Marriage and Financial Inequality: Why Gay & Lesbian Couples Pay More

It was a day many couples dream of for Mignon R. Moore, 42, and Elaine Harley, 43, who exchanged wedding vows at a beachside ceremony in Los Cabos, Mexico, in 2012. The native New Yorkers marked their 10-year relationship by obtaining a marriage license from the state. Unfortunately, they are not receiving all the benefits of a legal marriage because they have been living in Los Angeles for the past six years, where they are recognized not as spouses but as domestic partners.

“We only had a small window of time to get married in California before Prop 8 [the ballot initiative that stripped same-sex marriage], so we never got the opportunity,” says Moore, an associate professor at the University of California, Los Angeles.

Most people take for granted the financial safety net a legal marriage creates, says attorney Camilla Taylor, Marriage Project director at Lambda Legal, a national organization advocating for lesbian, gay, bisexual and transgender (LGBT) people and people with HIV.

“There are roughly 1,100 benefits, rights, and protections conferred on married couples on the federal level. And hundreds more benefits, rights, and protections that married couples receive under state law,” says Taylor. Among these is the right to joint parenting, joint adoption, status as next-of-kin for hospital visits and medical decisions, and inheritance of jointly owned real estate.

The marital benefits couples such as Moore and Harley receive from a state that recognizes their union doesn’t extend across state lines. Moreover, the 1996 federal Defense of Marriage Act, or DOMA, which defines a marriage as a union between one man and one woman, restricts the federal government from recognizing any state-issued marriage licenses for same-sex couples. The financial consequences of this can be grave. The U.S. Supreme Court is currently reviewing a case challenging DOMA filed by Edith Windsor, 83, who paid more than $363,000 in federal estate taxes on her inheritance after her wife, who she had been with for 40 years, died in 2009. Had their 2007 Canadian marriage been recognized federally, no estate tax would have been owed.

Historically, states have decided who can marry within their borders, says Michael Crawford, director of online programs at Freedom to Marry, which is leading the campaign to overturn DOMA nationwide and is working to win civil marriage in battleground states including Rhode Island, Delaware, Hawaii, Minnesota, Iowa, and New Jersey.

“Civil Marriage–much like divorce–is not governed under any religious jurisdiction, contrary to much of the public debate over marriage equality. To date, eight states have civil unions or domestic partnerships. Another nine states and the District of Columbia permit same-sex couples to enter into a civil marriage, and 29 states have banned same-sex marriage. If DOMA is struck down, the federal government would be required to treat same-sex couples legally married in their state the same as any married spouses,” says Crawford.

“While California may not have same-sex civil marriage, it is unique in that it is one of the few states that allow same-sex couples to adopt,” says Harley, a graphic artist.

The couple, who are currently fostering a baby they plan to adopt, work with a lawyer and financial planner to stay current on the different changes that are taking place in terms of how same sex couples are protected or not protected. The couple purchased their home together in September 2006.

“We are joint tenants in common. We did that to protect ourselves. If we were heterosexuals who married, we wouldn’t have to, because if one of us died the home would automatically go to the surviving spouse,” says Moore. “With same-sex couples, on the other hand, if one partner owns property and later adds his or her spouse to the deed, it creates a gift tax.”

Moore and Harley represent millions of gay and lesbian couples for whom being denied a civil marriage affects their families financially at every stage of life. The impact is often felt in five key areas: taxes, Social Security survivor benefits, medical benefits, pensions, and homeownership and estate planning. Says Crawford, “They are at a disadvantage legally and financially.”

The Battle for Benefits

“Straight married couples have the right to make medical and financial decisions on one another’s behalf, but for a gay or lesbian couple, if someone is hospitalized his or her partner is powerless. To be allowed to even visit that spouse would require a healthcare proxy,” says Taylor.

Getting health insurance is another obstacle. JaChel and Micaela Redmond of Dallas were married last year in the District of Columbia since Texas does not recognize same-sex marriage or

domestic partnerships. The 32-year-old couple has one child, JaChel’s 11-year-old daughter, Micaela, who is self-employed, wants to give birth to a second child but her single policy wouldn’t cover maternal care costs, and JaChel’s company doesn’t offer domestic partner benefits. Since they don’t qualify for a family health insurance plan, starting a family is financially out the question.

There’s also the issue of laws that establish both spouses as a child’s parents if the child is born during the marriage; only in states that have marriage equality, civil unions, or domestic partnerships is the non-biological parent in same-sex couples put on the birth certificate, which affects that parent’s ability to put the child on his or her health insurance, enroll the child in school, travel with the child, or make medical decisions for the child. Even in instances where employers offer health insurance to domestic partners, those benefits are federally taxed as an additional income at the employee’s rate. Several firms, including TD Bank, Google, Barclays, Microsoft, and the Gates Foundation, have opted to absorb these extra costs to equalize benefits for their gay and lesbian employees.

