What Happened to DOMA and What’s Next?
What Happened?
On June 26th, in United States v Windsor, the Supreme Court ruled 5-4 that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional ab initio (from the start). The court decided that if the citizens of a state voted to recognize and protect a class of people, then the federal government could not fail to honor that without a valid and legitimate government purpose for doing so. As a result, same-sex couples who are in a state-recognized marriage will now be recognized by the federal government.
In Hollingsworth v Perry, the Supreme Court ruled that the defendants of Proposition 8 (composed of non-government parties as the state of California chose not to appeal) did not have legal standing to appeal, so the lower court’s ruling that overturned Proposition 8 was allowed to stand. As a result, California joins the District of Columbia along with 12 other states (Connecticut, Delaware, Massachusetts, Minnesota (Aug 1), New Hampshire, New York, Rhode Island (Aug 1), Vermont and Washington) that now allow same-sex marriages.
What’s Next?
Below is a table that highlights the effects that the above court cases have in a variety of financial planning areas:
| Financial Planning Areas | Section 3 of DOMA Repealed | The Aftermath (in states that recognize same-sex marriages) |
| Income Tax | Same-sex married couples can now file married filing jointly (MFJ) or married filing separately (MFS) on their federal tax returns. | Amended returns can be filed for the past three years. Being able to file as MFJ/MFS could result in refunds plus interest for many couples, but for others, the “marriage penalty” embedded in the tax code may actually mean a bigger tax hit. |
| Couples should consult their accountant to determine the best strategy for their situation for each year they are analyzing. It is also expected that the IRS will give more guidance in the coming months. | ||
| Gift Tax | Transfers between same-sex spouses are now tax-free for any amount and do not count against an individual’s lifetime gift exemption. | Prior to the repeal, transfers between same-sex spouses were taxable above the annual exclusion ($14,000 for 2013) and were deducted from an individual’s lifetime gift exemption. |
| Amended returns can be filed to obtain refunds plus interest and to credit back deductions taken against an individual’s lifetime gift exemption. | ||
| Estate Tax | Transfers between same-sex spouses are now tax-free as they are eligible for the unlimited marital deduction.Also, same-sex spouses can now elect estate exemption portability. | Prior to the repeal, transfers between same-sex spouses were subject to taxes for the amount above the deceased spouse’s estate exemption ($5,250,000 for 2013). |
| For estates below the estate exemption amount, couples were not eligible to use the portability election, which would have allowed the unused portion of the deceased spouse’s exemption to be used at the surviving spouse’s death. | ||
| Amended returns can be filed to obtain refunds plus interest for estate taxes paid on transfers between spouses. Also, the returns can be amended to elect portability for the surviving spouse for deaths on or after Jan. 1, 2011 (when portability first took effect). | ||
| It is important to note that while recognition is on a state by state basis, it may be prudent for same-sex couples to still have additional estate documentation in the event that the couple moves to a state that does not recognize same-sex marriages. | ||
| Social Security | Same-sex spouses are now eligible to file for spousal, survivor, and/or ex-spouse benefits from the federal government. | Same-sex spouses can file to receive up to 1/2 of their spouse’s benefit after age 62. They can also file for benefits if their spouse dies or if they have a divorce (subject to certain requirements). |
| Same-sex spouses who were eligible for benefits in the past could potentially be able to file now and receive their benefits retroactively. It is expected that the Social Security Administration will give more guidance in the coming months. | ||
| Employee Benefits | Same-sex spouses are now potentially eligible to receive spousal benefits from the other spouse’s employer.*Multi-state employers may be subject to different rules. Employees of such companies will need to seek further guidance to determine the applicable benefits. | This will depend on what is offered by the employer, but a few to note are that same-sex spouses could now be eligible to be covered by their spouse’s health insurance tax-free, have access to COBRA as a spouse, and to be factored into a spouse’s pension plan arrangements. |
| Medical Decisions | Same-sex spouses can now be considered next of kin. For some states, this means they are the primary authority for who would make decisions on their spouse’s behalf in the event of the spouse’s incapacitation. However in some states, the doctor or a court-appointed guardian would be considered the primary authority. | Prior to the repeal, other relatives would have been considered next of kin, which limited the authority of the same-sex spouse to make decisions in the event of their spouse’s incapacitation. This would be particularly troublesome if the relatives and the same-sex spouse disagreed on what to do. |
| Due to the differences in state law, it will likely still be prudent for same-sex couples to have Power of Attorneys, Advanced Medical Directives, and/or Living Wills in the event that the couple lives in a state that does not recognize the spouse as the primary authority or if the couple moves or even travels to a state that does not recognize same-sex marriages. | ||
| Retirement Accounts | Same-sex spouses can now have the option to make spousal IRA contributions.Same-sex spouses who inherit their spouse’s IRA are now able to choose more favorable distribution methods than if they were still considered a non-spouse beneficiary. | For a same-sex married couple with unequal compensation, contributions could be made to an IRA on behalf of the spouse with the lesser compensation. |
| A surviving spouse can now rollover the deceased spouse’s inherited IRA into their own IRA. If younger, this would prove beneficial as the surviving spouse would be able to defer RMDs until their own age 70 1/2 rather than having to withdraw RMDs the year after death. |
It is important to note that the remaining sections of DOMA are still in force. Same-sex couples who reside in a state that does not recognize same-sex marriages are not able to have a marriage recognized by the federal government. Couples who move from a state that does recognize same-sex marriages to a state that doesn’t recognize same-sex marriages will face varying complexities with regards to what rights they retain and what rights they lose from the move.
This has opened up discussions about whether marriage should be recognized based on place of residence or place of celebration. Many of the current laws such as those in the tax code and related to Social Security are based on a person’s place of residence. However, immigration policies are based on place of celebration.
The months and years to follow should provide more guidance for how same-sex couples can plan their financial affairs. Regardless, the rulings in United States v Windsor and Hollingsworth v Perry represent a monumental shift in the rights of same-sex married couples. As the table illustrates above, there are many planning areas to explore to make sure same-sex couples are maximizing their financial opportunities.