Toni L. Taft, CFP, AAMS Senior Vice President Investment Officer with the Accredited Domestic Partnership AdvisorSM Designation, Wells Fargo Advisors, LLC in Bellingham, Wash., seeks to address the unique financial challenges faced by same-gender partners. Toni has been legally married to her wife, Janice, since June 2004. They were married in Victoria, British Columbia. Their marriage is now recognized by the State of Washington. You can reach Toni at firstname.lastname@example.org and www.wfadvisors.com/toni.taft.
Much has changed for LGBT partners since the DOMA ruling last June. Long-awaited federal benefits are now available for legally married same-gender couples that were previously only available to those within a traditionally defined marriage (between one man and one woman). This month’s column focuses on five key planning topics that LGBT couples may consider regarding their retirement planning, as a result of last year’s DOMA ruling.
Do You Qualify
To qualify for these benefits, LGBT couples must be married in a jurisdiction that recognizes same-sex marriage. Most federal agencies define this as the “Place of Celebration” (where the couple was married). The “Place of Domicile” (where the couple lives) is also used by some federal agenciesmainly the Social Security Administration. Please note: Other types of legal recognition currently available to the LGBT community (domestic partnerships and civil unions) do not qualify for these federal spousal benefits at this time.
Five Topics to Consider Around Retirement Planning
1. New Rules for Individual Retirement Accounts (IRAs)
There are several changes regarding IRAs:
- Funding Your Spouse’s IRA. One significant change since the DOMA ruling is the ability to fund IRA contributions for your same-sex spouse. Modern families today often have one spouse staying home to raise children or care for elderly relatives. This ruling allows for the working spouse to make contributions to his or her own IRA and also contribute to the nonworking spouse’s IRA.
- Distributions From IRAs. Distributions from IRAs have changed for LGBT married couples. Access to IRA funds prior to age 59 1/2 may now be allowed penalty-free for both you and your same-gender spouse under certain circumstances. The circumstances that may allow these withdrawals penalty-free include the death or disability of your spouse, medical expenses, paying medical-insurance premiums while unemployed, qualified education expenses for you or your same-gender spouse, purchasing a first home, and several others. IRA withdrawals generally have income-tax consequences (a 10 percent penalty if withdrawn prior to 59 1/2) and you should consult with your tax advisor prior to taking a distribution.
- Changes to IRA Inheritances. Same-gender married couples now have more options available if one partner inherits IRA assets from a spouse. The surviving spouse can now choose to roll the inherited proceeds into his or her own IRA and treat the assets as his or her own, or defer the required minimum distributions on the inherited IRA until age 70 1/2 or until the deceased spouse would have turned 70 1/2.
2. Now Available: Pension Benefits
By law, pension plans must provide minimum benefits to any surviving spouse. Prior to the DOMA ruling, same-gender married couples were not guaranteed these minimum protections because federal law did not recognize their unions. Now that federal law does recognize same-gender marriage like any other marriage, LGBT married couples are extended these same minimum safeguards as well. These default protections include:
- Qualified Joint and Survivor Annuity (QJSA) pays a benefit as long as the retiree or the spouse lives. In most cases the payment to the survivor is 50 percent of the joint annuity. This option is often a default or automatic payment option for married participants. The benefit option may only be changed with spousal consent.
- Qualified Optional Survivor Annuity (QOSA) offers a higher benefit of 75 percent of the joint annuity. Other payment options may also be available.
- Qualified Preretirement Annuity (QPSA) provides benefits to the surviving spouse in case the participant dies before his or her pension benefit would have started to pay.
3. Now Available: Social Security Benefits
Social Security benefits are now available for same-gender spouses as long as they reside in a state that recognizes same-gender marriage. The Social Security Administration follows the Place of Domicile Rule, which means if you are in a same-sex marriage but live in a non-recognition state, you are not eligible for Social Security benefits on your spouse’s work record. This rule also applies to Medicaid, Supplemental Social Security Income and Medicare. LGBT married couples should consider where they reside if they are counting on using Social Security benefits as part of their retirement planning. This subject will be covered in greater detail in the July 2014 edition of this column on DiversityInc.com.
4. Beneficiary Updates and New Options
LGBT couples should review all beneficiary designations if signed before the DOMA ruling. Retirement accounts, annuities and life insurance must indicate the legal relationship of the named beneficiary. The payout options available for a spousal beneficiary may be different than for a non-spousal beneficiary.
If no beneficiaries are listed or the beneficiary listed is the “estate,” the funds will be distributed using the state intestacy rules. These rules provide guidance if someone dies without a valid will or beneficiaries. State intestacy rules could cause great difficulties if a LGBT married couple lives in a non-recognition state. Currently, many states will not consider the couple married even if the couple is recognized for federal benefits, and the surviving married spouse in most cases may not receive the assets of the deceased spouse.
5. Qualified Domestic Relations Order (QDRO)
With more LGBT couples getting married, there inevitably will be another consequence the “D” word, divorce. The DOMA ruling has allowed tax-favored splitting of retirement assets in case of divorce under a Qualified Domestic Relations Order (QDRO). QDROs are commonly used in divorce to split a participant’s interest in an IRA or retirement plan in favor of an ex-spouse. Check out the September 2014 edition of this column for more information on this subject.
Planning for LGBT married couples is now more important than ever. Please meet with your trusted advisor to review your individual situation. Stay tuned for future columns as my colleagues and I cover many critical financial- and estate-planning issues that affect same-gender married couples.
Wells Fargo Advisors is not a tax or legal advisor. You should consult with your tax advisor or attorney concerning your particular situation. Investment products and services are offered through Wells Fargo Advisors, LLC, member SIPC. Wells Fargo is No. 25 in the DiversityInc Top 50.