Federal benefits present an even bigger challenge for Kaali and LaTasha Cohen. Together nine years, the couple obtained a civil union in New Jersey in 2008. Kaali, 41, was in a severe car accident and was deemed disabled.

“Because I am considered single, I receive less Social Security benefits than I would if I were in a straight marriage. I have a spouse and a daughter [Tasha’s biological child]. But to the government my daughter ceases to exist; my wife ceases to exist. So, where my daughter should be able to get benefits because I am her stepparent, she is not entitled. My wife would not qualify for Social Security survivor benefits,” says Kaali, who is the CEO and founder of REDZONE Solutions Inc., a consulting firm in Pennsauken.

The Legal Fight: What’s Mine, Yours, and Ours

There is unlimited transfer of assets between traditional husbands and wives. But same-sex couples must piece together their own financial and legal protections so as to not leave their assets vulnerable in the event of a breakup or death.

Nashville, Tennessee residents Dr. Kevin B. Johnson, 51, and Rob Smith, 57, obtained their civil union–a legally recognized form

of partnership similar to marriage–in Vermont in 2006. But their civil union has no legal standing in Tennessee. Still, “it was our way of telling people the level of commitment we had for each other,” says Johnson, who was named to BLACK  ENTERPRISE‘s May 2008 list of “America’s Leading Doctors.”

An upside for Johnson is that he works for a hospital that acknowledges his husband.

“Vanderbilt has a domestic partnership model. Rob gets all of the spousal benefits that Vanderbilt provides; that includes 403(b) survivor benefits and use of the health facilities.”

But Smith, a registered nurse, points out, “once we leave the Vanderbilt campus there is really no protection. We are essentially two guys living in the same house.” Also, “because we are two divorced dads, we needed to carefully document through wills, trusts, and medical directives, what we wanted to happen to protect our spouse if one of us dies, because we have no legal relationship in our state of residence,” Johnson adds.

“The issue of property and titling is one aspect of estate planning, Making sure a partner is named as the primary beneficiary on life insurance and retirement accounts is especially important for same-sex couples, otherwise their assets will pass to a parent or other relative,” says Melvin Kornegay, a West Palm Beach, Florida-based Wells Fargo adviser.

Even so, there are financial ramifications: Whereas a widow could take her husband’s 401(k) and roll the assets over into an IRA without paying taxes, a same-sex partner as a beneficiary would need to consider several options including a lump sum distribution, opening an inherited IRA; a “stretch” IRA or life expectancy IRA; or a disclaimed IRA.

“Retirement planning and estate planning is widely burdened by marriage inequality” says Ravi Perry, an assistant professor at Mississippi State University. “We have to take extra steps and added legal fees. Even after death certain state laws do not recognize or support your marriage–making it all too common that our wishes as a gay married coupled are not granted.”

Last year, Perry, 30, married his partner of more than four years, Paris Prince, 29, in Massachusetts, their state of residence. While they’ve considered relocating for work, they’re finding that marriage equality impacts their earning potential, notes Prince, a compliance officer for the Massachusetts Commission Against Discrimination.

“Discriminatory state and federal marriage laws limit potentially attractive career options for us as two highly educated and skilled young people. We must factor this state-specific discrimination into our future career plans instead of only focusing on the best opportunities to flourish professionally.”

Another issue is the tax burden same-sex couples must bear. Not being allowed to file joint tax returns means they miss out on certain tax deductions.

“It becomes complicated because we can file jointly on our state taxes but we have to file separately on our federal taxes,” says Cohen. “We are both federally taxed as a single person. Only Tasha, 41, can claim our daughter as a dependent. Singles typically pay more than families. So, we are hit extra hard.”

Firms Offering Gay-Friendly Financial Services

Whether it’s a lack of healthcare benefits, inability to file joint tax returns, or the denial of access to pension plans, a slew of issues face same-sex couples. With an uptick in demand for specialized financial services as more states pass marriage equality laws, firms such as Wells Fargo, Bank of America Merrill Lynch, Morgan Stanley, Northern Trust, and UBS have divisions catering to LGBT clients. Wells Fargo even worked with the College of Financial Planning to develop an Accredited Domestic Partner Advisor certification in 2010.

Not just any adviser is prepared to deal with the unique financial pitfalls facing same-sex couples, with marital benefits varying by state, says Lisa James, a Chicago-based Merrill Lynch adviser. “It’s important that they work hand in hand with an estate planning attorney and a financial adviser.”

Five documents that everyone should have: basic will, durable power of attorney, healthcare proxy, living will, and an irrevocable trust, adds Wells Fargo adviser Mel Kornegay. But for same-sex couples, it is even more crucial to set up a trust that warehouses all assets, including property and designated benefits from life insurance policies and retirement accounts. “It is very easy to challenge a will, but it is difficult to challenge a trust, which is not probated.”

With the different financial issues that arise, especially the transfer of wealth, says James, same-sex families need an adviser who is well versed on the strategies that should be used to address them.