How to help LGBTQ+ clients plan their financial futures

12/30/2022 — Key takeaways:

• LGBTQ+ individuals have had to fight hard for their rights and protections to feel safer at home among family and friends, as well as at work among their colleagues.
• LGBTQ+ individuals have made great strides in legal rights, most recently with the right to marry being expressly protected under Federal law with the passage of the Respect for Marriage Act in 2022.
• When working with LGBTQ+ clients, it is important to remember they’ve likely faced a lifetime of discrimination.

I remember a conversation that I had a few years ago now, as I was catching up with a friend and fellow Nationwide Associate whom I had not seen in some time because COVID restrictions had kept us away from the office. As we reconnected, I casually asked what he did over the past weekend. He very matter-of-factly responded with, "Oh, not too much. Just went to the park, got married, had dinner."

My friend and coworker and his now husband had already been together over a decade at that point. They had started a business and owned a home together; but I did not think they ever planned on getting married. I obviously immediately expressed my excitement and congratulations, but my curiosity soon got the best of me. I asked, "I always thought you opposed marriage, what made you change your mind?" His response: "A meeting with our accountant and financial professional."

This conversation with my friend provides a perfect example of just one of many important life events with significant financial ramifications that many members of the LGBTQ+ community approach differently. It is my belief that in order to provide competent financial guidance to members of this community, financial professionals must be culturally competent and also understand how sexual orientation and gender identity often have fundamental impacts on their clients’ financial past, present, and future. With that concept in mind, this blog touches on a number of these differences and how they may impact your LGBTQ+ clients.

Throughout history, LGBTQ+ individuals have had to fight hard for their rights and protections to feel safer at home among family and friends, as well as at work among their colleagues. In recent history, LGBTQ+ individuals have made great strides in legal rights, most recently with the right to marry being expressly protected under Federal law with the bipartisan passage of the Respect for Marriage Act, which was signed by President Biden on December 13^th, 2022. The LGBTQ+ community also recently gained protection under the Civil Rights Act of 1964 through the United States Supreme Court’s Bostock v Clayton decision, which was issued on June 15, 2020.¹

These new legal protections make more individuals feel safe enough "to come out of the closet" and identify as LGBTQ+. Accordingly, a recent Gallup survey indicated that more adult Americans are identifying as either Lesbian, Gay, Bisexual, or Transgender, with 7.6% of U.S. adults identifying as such. The current figure is up from 5.6% four years ago and 3.5% in 2012, Gallup’s first year of measuring sexual orientation and transgender identity.² Financial professionals need to be ready to help these individuals prepare for their financial futures. To do so well, you need to understand some of the unique challenges that LGBTQ+ individuals face, which may affect their financial planning.

Understanding LGBTQ+ history and challenges

When working with LGBTQ+ clients, it is important to remember they are likely to have faced a lifetime of discrimination. According to the Center for American Progress, more than one in three LGBTQ+ Americans reported facing some type of discrimination within the past year.³ More upsetting, is that nearly four in five Americans reported they took at least one action to avoid experiencing discrimination based on their sexual orientation, gender identity, or intersex status.⁴Such actions included hiding a personal relationship, avoiding law enforcement, avoiding medical offices, or changing the way they dressed. These survey results reflect the reality that despite more visibility and some legal protections, many LGBTQ+ people continue to face discrimination in their personal lives, employment, housing, and health care, as well as in the public sphere.

Discrimination, and its negative ramifications, are all-encompassing. It impacts LGBTQ+ individuals not only in their personal lives, but also professionally. Up until the Supreme Court’s Bostock decision, it was perfectly legal (at the federal level) to fire or otherwise discriminate against an employee simply for being (or being perceived as) a member of the LGBTQ+ community. In the majority of states (28, to be exact), there were no state-wide nondiscrimination laws that prevented this type of workplace discrimination. This led to members of the LGBTQ+ community not feeling safe to be their full selves in the workplace. Aside from the mental toll this placed on LGBTQ+ employees, it also had a detrimental effect on LGBTQ+ individuals’ lifetime earnings potential.  According to a survey by the Human Rights Campaign (HRC), LGBTQ+ workers earn about 90 cents for every dollar that a typical worker earns. Further, LGBTQ+ people of color, transgender women and men and non-binary individuals earn even less when compared to the typical worker.⁵ As we know, the detrimental impact of reduced annual earnings compounds over time, which negatively impacts LGBTQ+ individuals financial futures and planning.

