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Three Legs on the Ground: Retirement Income Essentials for LGBT Adults
posted 07.09.2012

By David Godfrey

Consider the ordinary tripod, which the Encyclopedia Britannica describes as: “Any piece of furniture with three legs. The word can apply to a wide range of objects, including stools, tables, light stands, and pedestals. The most obvious functional advantage of the tripod is its property of remaining steady on an uneven surface, as seen at its most basic level in the stool” (Encyclopedia Britannica, 2012). Neither a two-legged nor a one-legged stool would be wise choices when it comes to stability, whether one is selecting an item of furniture—or, say, a long-term retirement plan. When planning for retirement, a plan based on three legs—Social Security, pensions, and savings—is more stable  than a retirement plan based on one or two legs.

It is a frightening fact that most Americans are failing to plan for retirement income security. A recent survey shows that while slightly more than half of all workers are saving for retirement, less than one-half have calculated how much money they need to save (Helman et al., 2011). And while retirement income rules and inheritance laws provide special protections for married couples, that is not always the case for lesbian, gay, bisexual, and transgender (LGBT) older adults: the rules are inconsistent. Some protections, such as Social Security spousal benefits, are not available to married same sex couples (Social Security Administration, 2012a), while others, such as joint and survivor pension benefits, may be available to same sex couples.

The unique issue for LGBT adults centers on recognition of marital status. Some LGBT adults are in a legally recognized, opposite sex marriage, but nearly 150,000 LGBT same sex couples (an estimated 22 percent of same sex couples) are married under state law (Badgett and Herman, 2011). The federal Defense of Marriage Act (DOMA) complicates the landscape by denying recognition of same sex marriages when it comes to eligibility for federal benefits (Defense of Marriage Act, 1995–1996). Today’s LGBT couples must take great care and attention when planning for retirement income and for the surviving spouse’s security. This article will explore how LGBT adults can plan for the three elements of a stable retirement income, and the special challenges they face to achieve this balanced approach.

The First Leg: Social Security

Social Security, the first solid leg on the ground for retirement income security, cannot be overlooked in planning for retirement. Virtually every worker in the United States is subject to Social Security tax. After the equivalent of ten years of contributions into the system, workers are eligible for retirement benefits at retirement age (Social Security Administration, 2011). For more than 50 percent of all retirees, Social Security provides more than half their retirement income (Center on Budget and Policy Priorities, 2010).

There are three significant protections in Social Security for married couples, provisions that create “special” protections, guaranteeing a minimum benefit for virtually every married retiree and leveling disparity where spouses have vastly different earnings over a lifetime. However, same sex couples have to treat Social Security differently than married opposite sex couples, as none of the marital protections in Social Security are available to same sex couples—married or not (Social Security Administration, 2009).

The first provision is that a married person can draw a benefit equal to the greater of a benefit calculated based on the person’s individual earnings record, or half of the benefit their spouse draws (Social Security Administration, 2008). This increases retirement income when there is a significant earnings difference between the two spouses. For example, if the higher-earning spouse earns the maximum in wages that are taxed (currently about $110,000 per year) over the thirty-five-year earnings average used to calculate benefits (Social Security Administration, 2012c), they will receive the maximum retirement benefit of $2,366 per month (Social Security Administration, 2012d). If the other spouse earns a belowaverage wage, their benefit may be less than $1,000 per month, making half of the benefit of the higher-earning spouse the larger benefit, and the one the lower-earning spouse would receive.

A spouse who lacks ten years in covered employment and is individually ineligible for Social Security retirement benefits can draw a benefit based on their spouse’s eligibility (Social Security Administration, 2008). This second provision was intended to protect parents who did not enter the labor market. It is becoming increasingly rare for a person to reach retirement age without the requisite ten years in covered employment, but it does happen. This provision continues to encourage stay-at-home parents and family caregivers.

