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Financial Strategies for the LGBT Community

As a lesbian, gay, bisexual or transgender individual, you face unique challenges when trying to reach financial goals. You must deal with a variety of legal and tax issues. Many states have passed civil rights legislation that protects the LGBT community from discrimination in housing, employment and credit. Yet penalties still exist for domestic partners when applying for Medicaid, Social Security, and pension plan survivor benefits. Although federal laws now recognize same-sex marriages for tax purposes, the availability of some federal benefits to same-sex spouses are not as clear. Although state laws govern civil unions, they do not supersede federal laws, which do not treat civil union partners or domestic partners the same as spouses. The following are financial strategies for you to consider with your legal and tax advisors:

  • A potential crisis could be lurking during the most vulnerable time in your life. Suppose you’ve just lost your life partner. Even if your partner prepared a will, the assets you inherit from him or her may be subject to estate taxes. That is why it’s important to prepare for this with generally income-tax-free vehicles such as life insurance. (See IRC Section 101(a).)
  • Married couples are able to leave assets to their surviving spouse without paying estate taxes at the first death. While the federal estate tax applicable exclusion amount was permanently set at $5 million (indexed for inflation from 2011, $5.34 million in 2014) it serves as the limit to what can be passed to the surviving partner and other heirs without income tax. This could force the surviving partner to sell the couple’s home in order to pay the IRS. Products like life insurance can be used to help pay estate taxes. There are ways you can structure ownership and beneficiary arrangements to reduce estate taxation.
  • Annuities can sometimes be used to lessen current income tax burdens, but payments made to your partner beneficiary will be subject to income tax in addition to estate tax (although an income tax deduction is available for the federal estate tax paid on the annuity). An attorney can help you put ownership of assets into a trust. This will allow you to keep as much of your hard-earned money as possible for your partner, your children, or other loved ones upon your death.

Retirement Planning

Many LGBT couples believe that their current savings will adequately meet their retirement needs. Often the loss of pension plans and Social Security survivorship benefits is not factored into their savings plans. Even for same-sex spouses, Social Security spousal benefits are not guaranteed. Spouses are encouraged to apply for spousal benefits to preserve their rights while the federal government works to determine if the same rules applied for tax purposes apply for Social Security benefits provisions. The money your partner receives from other sources could be completely gone long before his or her death. Strategies should be put in place to help maximize contributions to employer-sponsored plans and/or individual retirement accounts (IRAs) to help sustain income for increased longevity.

For married couples, if a spouse is in a nursing home and applies for Medicaid, the healthy spouse can remain in the couple’s house if it is jointly owned. However, for domestic partners, a healthy partner cannot remain in a jointly owned home unless he or she buys out the ill partner’s share of the home. Medicaid treats the home as an asset that must be “spent down” before coverage begins. In many instances, you may be eligible for food stamps before becoming eligible for Medicaid. This is why long-term care insurance should be evaluated when preparing for later years.

Working with a Financial Professional

When looking for a financial professional, seek out an individual who is sensitive to and educated about the needs of the LGBT market. Consider doing business with companies that promote fair and inclusive representation of the gay community in all media to help eliminate discrimination. Look for companies that offer domestic partners spousal discounts that are the same as those offered to married couples. Also seek companies that offer domestic partner benefits for their employees.

Even if you are currently single and concerned about protecting your independence and meeting your distinct needs now and in the future, being prepared will help you enjoy the future you envision. Perhaps you are in a committed relationship and want to help ensure that your wealth works hard for you and your partner. Because of the lack of federal recognition of same-sex marriage, it’s even more important to seek out financial professionals. Doing so could save you a great deal of trouble later in life.

Prudential and its financial professionals do not provide tax or legal advice. Please consult your tax and legal advisors regarding your personal situation.

Insurance and annuities issued by The Prudential Insurance Company of America and its affiliates. Each is a Prudential Financial company that is located in Newark, NJ, and is solely responsible for its own financial condition and contractual obligations. Our policies contain exclusions, limitations, reductions in benefits and terms for keeping them in force. One of our financial professionals can provide you with costs and complete details.

Annuities are designed for long-term and retirement planning purposes. Income taxes are payable upon withdrawal. A 10% federal income tax penalty may apply to withdrawals prior to age 59 ½.