Executive Summary
While the case of United States v. Windsor in 2013 required the Federal government to recognize the marriage of a same-sex couple if the marriage was legal where performed, states were not required to permit same-sex marriage, nor were they required to recognize legal marriages of same-sex couples performed elsewhere. However, with last week’s Supreme Court decision in the case of Obergefell v. Hodges, states are now required to permit same-sex couples to be married, and furthermore must recognize same-sex marriages performed in other states and jurisdictions.
The Supreme Court’s decision creates several immediate new planning opportunities for same-sex married couples, particularly those who were previously married in another state but have been recently living in a state that did not recognize (or one of the 13 that outright banned) their marriage. Those couples will now be able to do everything from filing joint income tax returns, to benefit from the marital deduction for state estate and inheritance tax purposes, to get divorced if the couple decides to separate. In fact, for many such couples, a major planning issue will simply be unwinding the strategies previously in place to handle the fact that their marriage wasn't recognized, but are no longer necessary!
Perhaps most financially significant, though, is that same-sex married couples will now be able to claim spousal and survivor benefits as a married couple, regardless of their current state of residence. This creates both immediate Social Security claiming opportunities for some same-sex couples, and the need to plan more proactively for a same-sex married couples’ Social Security benefits in the future, as all the claiming strategies for married couples – including file-and-suspend and restricted application – are now available.
On the other hand, the Supreme Court decision actually makes financial planning for same-sex couples far simpler in the future – or at least, no more complicated than the conversations that arise when any couple is considering whether to marry, and how it might impact them from income tax planning to financial aid to estate planning and everything in between. In fact, as the legal differences for marriage between same-sex and heterosexual couples shrink to almost nothing, it remains to be seen whether LGBT planning will even remain as a distinct ‘niche’ amongst financial advisors - as while potential discrimination against gays and lesbians remains an issue, equal marital rights appears to be eliminating most of the need or relevance of ‘specialized’ LGBT financial planning in the first place?
Same-Sex Marriage, Obergefell v. Hodges, And The Fourteenth Amendment
In 2013, the Supreme Court’s decision in the case of United States v. Windsor declared that Section 3 of the Defense Of Marriage Act (DOMA) – which required that under Federal law, a marriage union must be between a man and a woman (and not a same-sex couple) – was unconstitutional under the Fifth Amendment. The outcome of the case was that the Federal government had to recognize an otherwise-legal same-sex marriage, and allow the couple to be treated as married for Federal tax purposes, including filing joint tax returns as a married couple, and eligibility for the marital deduction for estate tax purposes (which was the actual issue at hand in the Windsor case).
However, the Windsor decision did not require states to allow same-sex marriages, nor did it require states to recognize a same-sex marriage from another state (even if it had to be recognized by the Federal government). This in turn lead to confusing planning scenarios where same-sex couples were recognized as married for Federal purposes as long as the marriage ceremony was legal where it was performed (the “place of celebration”), but might not be recognized as married for state purposes if their current state of residence did not permit same-sex marriage.
On June 26 of 2015, though, this distinction between “place of celebration” and “[current] state of residence” came to an end, as the Supreme Court ruled in the case of Obergefell v. Hodges that marriage is a fundamental right under the Fourteenth Amendment between any two people, regardless of whether they are of the opposite or same sex. Accordingly, the right to marry is protected under the Due Process and Equal Protection Clauses of the Fourteenth Amendment, and states cannot limit that right to marry. Which means that states may no longer ban same-sex marriage, and must not only issue marriage licenses to same-sex couples but must also recognize such same-sex marriages that occurred in another state.
Planning For “Married” Same-Sex Couples In States That Previously Prohibited Same-Sex Marriage
For same-sex couples living in states that previously prohibited same-sex marriage in the state, and/or would not recognize a same-sex marriage from another state, the Supreme Court’s decision in Obergefell v. Hodges raises several immediate planning issues and opportunities. Specifically, for those same-sex couples who were already married (legally) in another state (or another country!) but were/are now living in a state that didn’t recognize the marriage, the Supreme Court’s decision forces that marriage to be recognized by the state.