A surviving widow or widower draws a benefit equal to the greater of the benefit based on their individual earnings history or the deceased spouse’s benefit (Social Security Administration, 2008). This third provision helps protect surviving widows and widowers from impoverishment; without it, the surviving spouse faces a drop in household benefits by as much as two-thirds. For example, the average retirement benefit is $1,177 (Social Security Administration, 2012e). If the spouse is drawing a spousal benefit of half of this (or $588 per month), the household has a total income of $1,765. If the higher-earning spouse dies, the survivor draws the greater of their benefit of $588, or the deceased spouse’s benefit, in this case $1,177. Under this provision, the household benefit drops by one-third. Without this provision, the  household benefit would drop by two-thirds.

None of these Social Security protections are currently available to same sex couples—married or unmarried—because of the Defense of Marriage Act, or DOMA (Social Security Administration, 2009). The Human Rights Campaign Fund reports that the average retired same sex couple loses $5,528 a year in household income as a result of unavailable Social Security spousal protections (Human Rights Campaign Foundation, 2009).

All LGBT couples should consider Social Security as a separate income for each person, an income that will die with that person. The impact is greatest on couples with disparate incomes, such as when one partner has been a caregiver or homemaker. Couples like this must plan for sufficient income for the surviving spouse, who will not be entitled to the usual spousal protection provisions of Social Security. With Social Security providing more than half of the retirement income for a majority of retired households (Center On Budget and Policy Priorities, 2010), the lack of spousal protections for LGBT couples can be a significant obstacle to achieving retirement income security.

The Second Leg: Pensions

Pensions are probably better referred to as retirement plans. They come in two primary types: traditional defined benefit pensions (DB) and defined contribution plans (DC). Under a DB plan, an employee works for a minimum number of years covered under a plan and, at retirement, receives a guaranteed monthly benefit for life (Wells, 2012). Under a DC plan, the worker or their employer contribute money to an investment account (generally taxdeferred), and at retirement age the balance of the account becomes available (Wells, 2012). A 401(k) is a commonly recognized DC plan. Even if not covered by a plan at work, most wage earners can participate in DC plans such as IRAs. These constitute the second leg of much-needed retirement income security.

The Employee Retirement Income Security Act (ERISA) regulates most, but not all, pension or retirement plans. The ERISA provides significant protections for all plan participants and special protections for the spouse of a plan participant (United States Department of Labor, 2012). Prime among the ERISA plan protections for a married couple is the requirement that spousal protections cannot be waived without consent of the non-covered spouse.

An important marital protection for an ERISA-covered DB plan is that the plan must provide as the default payout for a married couple a joint-and-survivor benefit—meaning that, unless waived, the pension pays a benefit to the surviving spouse for as long as they live (United States Department of Labor, 2012). The ERISA is a federal law, but the definition of marriage is based on the definition in the plan. The ERISA-covered DB plans are not federal benefits, placing the plans outside the reach of DOMA. Couples married under state law may or may not be covered by the ERISA provisions—the deciding factor is the definition of marriage in the plan documents (Gonga et al., 2011). An employee needs to read the plan to figure out which definition of marriage is used. Experts recommend that retirement plans adopt specific definitions of marriage defining which relationships they want to cover (Gonga et al., 2011).

Same sex couples that are unmarried or in a plan that does not include them in its definition of marriage need to inquire about a joint-andsurvivor benefit. Many ERISA and non-ERISA plans offer this as an option for unmarried couples, but not as an automatic default (Justia, 2012). An unmarried member of a same sex couple would be listed as “single” on an employment record and would routinely be offered a sole benefit that ends at their death, unless they specifically elect a joint-and-survivor benefit. The same issue comes up with DC plans when they are annuitized. Annuitizing converts the assets in the plan to a guaranteed stream of income (, 2012). When this is done, a decision needs to be made for a sole or joint-and-survivor benefit.

The other issue for DC plans for same sex couples is inheritance. It is generally easy to name a beneficiary for a DC plan, but it is common for people to fail to update beneficiary designations and to coordinate beneficiary designations with other estate plans (Palmer, 2012)—making the accounts subject to general inheritance laws described below.

