[IMGCAP(1)]In June, the Supreme Court held in Obergefell v. Hodges that “same-sex couples may exercise the fundamental right to marry in all States. It follows . . . that there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State on the ground of its same-sex character.”
While the question of same-sex marriage was decided on federal level exactly two years previously in U.S. v. Windsor, this decision has numerous implications regarding income tax, estate tax and retirement planning, especially for spouses who were living in states that previously did not recognize same-sex marriage.
Windsor recognized same-sex marriages on a federal level. If you were married in a state that recognized same-sex marriage, then you could file a federal income tax return as married, claim estate tax benefits (such as the unlimited marital deduction), and have your federal retirement plan benefits, e.g., your IRA, pass to your (same-sex) spouse tax-deferred, and your spouse would not have to touch the plan benefits until he or she reached normal retirement age.
But, states were free to recognize, or not recognize, the couple’s marriage. If a couple moved to a state that did not recognize their marriage, then they would enter a disjointed situation where, for example, they would be filing as singles on the state level and married on the federal level. This might require their accountant to prepare three federal tax returns—one married (to be filed federally), and two individually to be used to prepare the state level return. If one spouse died intestate, then the other spouse would not be entitled to spousal inheritance rights. And they could not list each other as spouses on their employer pension plans, thus missing out on various joint and survivor payout options.
Now Comes Obergefell
Certainly going forward, same-sex spouses can file as married (or as married filing separately) on the state level, regardless of which state they live in, for the simple reason that every state now must recognize their marriage. It is an open question, though, whether that couple may file amended state returns if their state of residence did not recognize their marriage previously.
Is this good for these families? Economically, remember that often there is a “marriage penalty” where two spouses have similar incomes. Couples should work with an accountant.
On a slightly different tack, many employers have provided health and other benefits to same-sex unmarried couples, acknowledging that they could not get married in various states. We might see employers dropping those benefits now.
The Golden Years and Beyond
Married couples receive a few benefits when it comes to retirement, mainly in the ability for a surviving spouse to elect to receive survivor benefits. Couples whose marriages were not recognized by the state could not elect joint and survivor benefits as part of employer pension plans. This is now not the case.
Obergefell also eliminates any doubt as to what Social Security survivor benefits a same-sex spouse can receive because the Social Security Administration, as required by federal law, recognizes marital relations as per the state in which a couple lives (hence the Windsor case did not apply to Social Security). Same-sex spouses can now receive Social Security spousal and survivor benefits, regardless of where they live. A spouse at full retirement age can now receive the greater of half of what his spouse’s benefit at full retirement age is, or what his own benefit would be. And a surviving spouse can generally receive the greater of his benefit or the decedent’s benefit.
Obergefell eliminates the estate-planning traps that same-sex spouses have faced since inheritance laws are determined at the state level. But spouses who live in states that previously did not recognize their marriage should review their wills to make sure they properly reflect their intentions, as the wills’ language might need to be changed to reflect their change in status.
Regarding financial planning, spouses can make unlimited gifts or bequests to each other, state and federal gift or estate tax free. And the estate tax exemption is portable between spouses, i.e., one spouse can pass the unused portion of the estate tax exemption to his or her survivor. This was the case under Windsor. Under Obergefell, any state level estate and gift tax issues have been resolved.
Bottom line is that when you speak to same-sex spouses about income, estate and financial planning, just ignore the phrase “same-sex” and you can advise them like you advise all your other clients.
Michael Sonnenblick, J.D., LL.M., currently serves as an editor/author with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters. He holds a J.D. degree from Boston University School of Law and an LL.M. in Taxation from New York University Law School. A member of the New York Bar, He has 20 years of tax experience, including service with a major Wall Street bank and international law firms. In addition, he has represented clients before the IRS. His specialties include individual taxation and retirement planning.
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