking outside expertise where necessary.
Financial planning will help minimize surprises.
As you can see, same-sex couples, particularly those with already established lives, have several significant decisions to make before they pick out the flowers and order the cake for the big day.
Each couple’s finances are unique, so contacting a financial advisor may be the best place to start. An advisor can help identify the specific financial issues that will impact your union and help you find ways to minimize any potentially negative impacts.