Estate planning for the LGBTQ+ community became easier when the U.S. Supreme Court published its landmark 2015 decision that same-sex couples are guaranteed the fundamental right to marry. Between simplified taxes, better insurance coverage, and increased benefits for surviving spouses, there are many ways that LGBTQ+ individuals and couples can build and transfer wealth to care for their families.
And yet, LGBTQ+ families, on average, are building less wealth than their heterosexual counterparts, putting their long-term financial security at risk. According to a recent article from UBS :
- 20% of LGBTQ+ people have a will or estate plan vs. 26% of their heterosexual counterparts
- 35% of LGBTQ+ people have a 401(k) savings account vs. 40% of their heterosexual counterparts
- 20% of income is the average amount LGBTQ+ individuals save in retirement accounts vs. 25% for their heterosexual counterparts
- $66,000 is the median retirement savings for same-sex couples vs. $88,000 for heterosexual, married couples
Secure your family’s financial wellbeing through the following steps.
Get a Will or Trust
Both wills and trusts help secure assets (cash, savings, real estate, cars, other property, etc.), but there are a few things to consider.
Wills are often less time-consuming to create and less expensive to draft than trusts. However, couples usually prefer the privacy and simplicity of living trusts because they avoid probate – a court-supervised process in which a deceased person’s assets are gathered and distributed to pay off any debts and taxes before whatever is left over is distributed among inheritors. The deceased’s assets are frozen upon death because of the probate process, whereas trusts skip this step and allow property to be transferred more quickly and privately.
Wills are also easy to contest – meaning there’s a greater risk that spouses and children of LGBTQ+ individuals may have to share a portion of the deceased’s estate or get tangled up in a lengthy legal battle with unsupportive family members who feel entitled to inheritance even if they didn’t recognize the validity of the deceased’s relationship while they were alive.
The decision about whether to have one joint trust or separate trusts for each spouse must be made after discussing who or where they want to give their wealth. For example, one person may want to ultimately leave assets to nieces and nephews, while the other partner or spouse may want to leave their share of the assets to charities or other individuals. Alternatively, some couples like having one joint trust because it further demonstrates they’re a married couple and treating their assets as joint property.
Update and monitor beneficiary designations
Whether a same-sex couple is married or not can have a significant impact when they name each other as the designated beneficiary of an individual retirement account or another qualified retirement account, spouses who are beneficiaries of an IRA follow different rules regarding required taxable distributions than individuals who are not the spouse of the IRA owner.
LGBTQ+ families should also monitor their beneficiary designations on the life insurance, annuity, and other accounts or assets that will be transferred upon death to the beneficiary. For example, if you want life insurance that you own to be payable at your death to your spouse or partner, it does no good to only mention that in your last will and testament. Make sure you list your spouse or partner as the beneficiary designation form on record with the insurance company, and that you update the beneficiary in the event of a divorce, remarriage, or other life events.
Take note of taxes
Estate taxes typically aren’t an issue that couples will have to concern themselves within the immediate future. Single individuals can pass away with up to $11.7 million in assets without needing to file a federal estate tax return - married couples can potentially be exempt $23.4 million. Very few people have that much wealth - so fewer people need to concern themselves with federal estate tax planning.
It’s also important to note that the legalization of same-sex marriage means LGBTQ+ spouses now qualify for the unlimited marital deduction, which allows individuals to transfer an unrestricted amount of assets to their spouse at any time, free from tax.
However, Fiduciary Trust International notes that the transfer price tag is high if your assets total more than the exemption amount. Your estate will pay 40% federal gift and estate tax for any assets transferred above the federal exemption. And if you’re giving assets to grandchildren (or future generations), an additional layer of tax called the generation-skipping transfer (GST) tax may apply at 40%. LGBTQ+ families looking to secure their wealth generationally should consider establishing trusts for each family member.
Get the legal authority to make decisions
Incapacity legal planning also is critical for LGBTQ+ families. For example, if a same-sex couple is not married, then the partner would have no authority to make decisions without the proper legal documentation in place. This could mean a blood relative is given the power to make decisions even if they never accepted the couple or the wishes of the incapacitated partner.
A combination of trusts and powers of attorney done correctly typically takes care of these issues. Make sure you have the following documents:
- Living Will – a written statement detailing your wishes in the event of an injury, illness, or during end-of-life care
- Healthcare Power of Attorney – a legal document designating who can make medical decisions for an individual if they are too sick, injured, or otherwise incapacitated
- Durable Financial Power of Attorney – a legal document similar to Healthcare Power of Attorney, but for finances
- HIPAA Privacy Authorization Form – a document that allows healthcare professionals to share health information and records with your designated trustee or Health Care Power of Attorney