There are sure to be many financial ramifications for married same-sex couples across the United States after the Supreme Court’s decision this summer in the case of United States v. Windsor striking down Section 3 of the federal Defense of Marriage Act (DOMA), which had defined marriage federally as being between one man and one woman. In the wake of the Windsor decision, the federal government and all its agencies and departments must recognize valid same-sex marriages.
With regard to estate planning, federal recognition of same-sex marriages means that couples can now plan to leave their estates to the survivor of the marriage with no estate tax being due upon the death of the first to die. Previously, only opposite-sex couples could leave an unlimited amount of money and property to the survivor of the couple with no possible estate tax implications. Similarly, same-sex married couples can now give gifts of any amount to one another during their lifetimes with no need for the filing of a gift tax return. Another estate tax related benefit of the federal recognition of same-sex marriage is the ability of a surviving spouse to use his or her deceased spouse’s unused estate tax exclusion, known as portability. Previously, this strategy was available only to heterosexual married couples.
There are also new retirement strategies available to married same-sex couples thanks to the Supreme Court’s decisions. Same-sex couples can now take advantage of the transfer benefits once only available to married heterosexuals such as the ability for a surviving spouse to roll the deceased spouse’s retirement accounts into their own IRA account, assuming ownership of the account. Married same-sex couples can also optimize their Social Security benefits both during life and again upon the death of the first-to-die.
While this new ability to give freely is a money saver when it comes to estate tax, it does mean that more planning will have to be done if a couple wants to keep their finances separate. As same-sex marriage will now be recognized when it comes to qualified plans, such as 401k and IRA accounts, contributor-owner spouses are only allowed, by law, to name their spouse as a beneficiary of a qualified plan. In order to name someone other than their spouse, the contributor-owner spouse will have to obtain consent of his or her spouse, usually in the form of a notarized signature on the beneficiary designation form. A review of one’s beneficiary designation forms once per year is always good practice. It is especially important for members of same-sex marriages at this time. The plan administrator should be able to answer any questions you may have.
Married same-sex couples will now have the ability to file joint tax returns. For most couples, the higher married tax brackets will be a welcome benefit. Some couples will, however, suffer what is known as the “marriage penalty”. The marriage penalty is felt by some couples who earn relatively the same amount.
All in all, the federal equal recognition of all marriages will result in myriad financial benefits flowing to same-sex couples. That said, changes in the law can create unanticipated complications. Same-sex couples (and couples thinking of getting married) should discuss the changes in the law with their lawyers and trusted advisors to make sure they are taking advantage of all of the benefits available to them and avoiding some of the new snags that could potentially derail even the most well-thought-out estate and financial plans.