Financial implications of marriage

The Supreme Court’s Windsor and Obergefell decisions in 2013 and 2015 granted same-sex couples who marry the same 1,100+ legal benefits and protections granted to opposite-sex married couples.⁶ Yet along with those benefits and protections, some LGBTQ+ couples may experience negative financial implications. For one, LGBTQ+ couples are less likely to have children, making it more likely that both members of the couple work. If both members of the couple work in a highly paid job, they can potentially fall victim to the "marriage penalty" under federal income tax law. This means that, as a married couple, they would potentially pay more in federal income taxes than if they remained unmarried.

Another factor to consider if children are involved is the cost of college. If one party to the marriage has a child from a previous relationship and that child is nearing college age, it might be better to delay getting married if they plan to send the child to college. This is because once they are legally married, they would be required to list both incomes on the student’s FAFSA ("Free Application for Federal Student Aid") form, which may reduce how much financial aid the student receives.

Financial benefits of marriage

While there can be a few potentially negative financial implications of getting married, there are also a plethora of positive benefits to consider.

Tax benefits

On the opposite end of our previous example where both individuals in the pair have a high income and could face a "marriage penalty," if there is a large disparity in the incomes of the two, it could save them money if they marry and file a joint income tax return because they can average out their earnings. This means that the income of the higher-income earner of the two could be taxed at a lower rate than if they were single. This savings is often significant. As a financial professional, you are able to help them determine the best option for them, at least from a tax savings-perspective.

Health care benefits

Another major benefit to marriage for an LGBTQ+ couple is that they are now afforded the same health care rights as a heterosexual couple. This means that a company that offers healthcare benefits to a heterosexual partner in a marriage, must now also offer the same benefits to an LGBTQ+ partner. One more health-care-related benefit that LGBTQ+ couples now have access to is being able to visit their partner in the hospital, which was not always possible in the past.

Property ownership

Marriage also grants benefits when it comes to property ownership. If one of the spouses were to pass away, the property would be able to pass onto the other without any federal estate tax consequences.

Retirement planning

Different steps can be taken to maximize social security benefits for surviving spouses. It all depends on a client’s individual needs, so as a financial professional you can help guide them in the right direction.

Another way to help with retirement planning is making sure your clients have a life insurance plan. Having a life insurance plan will help protect your client by making sure the surviving spouse has a tax-free benefit to help replace any potential lost social security income.

Lastly, having an annuity with a joint income option would provide a source of protected lifetime income that would last for the remainder of the life of the survivor. Social security, life insurance, and annuities are three ways you can help your clients diversify their income stream. Educate your LGBTQ+ clients on these potential benefits to help with their retirement planning.

Planning for children

Planning to have children can be much more costly for LGBTQ+ individuals than their heterosexual counterparts. Whether they are looking at adoption, surrogacy, or other various forms of reproductive technology, all can end up being quite expensive. Depending on whether they are looking at domestic or international adoption, costs can range from $20,000 to up to $50,000+. Surrogacy can be even more expensive than that, with costs ranging from $100,000 to $225,000.⁷ With such a wide range of costs, you could really provide value to your LGBTQ+ clients if you are prepared to help them make a financial plan to achieve parenthood.

Key takeaways

Deciding whether to marry, have kids, and when to retire are important choices that all your clients will go through. Understanding and being able to provide guidance to your clients as they make these decisions will be important for your client’s financial future and physical and emotional well-being. When working with LGBTQ+ clients, understanding that their experiences with discrimination and how their lives may differ from many of your "typical" clients, and how those experiences and differences may impact how they make decisions, will be important for you as a financial professional to be able to relate to your clients and provide them with the best guidance possible.