Defined contribution plans have complex tax implications (BYU Marriott School, 2012). With a small account this may not be a big issue, but an increasing number of DC accounts hold hundreds of thousands of dollars in assets and the tax impact can be significant (Jacobs, 2010). Distributions from tax-deferred accounts such as IRAs and 401(k)s are treated as ordinary income (Taylor, 2012). Without properly designating the beneficiary, the entire account balance may have to be distributed in one tax year at the death of the account holder—potentially pushing the taxpayer into a higher marginal tax rate. With proper beneficiary designation, the distributions can be spread over several years, lowering the tax impact.

For example, a taxpayer with $50,000 per year taxable income has a marginal tax rate of 25 percent. If a $200,000 IRA is distributed to the taxpayer in one tax year, the marginal tax rate will jump to 35 percent (IRS, 2011b). However, if the account is distributed to a beneficiary across ten tax years, adding just $20,000 per year in income, the marginal rate will remain at 25 percent. The tax difference on the $200,000 account is $20,000—on a $900,000 account, the difference is $90,000. Consumers should definitely seek advice from an expert on how to structure accounts to minimize tax implications. Tax issues need to be reexamined at retirement and at age 70, just before minimum required distributions kick in.

The Third Leg: Savings and Investments

Savings and investments are the third leg on the ground for secure retirement income. For the average beneficiary, Social Security replaces about 40 percent of pre-retirement earnings (Social Security Administration, 2012b). Defined contribution plans look a lot like savings, but they are not the same. Withdrawals from tax-deferred DC plans are taxed as ordinary income. Withdrawals from savings are not subject to tax. Long-term investments (those held for more than one year) are taxed as long-term capital gains, at a tax rate that can be significantly less than ordinary tax rates (IRS,2012a). Savings and investments are more readily available and have no (or a lower tax) consequence than DC plans, and thus serve as the third leg of retirement planning.

The challenges unique to LGBT adults with regard to savings and investments are primarily access to money in accounts in separate names and how those assets are treated under inheritance laws. These issues can be minimized with forethought and planning.

The simplest answer to guaranteeing access to a savings or investment account of a same sex partner is to create joint accounts requiring the signature of just one account holder (, 2012). Not all couples choose to have joint accounts. It is common for couples to have a joint checking account and separate savings or investment accounts (Fowles, 2012). Joint accounts are not without risk; any joint account holder can unilaterally withdraw or restructure assets, and joint accounts are subject to liens or judgments against any account owner (Hawn, 2010). It is essential to understand the circumstances and to have trust in the other person included in a joint account arrangement.

Early in my legal career, I was in court waiting for a guardianship case to be called, when a man sat down next to me. He nervously told me that he was there filing for guardianship of his partner, who had suffered a health crisis and was nearly comatose. They had maintained separate bank accounts and owned cars in separate names. His partner had income that was directly deposited into a separate account, and had car payments due on a separately owned car, but no one could make the payments. The partner was forced to file for guardianship and then manage the finances under the supervision of the court.

An alternative to joint ownership is a durable power of attorney. A durable power of attorney appoints an agent to act on behalf of the grantor, and to transact business in the name of the grantor, as described in the document (State Bar of Michigan, 2002). A durable power of attorney is effective even if the grantor becomes incapacitated (State Bar of Michigan, 2002). It is impractical for every asset to be jointly owned, so a durable power of attorney should be used to grant authority over separately owned assets. All couples, including same sex couples, should consult an attorney about creating durable powers of attorney. To be most useful, the document needs to be drafted to take into consideration the unique assets, values, and beliefs of the grantor. Special attention should be given to instructions on gifts and transfers of money and property.

Inheritance between married couples is guaranteed by law in nearly every state (Zucker, 2011). Inheritance laws vary somewhat by state, but commonly guarantee the surviving spouse at least half of the estate. If the surviving spouse is left less than the minimum share allowed by state law, he or she can go to court and ask the court to award a larger share (Zucker, 2011).