This means same-sex spouses now have all the state rights otherwise afforded to spouses, including rights when it comes to medical decisions for an (incapacitated) spouse, adopting children as a married couple (though beware of adopting from foreign countries that may still not recognize or honor the marriage), and participate in a spouse’s health insurance and other relevant employee benefits (though that means companies may actually reduce their coverage options for unmarried couples in general, as that ‘workaround’ to offer benefits for not-able-to-be-married same-sex couples is no longer necessary to support them).
With the marriage recognized at the state level, income tax filings will also become easier, as for the past two years such couples were eligible to file a joint return as a married couple at the Federal level, but had to prepare separate individual tax returns at the state level (a significant hassle and causing some additional tax preparation costs). Now the couple will be able to file a joint tax return at the state level as well. However, it remains to be seen whether such couples will be allowed to file amended state income tax returns for prior years, if such treatment would have allowed for a lower state income tax liability; stay tuned for further announcements from state taxation authorities about whether this may now be possible (assuming the same-sex couple really was legally married [elsewhere] in prior years).
State recognition of the existing same-sex marriage for tax purposes also means more favorable state estate tax treatment, for the subset of states that still have a state estate or inheritance tax. Most states with an inheritance tax exempt the tax for bequests to spouses – for which a same-sex spouse is now eligible. And the availability of a state estate tax marital deduction means that the couple may now wish to update their estate documents, as trusts commonly used for unmarried couples are no longer necessary (including life insurance polices and ILITs created to cover state estate taxes that will no longer apply). Notably, same-sex married couples already have been eligible for a Federal marital deduction since 2013; what has changed is that now they are eligible at the state level, too, for states that were not previously willing to recognize the marriage.
Notably, state recognition of the same-sex marriage also creates the potential for same-sex couples to get divorced – ironically a very thorny legal issue for the past two years, as same-sex couples could get married in a state that recognized the marriage, but end out moving to a state that didn’t recognize the marriage and therefore wouldn’t process a divorce (nor would the state necessarily recognize a pre-nuptial agreement formed in another state). Now that the state must recognize the marriage, it must also permit the dissolution of that marriage, including the determination of appropriate spousal alimony and child support as appropriate. In point of fact, it’s possible that the major planning issue for some same-sex couples, who perhaps were having marital issues, will now be whether to proceed with a divorce that is finally permissible!
For older same-sex couples, though, perhaps the biggest opportunity created by the Supreme Court decision that forces their state of residence to recognize the otherwise-legal marriage is that now the couple becomes eligible for Social Security benefits.
Social Security Benefits Planning For Same-Sex Married Couples
In the immediate aftermath of the Windsor decision in 2013, President Obama directed then-Attorney-General Eric Holder to begin a process of reviewing all Federal rules and regulations to support the recognition of same-sex marriage under Federal law where feasible. As noted earlier, this directive led the Treasury and IRS to declare in Revenue Ruling 2013-17 that same-sex marriages would be recognized in the case of Federal tax law (for both income and estate tax purposes), as long as the same-sex marriage was legal at the “place of celebration” where the marriage ceremony legally occurred. However, in the case of Social Security benefits, the law technically stated that the determination of whether a couple is married is based on the couple’s current state of residence – and as a result, same-sex couples that were legally married in one location but moved to another where the marriage would not be recognized were not eligible for spousal and survivor benefits as a couple.
With the new Supreme Court ruling, though, a same-sex couple that was legally married must be recognized as married in every state – as states are no longer permitted to limit same-sex marriage or fail to recognize such marriages from another state. As a result, same-sex married couples living in a state that did not recognize their marriage have now suddenly become eligible for benefits as a married couple.
