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Financial advisors to same sex couples on marriage: not so fast

Lauren Laughlin

This a guest contributor article written by Lauren Laughlin. Ms. Laughlin is a freelance corporate and personal finance journalist with over a decade experience published in outlets including the Wall Street Journal, New York Times, and Fortune Magazine. She began her career as an investment banker in the media group at Deutsche Bank. You can follow her on Twitter.

As same sex marriage becomes legal in the U.S., couples are rushing to tie the knot. But financial advisors warn: walking down the aisle doesn’t always mean lifelong bliss, at least when it comes to the bookkeeping. In fact, for many same sex couples, marriage can make their financial situation more challenging.

According to a March 2015 report from UCLA Law’s Williams Institute, the number of people in same sex marriages about tripled in the year leading up to February versus the year prior. As of that month, about 700,000 people in the U.S. were in a same sex marriage, versus about 260,000 the year before. With the recent Supreme Court ruling, this wave isn’t likely to slow down.

Same sex couples finances are different than heterosexual couples for two reasons: they often earn more money and they often have bigger nest eggs. Though this might sound like good news for same sex couples, marriage can actually be more expensive and more complicated than for heterosexual couples.

“Let’s put on the brakes and consider what this means from a financial standpoint,” says Alex Popovich, Los Angeles-based Wealth Advisor for JPMorgan Private Bank.

According to the Williams Institute, the average household income of a same sex married couple is $106,000 versus $79,000 for heterosexual couples. More income means more taxes - disproportionately when the wealthy are married. It is called the “marriage penalty” or the idea that “two income tax payers actually pay more than if they were two individuals filing separately,” says Popovich.

For example, a married couple who collectively earns $300,000 will pay nearly $4,000 more annually than two unmarried people who together earn as much, according to work done by the Tax Foundation, an independent tax policy research organization. Contrast with a married couple whose household takes in $75,000. They book a “marriage bonus” of $225.

Same sex couples also have factors that should boost savings. Higher incomes help. People in the top 1% of the wealth class saved 40% of their income in 2012, according to a study by Emmanuel Saez at the University of California, Berkeley, versus 15% of less for everyone else. They also have smaller families. About a quarter of same sex couples are raising kids versus nearly 43% of opposite sex couples, an average expense of $300,000 a pop, according to the Department of Agriculture.

Same sex couples marry on average 16 years later than heterosexual couples, says Gary Gates at the Williams Institute, giving them more time to build assets.

These demographic realities should make for bigger bank accounts, but then marriage is harder to financially untangle when it goes awry. Advisors recommend couples take time to consider a prenuptial agreement before they take vows.

“If a couple has been together for a long time and they are older, they have had time to accumulate assets,” Popovich says. “Presumably those assets are held in individual names and they have probably done a lot of planning around the fact they are in individual names.”

A couple with more assets has other loose ends to tie up. For example, a married person is legally entitled to assets of the spouse upon death, something known as “elective share.” “In most states that is about a third, meaning, if I pass away my spouse is entitled to a third of my assets,” Popovich says. Legal documents need to be rewritten if a person prefers the assets to go to someone other than the spouse.

A person should also sell money-losing assets to the partner before marriage if they hope to book a loss for tax purposes. Further, people who have non-grantor trusts may be exempt from paying city and state taxes when they are single, but marriage can take away that benefit.

It sounds unromantic, but a shot of realism is important for the established soon-to-be-spouse.

“Certainly someone in their 50s will go into this with their eyes more open, having been together for 25 years, rather than someone in their early 20s in their first blast of young love,” says Paul Ferrara, Wealth Strategist at the U.S. Trust, Bank of America Private Wealth.