Legally married same sex couples that live in a state that recognizes the marriage shouldbe treated as married for inheritance purposes. This can be more complicated than it sounds. If a married same sex couple live in a state that recognizes same sex marriage, and one of them dies, the surviving spouse would be able to claim a statutory share of assets in that jurisdiction. However, if the deceased owned property in a second state that does not recognize same sex marriage; the survivor would not be afforded any protections for inheritance purposes in the second state.

The good news is that most inheritance issues can be solved with careful planning. Many assets can be owned jointly with a right of survivorship. For married couples, joint ownership with a right of survivorship is assumed to be what they want, unless they ask for some other form of ownership. An asset owned jointly with right of survivorship automatically passes to the surviving joint owner upon the death of one of the joint owners. For a same sex couple, this may not be the assumption. The assumption for two unmarried buyers is a tenancy in common (with no right of survivorship). Same sex couples need to explicitly request that property be titled jointly with right of survivorship.

Joint bank accounts are generally joint with right of survivorship (Garber, 2012). There are also options available to provide for automatic inheritance of separately owned financial accounts. Financial institutions in most jurisdictions allow separately owned accounts to name a beneficiary. These may be known as payable on death (POD) or transferable on death accounts (TOD) (Garber, 2012). Same sex couples should consider adding POD or TOD designations to separately owned accounts.

Every person also needs to create an estate plan describing who inherits their real and personal property when they die. If you die without an estate plan (will or trust), state law determines who inherits your real and personal property (, 2012). Property owned jointly with a right of survivorship and assets with a legal designation of a beneficiary (such as TOD, POD accounts, and life insurance) pass at death to the named beneficiary. State laws determine who inherits everything else. For most people there is an amazing amount of “everything else”: cars are often in one name, furniture, artwork, jewelry—even the cash in one’s pocket.

Inheritance laws are state laws, so there are more than fifty versions (Zucker, 2011). But all of them have one thing in common—protections for the marital and biological family (Zucker, 2011). A surviving spouse is generally entitled to a significant share of the estate. The remainder of the estate generally passes to children of the deceased and, if there are none, to the parents of the deceased. If there are no parents, the share passes to the siblings of the deceased, and then to the next of kin to whatever degree defined by state law. Persons outside the family defined in the law, no matter how close to the deceased, are not entitled to a share of the estate, unless there is an estate plan in place that leaves them an interest. Not having an estate plan can be devastating for same sex couples. The solution is a will or trust supplemented by other estate-planning tools. Every adult, but especially those with families of choice, needs an estate plan.

Estate and inheritance taxes also impact same sex couples. Federal estate taxes are payable by the estates of people who died in 2011 with taxable estates in excess of $5,000,000, and impact about 2 percent of all estates (IRS, 2012b). While there are significant estate tax protections for opposite sex married couples that are not available to same sex couples (IRS, 2011a), the impact is on a relatively small number of estates and will not be covered in this limited forum (couples with estates in excess of $1,000,000 should consult an estate tax planning expert).

Many states impose a separate inheritance tax on assets passing at death, generally with liberal exemptions for immediate family (Kentucky Department of Revenue, 2011). Inheritance tax can have a significant impact on same sex couples if they are not considered immediate family under state law. Inheritance tax is based on state law, so all same sex couples should consult an attorney in the state in which they either live or own property, to investigate inheritance tax planning options.

All Three Legs Firmly on the Ground

Social Security, pensions, and savings make up the three legs of retirement income stability and the law gives special protections in these critical areas to married couples. The interaction of the federal Defense of Marriage Act and the increasing numbers of states recognizing same sex marriage make the landscape more complex than ever before. Careful planning is essential to ensure that we age into retirement with all three legs firmly on the ground—for ourselves and for our loved ones.

David Godfrey, B.A., J.D., is a senior attorney with the American Bar Association Commission on Law and Aging in Washington, D.C. He can be contacted at


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Editor’s Note: This article is taken from the Summer 2012 issue of ASA’s quarterly journal, Generations, an issue devoted to the topic “Financial Capacity and Competency in an Aging America.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online storeFull digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.

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