Suddenly becoming eligible for benefits as a couple can be a significant income bump for many same-sex (or any) married couples. This means a same-sex partner can receive spousal benefits (as long as the couple has been married for at least one year), as well as survivor benefits (as long as the couple was married at least nine months). The dollar amounts of these Social Security benefits can be significant, potentially the equivalent of a retirement asset worth several hundred thousand dollars that has just become available now that the marriage is recognized!
In addition, the fact that the marriage is recognized also means that the various Social Security claiming strategies for married couples also becomes relevant. For instance, upon reaching full retirement age, one member of a same-sex married couple can now file-and-suspend to activate spousal benefits for his/her partner, or file a restricted application to receive spousal benefits based on the other spouse’s record while delaying his/her own. Delaying Social Security benefits for at least one member of a same-sex married couple will often be more appealing now, as the availability of spousal and especially survivor benefits increases the potential for the couple to survive to requisite ‘breakeven’ period.
Notably, same-sex couples who are married and then get divorced have the potential to receive ex-spouse spousal or survivor benefits as well. Though in order to be eligible, the marriage must have lasted for at least 10 years, and the couple then must be divorced for at least two years, which means few couples will likely be eligible now as same-sex marriage is still a ‘relatively recent’ phenomenon in most states. However, ex-spouse benefits may be increasingly relevant in the future, as more and more same-sex couples are married long enough to be eligible.
Though given that same-sex marriage has been permitted for many years in a number of states, for some couples the sudden availability of Social Security benefits means the couple may actually wish to not only claim benefits now, but try to claim benefits retroactively to when they were eligible. In point of fact, back in 2013 when the Windsor ruling occurred, same-sex couples were encouraged then to file for any benefits they might become eligible for if their otherwise-legal marriage become recognized in their current state, in order to protect against their potential loss of benefits. Accordingly, at a minimum, those who already filed for benefits but found them to be “pending” for the past two years, may soon find those benefits paid. Whether a broader level of retroactive claiming will be permitted or not remains to be seen, but expect to hear further guidance from the Social Security Administration about whether or under what circumstances it will be possible to claim benefits retroactively for a same-sex couple that was already married but couldn’t claim Social Security spousal or survivor benefits because their state didn’t recognize the marriage until now.
Financial And Other Issues For Same-Sex Couples Deciding Whether To Marry
On a prospective basis, the biggest change of the recent Obergefell v. Hodges Supreme Court decision is simply that same-sex couples in states that prohibited such marriages will now have the option to do so. And ironically, that may actually create stress for some same-sex couples, who will now need to have the same “should we get married?” conversation that heterosexual couples face – an issue and conversation many gay and lesbian couples never had to have in the past, because it wasn’t an option anyway. But now it is.
Beyond the decision of whether to marry to make the mutual commitment as a married couple, from the financial planning perspective the decision of whether to marry also entails a number of financially-related consequences, which financial planners must now bring to the table with their same-sex couples, just as with any other couple that is considering whether to marry.
For instance, the so-called “marriage penalty” for income tax purposes – where a married couple pays more in income taxes jointly than they would have separately – will now apply, particularly when two high-earning individuals (whether as a same-sex or opposite-sex couple) choose to marry (though notably, with a large income disparity, marriage can produce a lower income tax liability for the couple). Same-sex couples who choose to marry will now also become eligible for the marital deduction for estate tax purposes (though notably, they could have already obtained such benefits by getting married in another state that recognized the marriage, even if their home state would not).
In addition, same-sex couples that choose to marry must consider all the other financial dynamics that change as the couple comes together jointly. A merged household can impact student loan obligations (particularly for income-based repayment plans, if the couple isn’t going to file separate tax returns), financial aid eligibility for children (of one member of the couple) who are applying to college, or for older couples potential eligibility for Medicaid. And with all states recognizing the marriage of a same-sex couple, the discussion of pre-nuptial agreements before getting married are now on the table, too.
