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The Biggest Financial Issues for Same-Sex Couples

Casey Quinlan

John Brady, 41, and his husband, the Rev. Trent Williams, 36, married almost a year ago in Massachusetts, one month before the United States v. Windsor recognized the validity of same-sex marriage under federal law. Now they live in Pennsylvania, a state that does not recognize their marriage, and where muddy legal issues at the state level mean a host of headaches for the couple.

Brady, an entrepreneur and executive director and principal at consulting firm Protem Partners, and Williams, a minister in the United Church of Christ, keep their marriage certificate and other important documents close -- on their smartphones and in a cloud computing system. They also keep paper copies in their laptop cases and inside both of their vehicles.

Brady and Williams want to make sure they are prepared if their marriage's legitimacy is challenged, and they have consulted an attorney and financial advisor to understand their options and protect themselves financially. "We pay thousands of dollars in legal fees to make sure we get what other people get automatically," Brady says.

As the anniversary of the Supreme Court decision of United States v. Windsor nears, celebration has shifted to caution as some couples try to figure out if marriage is worth the additional financial and legal complexities or decide if the benefits of moving to another state without those protections are worth the drawbacks.

Along with social and emotional benefits, same-sex couples have gained some tax and financial planning benefits, including the ability to qualify for gift splitting and access to an unlimited estate tax deduction to pass along assets to a surviving spouse sans federal taxes. In March, Prudential Financial issued a report, "Financial Planning Considerations for Same-Sex Couples After Windsor," which points to additional benefits, such as the ability to receive survivor benefit protection for defined-benefit plans.

[See: 13 Money Tips For Married Couples.]

That's the good news, but a host of financial issues surrounding same-sex marriage remain unresolved. For example, if you live in a state that does not recognize same-sex marriage, you will receive a denial or delay when applying for benefits because the Social Security Administration determines your eligibility based on whether your state acknowledges your marriage.

Robin Maril, legislative counsel for administrative advocacy at the Human Rights Campaign, says it's anyone's guess as to when Congress will address the SSA problem. "Social Security is asking people to apply, but it can be tough if it's a fairly long window. It could be several years, and people have bills to pay today," Maril says. "If you're 73, you don't have time to wait."

Michael Adams, executive director at Services and Advocacy for GLBT Elders, says Social Security remains one of the biggest hurdles for same-sex couples. Even so, he advises that people continue to file for spousal and survivor benefits. "The sands are shifting, but for right now, Social Security benefits would have to be retroactive, and if granted, they are entitled to them," he says.

Health care and social safety nets. According to Megan Fisk, director of family services at The Lesbian, Gay, Bisexual & Transgender Community Center in New York City, "One of the questions people ask [when considering marriage] is about health care enrollment. People wonder, "How will marital status affect my ability to enroll in health care?"

It is unclear whether employers will continue to cover people in domestic partnerships and civil unions, and same-sex couples may have to choose between getting married or not having their significant other covered through their employer's insurance.

Another issue is that spouses' combined income could exceed thresholds for health care coverage, the Prudential report explains. A lower-earning spouse who is eligible for federal credits and subsidies could lose them by marrying, even if their spouse's employer doesn't offer health care coverage to spouses. The issue repeats itself in qualifying for Social Security income. Many spouses fall into an income bracket that is too high to qualify for Medicaid and too low to qualify for premium assistance tax credits and subsidies.

[Read: How to Budget For Health Care Expenses in Retirement.]

Taxes. Same-sex couples also encounter the "marriage penalty," which takes effect when spouses with similar incomes pay higher taxes than two equivalent-income single people.

Gregory Rogers, a Brookline, Mass., certified financial planner with the Accredited Domestic Partnership Advisor designation, says filing taxes is often a shock for high-income, same-sex couples. Rogers says a married couple made up of two high earners will hit the highest marginal tax rate at a combined income of $457,000 in 2014, whereas if they were single, they could have $406,000 each before they hit the highest bracket. "Add some capital gains on top at the highest possible tax rate [23.8 percent], and you have a lot more in taxes," Rogers says.

But that's far from the only tax consideration. A big question is whether to file federal taxes jointly or separately. Holly Kylen, a U.S. retirement coach with ING Financial Partners who specializes in LGBT financial planning, suggests couples speak to a tax advisor to decide which option is better for them financially.

State taxes are another story. When Brady went to the Pennsylvania Department of Revenue website, it explicitly read "joint income tax returns may be filed by husband and wife; and the spousal inheritance tax applies to husband and wife."

Estates. The Windsor decision strengthened and simplified estate planning for same-sex couples. However, Alexander Popovich, a wealth advisor at JP Morgan Chase & Co., says couples should consult an advisor before making decisions about their estate. Because spouses previously didn't qualify for the marital deduction and were more likely to pay estate taxes, they often turned to insurance policies, which helped them create trusts that would offer some tax protection.

Clients in states that don't recognize their marriages and have an estate tax should find out if their current plans protect on federal side and the state side, Popovich says. For example, widows and widowers could still be subject to state inheritance taxes in states that don't recognize same-sex marriage.

Same-sex couples may wonder if an annuity with a guaranteed lifetime income will become void when a spouse dies in a state that doesn't recognize their marriage. Robert Fishbein, vice president and corporate counsel for Prudential's tax department, says the likelihood is small because marital status is decided at issuance.

Retirement saving. Same-sex couples now have survivor benefit protection for defined benefit plans, but there are questions about how retirement plans should handle same-sex spousal benefit rights for any transactions made before the Windsor decision, the Prudential report explains.

However, the retirement of widows and widowers will be much more financially stable than in the past. Now, a widow or widower inheriting his or her spouse's individual retirement account can roll it into their own IRA.

[See: 6 Steps to the Retirement Lifestyle You Want.]

Kylen says that change is one of the most important financial benefits for same-sex couples. "If I have $200,000 in IRAs, and if we have been married, that would come in a lump sum and you lose 30 to 40 percent of it [to taxes]. Now we can roll it into the spouse's IRA and take the minimum required distribution, and it lasts a lifetime," Kylen says.

Older same-sex couples are in a particularly difficult situation, says Adams, whose organization focuses on older LGBT Americans. "They are more vulnerable and face more challenges. They need to make decisions about long-term care. They can't wait two or three years for these questions to be resolved," Adams says.

Despite the financial planning headaches, Brady says he doesn't mind swimming in paperwork now that he is able to enjoy marriage.

"On our wedding day, it might have been the first time in my life that I forgot I was gay," Brady says. "The day after the wedding, I had the opportunity to experience something I never experienced before. I wasn't thinking about the documents or what others thought, and instead I just thought to myself, 'This is how other people live.'"

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