“Let us be lovers, we’ll marry our fortunes together.”
Never have the lyrics from Simon and Garfunkel been more apt for same-sex couples. But, as Elvis sang, “Wise men say, Only fools rush in”!
In the early days of love, it is easy to rush in and get married without thinking about the financial consequences. However, after the glow of love subsides and the reality of marriage sets in, the financial complications could be significant for couples that have not thought through the ramifications or done advanced planning. Thanks to the Defense of Marriage Act, federal law and the IRS do not recognize relationships between same-sex couples; neither does the People’s Republic of Virginia, for that matter. As a result, where D.C. and Maryland laws overlap federal law, a new state is created — the state of confusion.
For example, there are no transfer taxes when adding a spouse to the title of your home. However, because federal laws do not recognize our relationships, adding a partner could trigger a gift tax of up to 35 percent in 2010 of the value of the equity.
Another complication that often arises is your tax filing status. Your federal taxes need to be filed as an individual. If you live in the District of Columbia you can file your D.C. taxes either jointly or as an individual. However, according to Equality Maryland, “In the past Maryland taxpayers have generally been required to file their tax returns using the same “single” or “married” status they use on their federal returns. Because of the discriminatory federal DOMA, married same-sex couples have had to file their federal returns as “single.” Further analysis will be needed to determine whether married same-sex couples can file their state returns jointly as married.”
So, what’s a newly married couple to do? Below is a list of frequently asked questions about the financial issues of marriage. Keep in mind that every situation is different, so speaking with a qualified adviser about your particular situation is recommended.
Should we get married?
The answer really depends on your goals. Marriage is a legal act and carries with it significant financial and legal obligations. It should not be entered into lightly. In situations where one partner is heavily in debt or has a serious health situation that may require the spending down of assets to qualify for state provided aid, marriage may not make sense.
Should we combine our financial assets like bank accounts or investment accounts?
Probably not. Thanks to the Defense of Marriage act, same-sex marriages are not recognized for the purposes of federal law. As a result, combining assets like financial accounts can trigger a federal gift tax of up to 35 percent when your partner withdraws funds in excess of the annual gift exclusion, which for 2010 is $13,000. This tax is payable by the giver.
Should I add my partner to the title of my home?
Again, probably not. This is a common mistake that many couples make. Adding a partner to the title of a home could create a federal gift tax of up to 35 percent in 2010 of the half of the equity. The tax is payable in the year the gift is made and paid by the homeowner. Secondarily, if the home has already appreciated significantly in value, you could also be creating a future capital gains problem.
Should we still get a will and other estate planning documents?
Absolutely. If your partner ends up in a Virginia hospital, your marriage may not be recognized. As a result, you could be denied access to visit your partner. Having medical powers of attorney and back up documents are important, as they will give you the authority to act in circumstances where your marriage is not recognized.
As mentioned earlier, for federal taxes, the law is clear: same-sex married couples can only file their taxes as single. For the state of Maryland it is still up in the air as there is no clear guidance on how to file taxes in the state. In the District, same-sex married couples can now file their taxes either jointly or as single.
Should we sign a prenuptial agreement?
There are many financial considerations for signing a prenuptial agreement. These situations typically arise when one of the partners brings significantly more assets to the relationship or makes appreciably more income. Some of the questions that ought to be asked, include: How will responsibility for the debts acquired before the marriage be paid? How will debts incurred during the marriage be divided? How will non-financial assets such as houses, automobiles, collections or artwork be divided? Are you both going to name each other as beneficiaries on life insurance policies and retirement assets such as 401(k)s, TSPs or IRAs?
Are there any other financial considerations we should consider?
Yes, federal estate taxes could be a future problem. Unless Congress acts, next year the federal estate laws change, exposing significantly greater numbers of same-sex married couples to the federal estate tax upon the death of a partner. Keep an eye out for next week’s article with more details about the impact of this.
This information is not legal or tax advice. Consult a professional regarding your specific tax and other potential legal obligations. Seek counsel from your own professional advisors when making tax, estate and/or financial planning decisions.
Joseph Kapp is a financial planner with Lincoln Financial Advisors Corp. Reach him at joseph.kapp@LFG.com.
DC Agenda, Equality Maryland and the DC Center will sponsor a series of free estate and financial planning workshops to help local couples navigate new laws related to same-sex marriage. RSVP to Kevin Walling at Kevin@equalitymaryland.org or 410-685-6567.
Join us in Baltimore, Silver Spring or Washington to learn more:
April 13, 7 p.m., 190 W. Ostend St., Suite 201, Baltimore, MD.
April 14, 7 p.m., 8720 Georgia Ave., Suite 303, Silver Spring, MD.
April 15, 7 p.m., 1330 Massachusetts Ave., NW, Washington, D.C.