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Post-DOMA Planning Primer

Mon, 22 Jul 2013

Same-sex couples in states that recognize their marriage will need to revisit their Social Security, income-tax filing, and estate-tax plans following the recent Supreme Court decision, says Tim Steffen, director of financial planning for Baird's Private Wealth Management Group.


Video Transcript

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

The Supreme Court recently struck down some key aspects of the Defense of Marriage Act. Joining me to discuss the financial planning implications of the ruling is Tim Steffen. He is director of financial planning for Baird's Private Wealth Management Group.

Tim, thank you so much for being here.

Tim Steffen: Thanks again.

Benz: The Supreme Court a couple of weeks ago struck down some key aspects of the Defense of Marriage Act. Let's talk about some of the key ones that affect same-sex couples from a financial planning perspective.

Steffen: The big one now is that same-sex couples are now entitled to all the same federal benefits that opposite sex couples have always been entitled to. So, you can start with some of the federal benefit programs, and the big one that's gotten the most attention is probably Social Security. Same-sex partners and couples now have the ability to apply for spousal benefits, and in fact the Social Security Administration recently said that they are now accepting applications based on same-sex spousal benefits. So, a lot of the Social Security planning that's always been out there for opposite-sex couples is now available for those same sex couples as well.

Benz: A little bit of a wrinkle here is that, your state must recognize same-sex mirage in order for you to be eligible for those benefits.

Steffen: Absolutely, and it's a pretty small list of states right now where that would apply. And that's one of the areas of uncertainty really that has yet to be fully fleshed out is that, if you were, for example, married in a state that recognized that, but you've now moved to a state that does not, how exactly does that impact your access of those federal benefits. I think the early presumption is that you would not have access to those, but I think that still remains to be seen entirely.

Benz: Is there any clarity on back benefits? So, if you've been married for a while and you've not been able to claim those spousal benefits, is it possible to maybe get back benefits?

Steffen: On the Social Security side, I think that is the another one of the uncertainties. So, while it was an important decision, there were a lot of things came out of that, the work is just really starting on some of these things, and that's one of the topics.

Benz: We're waiting for more information.

Steffen: Right.

Benz: How about from a tax-planning perspective in terms of same-sex couples? If they are a married couple and their state recognizes then marriage, then they have a couple of new choices in terms of how they file their federal income tax?

Steffen: … I guess "choices" is correct, because beginning in 2013, it seems pretty clear now that those same-sex couples would be required to file a joint tax return, or at least a "married," so a "married filing separate" or "married filing jointly." [They would] no longer be able to file as two single individuals. So, that means that they would be subject to all the same provisions that any other opposite-sex married couple would be, which may be a positive and could be a negative for those couples. There is this thing out there called the marriage penalty, which causes two single individuals who have equal levels of income to pay a lot more tax as a married couple than they would as two single individuals. That will now affect the same-sex couples as well.

Benz: So, if you're a same-sex couple, you're both working, both earning good incomes, you could, in fact end, up owing a higher federal income tax.

Steffen: If you're making more than a modest level of income, that's very likely going to be the case.

Now, the other side of that is, what happens on prior-year returns? And if you haven't filed your 2012 return or if you have to go back, are you going to amend your 2010 and '11 returns? The IRS came out recently and said that they are looking at this, and they will announce more information as they determine what exactly the policies are going to be. It seems you possibly have some flexibility in going back and amending those returns if it makes sense for you. But I think for 2013, it seems fairly certain you're going to be filing at least as a married couple, either separately or jointly.

Benz: And the married couples filing jointly, where you've got one spouse who is the main earner--and again, these are same-sex couples--one spouse the main earner, the other one maybe with a smaller or much smaller level of income. How will that net out in terms of their federal tax burden usually?

Steffen: In those cases, they'll probably see a reduction in their taxes. It's where we have equal levels of income, and over a more modest level. So, once you get past the bottom couple of brackets, the marriage penalty starts to kick in there if they have equal levels of income. But if they are disparate then you could see some savings by filing jointly.

Benz: Let's discuss a few of the estate-planning implications. Obviously, this is a hugely complicated area, and I think you're waiting for more information here as well. But some of the headline implications for same-sex couples doing a estate planning at this point?

Steffen: And that's really what drove this whole thing. This whole case started because of an estate tax situation. So, it seems now fairly clear that if you're a resident of a state that recognizes same-sex marriages, the death of one of those spouses will allow the other to take advantage of the unlimited marital exemption.

So, there will no longer be as significant, perhaps, of a estate tax as there would have been prior to this decision. It also allows things like unlimited gifting between spouses during your lifetime as opposed to being subject to the $14,000 annual exclusion limit. So, significant reductions on the estate side. Unlike on the income tax side where it's a little more uncertain, on the estate side, it seems pretty clear there's going to be some real opportunities for tax savings.

Benz: So, let's give just a practical example of how that marital exemption works. Say, the first partner dies, then what happens in terms of the other partner?

Steffen: Under the rules for 2013, an individual can pass unlimited amount to their surviving spouse without paying any estate state. Other than that, it's $5.25 million exemption. So, the first $5.25 million passes estate-tax free. The balance is taxed at 45%. So, prior to this decision if you had a same-sex couple and one spouse passed away and left everything to the other, anything over $5.25 million going to that survivor would have been taxed at 45%. Now, that entire amount could pass estate-tax free. So, again, pretty significant savings for that individual.

Benz: Tim, thank you so much for being here to summarize the takeaways from this latest Supreme Court ruling.

Steffen: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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