Notably, the ruling validating same-sex marriage in all 50 states doesn’t change the fact that Civil Union and Domestic Partnership laws still exist in some states, allowing couples (of the same or opposite sex) to enjoy some state benefits as a couple. However, Civil Unions and Domestic Partnerships still do not afford the depth of protections – nor generally any rights/protection under Federal law or outside of the couples’ home state – as a full marriage provides. As a result, same-sex couples who have relied on such rules in the past may still wish to consider full-fledged marriage, if having such couples’ rights are important to them.
Future Of Financial Planning For The LGBT Community
Ultimately, the reality is that full recognition of same-sex marriage across the entire United States should actually make financial planning for such couples far easier in the long run – at least relative to what it’s been in the past. Going forward, for better or worse, same-sex couples will generally face the exact same issues that any other couples – same-sex or heterosexual – must consider when deciding whether to marry.
Ironically, that means the Obergefell v. Hodges Supreme Court decision may even represent the beginning of the end of “LGBT planning” as a specialty niche for financial advisors – at least as it pertains to the couples’ financial issues (though notably, anti-discrimination protections against gays and lesbians outside of marriage are still a challenge in many states). Accordingly, it remains to be seen whether or how designation programs like the Accredited Domestic Partnership Advisor (ADPA) may change to remain relevant in the future.
In the near term, though, the introduction of the right to marry for same-sex couples who lived in states that prohibited – as well as the sudden recognition of an existing marriage for same-sex couples who married legally but now reside in states that weren’t acknowledging the marriage – creates a wide array of immediate planning opportunities, from income and estate tax planning, to health insurance and other employee benefits, to unwinding 'old' strategies that are no longer relevant, and perhaps most significantly, the availability of potentially significant Social Security spousal and survivor benefits.
So what do you think? Do you currently have any same-sex couples who either were already married, or are considering it, now that the Supreme Court ruling has declared same-sex marriage legal? What issues have come up for your client couples? Are there other challenges you’re seeing that haven’t been discussed here already? Please share in the comments below!
For financial advisors who are looking for more information about how to plan for same-sex couples, you may wish to check out the upcoming PridePlanners conference in September!
Great article, Michael! I’m interested in the ramifications of this ruling on 401(k) plans, pension plans, etc. that require a spouse to sign off if someone other than that spouse is to be designated the primary beneficiary. Under prior laws, I’m assuming if a same-sex couple got married in one state, and then moved to another state that did not recognize same-sex marriage, there would have been no required sign-off/notarization if an employee selected someone other than their same-sex spouse to be their primary beneficiary. I’m wondering what the handling would be if that employee died without changing their beneficiary form. Could the surviving now-recognized spouse come back and sue for benefits? Or is there some sort of “grandfathering” provision that would allow the beneficiary designation to stand?
Clarissa, I suggest you check out IRS Notice 2014-19 for the IRS view on many of these questions. http://www.irs.gov/pub/irs-drop/n-14-19.pdf IRS announced they would follow the state of celebration rule starting on 9/16/13. As with any marriage, qualified plans subject to the minimum vesting rules under ERISA (requiring spousal consent to name a non-spouse beneficiary or to waive a spousal survivor annuity) would have to treat someone whose same-sex marriage was validated by the court decisions as newly married, invalidating earlier non-spouse beneficiary designations and qualified pre-retirement survivor annuity waivers made before the marriage went into effect. The IRS was ok with plans that used state of domicile between 6/26/13 (date of the Windsor Supreme Court ruling) and 9/16/13 (the date Notice 2014-19 was issued), but not afterward. IRS said plans were also allowed to (but not required to) recognize same sex marriages before 6/26/13 (though this would have required the plan to be amended by 12/31/14). Aggrieved same sex spouses who were denied ERISA spousal protections could try to sue, but generally would have to try to exhaust administrative remedies under the plan claim procedures first. The IRS position may or may not be accorded deference by a court in deciding such as case.
Clarissa,
I defer to Fred. 🙂
– Michael
This is so helpful, Fred! Thank you!
Very good article and very informative. Question….could I receive my late husband’s social security benefits if he passed away in 2012? We were legally married in California. Does it matter that I am now remarried?