Last time we gave a brief description of the Supreme Court’s recent decision in Obergefell v. Hodges that recognized same-sex marriage as a constitutional right. Same sex marriage is now a right nationwide. Now that same-sex couples have the option of marrying in a manner similar to that of opposite-sex couples, it is worthwhile to consider the various benefits and detriments of marriage in general from a financial and estate planning standpoint.
Marriage can be beneficial for a couple when it comes to retirement benefits. When a Social Security recipient dies, the surviving spouse of that decedent may continue to collect benefits as a survivor of the decedent. Also, surviving spouses have more options when it comes to inheriting retirement accounts. A surviving spouse has the choice to receive the account as an “inherited account,” which is the only option available to a non-spouse beneficiary, or a surviving spouse can elect to treat the account as their own by rolling it over to an IRA titled in their name.
When the surviving spouse does a spousal rollover, the required minimum distributions are calculated differently. So a spouse can consider both options to decide which is more beneficial mathematically given the circumstances and other available financial resources. In some cases, over time or on different accounts or amounts, a spouse may do both (have an inherited account and a spousal rollover). In contrast, a non-spouse would not have an alternative option.
Income taxes are a little more complicated to consider. In general, if one member of the couple has a considerably larger taxable income amount than the other, then marriage will tend to lower their combined income tax burden. But if their income amounts are similar, they will then tend to have a higher combined tax liability as a married couple. The so-called “marriage penalty” for a married couple can be significant as their joint earnings push them into a higher tax bracket.
Certain types of governmental benefit programs are premised on household income. For these programs, an increase in household income could be detrimental. If you have two single individuals who do not legally comprise a household, then each would be assessed for eligibility given their own respective level of income. For a married couple, a benefit program claimant might have to report the couple’s combined income as total joint household income and that higher reported total might render the claimant ineligible for certain benefit programs.
One example is a program called the “Income-Based Repayment” program for federally subsidized student loans. That program calculates the amount of loan repayments as a percentage of household income. A single person making $40,000 in income with $100,000 in loans might pay $280 per month. But if that person marries someone who is also making $40,000 annually, then the required student loan payments under that program couple increase to over $700. In that scenario the household income doubles but the loan repayments more than double.
For older couples who need assistance paying for long term care for either one of them, there are potentially significant disadvantages. In Connecticut a single individual can own no more than $1,600 in countable assets in order to qualify for Medicaid. If a nursing home resident applies for Medicaid benefits and has a spouse who continues to live outside the nursing home, then the rules will let that so-called “community spouse” retain as much as $119,220 (in some cases even more - or possibly less but not less than $23,844) in assets plus a house, a car and some life insurance. However, in order to get down to that allowable amount of assets, the couple will likely need to “spend down” both of their assets until what is left does not exceed the permissible maximum for their combined situation. If you contrast that to a non-married couple, then the member of the couple who is not in a nursing home would not need to spend down any of their own assets before the nursing home resident member of the couple could be Medicaid eligible. However, any transfer between non-spouses can cause a period of ineligibility where there is no such problem between spouses.
For estate and gift taxes, married couples can inherit assets and receive gifts seamlessly between each other. That is to say a married individual generally can gift any amount to his or her spouse in a given year with no limits. But, an unmarried individual can gift no more than $14,000 to any other individual before a gift tax return is required. If a couple has a significant amount of assets they may need to deal with federal estate tax issues sooner or later if either one of the combined estates would be greater than $5,430,000 (at current federal exemption rates). The difference comes into play upon the first death. If a couple is not married and the first one dies owning more than $5.43 million, then there will be an estate tax liability assessed for that first decedent. If instead that couple is married, there would be no estate tax liability until the second member of the couple dies. That of course would permit more time to engage in estate planning to hopefully reduce or avoid that estate tax liability for the second-to-die individual.
For states that have their own estate taxes, the exemption amounts may be far less than $5.4 million and therefore would affect many more individuals who would otherwise come in below the federal exemption threshold[HCW1] . For example, in Connecticut the estate tax exemption is only $2 million. In the nearby state of Massachusetts, the exemption is only $1 million.
Home ownership tends to present complications for an unmarried couple. One member of the couple may help make mortgage payments but if his or her name is not on the mortgage to the property, he or she will be unable to claim an income tax mortgage interest deduction. If they both own the property but not as joint tenants with rights of survivorship, then it is entirely possible that a member of the first-to-die’s family could inherit their interest in the property and that person might have no ties whatsoever to the surviving member of the original couple. The survivor could then lose the home or be forced to buy out the interest of the heirs of the decedent.
A worker can often obtain health insurance coverage for their spouse under the same health insurance they can obtain from their employer. An unmarried couple would be unable to do that so each member of that couple would be responsible for obtaining health insurance coverage for themselves. Married couples automatically have the right to visit their spouse in the hospital. An unmarried member of a couple would have no such right and therefore would need to be sure to obtain a proper health care power of attorney to legally formalize the right of their loved one to make medical decisions on their behalf and even to get information from the doctors as to their health status.
As always, each family has unique concerns, and a trusted advisor can help to weigh those sometimes competing concerns against each other to develop a plan that addresses as many issues as possible. Please call us at 860-769-6938 if you have any questions about the material presented above or if you care to discuss any other planning issues with us.