The Supreme Court's June 26 decision, Obergefell v. Hodges, affirmed a constitutional right to same-sex marriage in all 50 states, opening up tax, estate planning and employee benefits opportunities for couples in the 13 states that have not permitted same-sex marriage. For one, same-sex married couples may be able to claim state income tax refunds. They no longer have to worry about state estate taxes at the death of the first spouse. And they may save on health insurance at work.
Same-sex couples in these states have been operating in a "sort of limbo situation," says Nicole Pearl, an estate lawyer with McDermott Will & Emery in Los Angeles. (The states are: Arkansas, Georgia, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee and Texas.) If they got married out-of-state, they could get the federal benefits of marriage but their home state could still deny them the benefits of marriage under state law. So they could file a joint federal income tax return but not a joint state income tax return, for example. The first to die could leave property to the other, without the survivor needing to pay federal estate taxes, but there was a same-sex state death tax trap.
"For couples who don't like a lot of uncertainty, it was too grey of an area; they wanted to know if they got married, it was a marriage recognized everywhere. Now this enables them to get married and know exactly where they stand," Pearl says. One high-net worth same-sex couple with three kids that she advises was waiting on the Supreme Court decision, hoping for a favorable ruling, which would make way for a summer wedding.
The constitutional right to marriage in all 50 states means tax certainty for same-sex spouses. (Credit: AP Photo by Jaquelyn Martin)
Here's the new lay of the land.
Income taxes. Married same-sex couples can now file joint state income tax returns, which typically leads to a lower tax liability than filing two individual returns. This applies retroactively to open year tax returns, so couples who were married out-of-state should file for refunds for past years. And going forward, including for 2014 on extension, same-sex couples should consider filing joint returns.
Gifting. A big advantage of married status is that you can make unlimited gifts to your spouse without worrying about federal or state gift taxes. This will help same-sex couples who have been stuck with federal gift tax bills when they've bought a house. Now if a same-sex couple buys a house together, even if they put in different amounts towards the purchase price, they can have joint 50-50 ownership of the house with no gift tax consequences.
Estate planning. The spousal exclusion is a basic estate planning principle that allows spouses to leave one another property without paying estate taxes at the first death. The Supreme Court in Windsor extended that federal right to same-sex couples. Now Obergefell extends that spousal exclusion right at the state level. Married same-sex couples will also have the right to inherit property under a state's intestacy statute that kicks in if there's no will. The issue of where same-sex couples can get a divorce is now off the table. Until now, couples who wanted a divorce didn't necessarily have access in their own states to bring a divorce action. Now there's a fundamental right to a divorce in every state, Pearl says. That will help spouses fighting for support rights.
Divorce. The issue of where same-sex couples can get a divorce is now off the table. Until now, couples who wanted a divorce didn't necessarily have access in their own states to bring a divorce action. Now there's a fundamental right to a divorce in every state, Pearl says. That will help spouses fighting for support rights.
IRA rollovers. Same-sex couples who marry now that's it's allowed in all states should double check their IRA beneficiary designation forms. If a spouse inherits an Individual Retirement Account, there's a special spousal rollover provision that lets a surviving spouse delay taking distributions until age 70.5 and stretch out tax deferred payments over the survivor's lifetime. That saves federal and state income taxes.
Hospital visits. Something as basic as the right to visit a spouse in a hospital is now certain for same-sex married couples—whether they are at home or traveling out-of-state.
Health benefits. In states that denied same-sex marriage, fully-insured medical plans could deny coverage to same-sex spouses. Now fully-insured medical plans will likely now be required to cover same-sex spouses. Self-insured medical plans can arguably continue to exclude same-sex spouses from coverage, but would be at risk of challenges under sex discrimination laws, says Todd Solomon, an employee benefits lawyer at McDermott Will & Emery in Chicago. And same-sex couples should get a tax break everyone else enjoys: Same-sex spousal health benefits will no longer be taxed at the state level.
Social Security. Spouses usually do not have the same lifetime earnings history, and hence their Social Security benefits differ. That is why many married couples take advantage of rules that permit a spouse to receive up to half of a living spouse's benefit if it is larger than his or her own. And the survivor rules permit widows or widowers to receive up to 100 percent of a deceased spouse's benefit or his/her own benefit, whichever is greater. Now, LGBT Americans can also take advantage of these rules.
TIP- Strategy for Increased Social Security Benefits for Married Couples: The big payoff comes when couples coordinate the timing of their Social Security benefit claims. You can claim as early as age 62, but that would reduce the lifetime value of your benefit by 25 percent. Or, you could wait until after the full retirement age (currently 66) to claim - that gives you a whopping delayed retirement credit of 8 percent for each 12-month period of delay - up until age 70.
Filing later means higher annual income for life, which can be a great hedge against the risk of running out of money in old age. The downside is that it can mean fewer total lifetime years of benefits, depending on your longevity. That is where a lesser-known, more complex strategy called file-and-suspend enters the picture.
In this scenario, the higher-earning spouse files for benefits at full retirement age, then immediately files a notice to suspend payment of those benefits. That permits the lower-earning spouse to file for a spousal benefit, which is equal to half of the spouse's benefit.
That gets some benefit flowing to the household while the higher earner continues to accrue higher benefits through delaying, perhaps until age 70; at that point, the lower-earning spouse converts to his or her own full benefit. (Note: The spouse can convert to a full benefit only by waiting until full retirement age to file for a spousal benefit.)