US Videos

Planning: New Rights, New Rules for Same-Sex Couples

Christine Benz

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

The Supreme Court's recent ruling regarding the Defense of Marriage Act, as well as the subsequent IRS ruling, has important implications for financial and estate planning for same-sex couples.

Joining me to discuss some of them is Jill Metz. She's a local attorney who specializes in estate planning for same-sex couples.

First of all, thank you so much for being here. I am sure your phone lines have been burning up with people with questions about these issues, so I am glad to have you.

Jill Metz: Thank you very much for inviting me. I enjoy doing it.

Benz: Jill, let's start with the headline: The Supreme Court struck down a key component of the Defense of Marriage Act, often called DOMA. What did it hold in the ruling?

Metz: In the Edie Windsor case, it ruled that the federal government could no longer discriminate against same-sex couples who are legally married, which is huge. It's the only time the federal government has written in discrimination, and that's gone.

Benz: Specifically, though, it held up another component of the Defense of Marriage Act.

Metz: It didn't address it, because it wasn't part of the case. So [the Supreme Court] hasn't really had that issue put before it, and that issue is whether one state has to recognize the marriage of another state. And that's still on the books.

Benz: Let's discuss whether there are implications for couples in other types of unions, whether civil unions or domestic partnerships. What are the implications for them under the Supreme Court ruling?

Metz: It's very clear that civil unions and domestic partnerships do not get federal benefits. So if you are married, you get federal benefits, you get all the recognition at the federal level that is available. Civil unions and domestic partnerships do not. And so the argument that people have been using that domestic partnerships and civil unions are the equivalent of marriage, and so why do we need marriage, is gone.

Benz: A few months after the Supreme Court's ruling, the IRS came out with a separate but related ruling. Let's talk about what was contained within that ruling. And then I'd like to get into some of the implications of that for planning for same-sex couples.

Read Full Transcript

Metz: Everybody has been waiting for this ruling to know what was happening. September 16, 2013, is an important date because it changed the timing of some things. The IRS said that they will interpret all the places in IRS rules and the Treasury Department rules that use the word "husband," "wife," "marriage," "spouse" to include same-sex marriage, and the couples in a same-sex marriage, in a very important ruling.

Secondly, it said that starting September 16, 2013, if you are legally married you must file your tax return as legally married. And for people who ask for an extension on their tax returns, and their tax returns haven't been filed before that date, they, for 2013, need to file as married couples. They can file the two ways that married couples can file. So that's very significant.

Benz: So married filing jointly and married filing separately, but married.

Metz: But married, they must do that. And it also said that civil unions and domestic partnerships will not be recognized. That was where that piece has come from for the federal government, and I think it's going to be followed with the rest of the agencies also. So those are really the important pieces.

Benz: Couples would also have the opportunity to … amend part returns? Is that correct?

Metz: Correct. There is a three-year statute of limitations on amending your tax returns. And so, if you have been married, in Massachusetts for instance, for at least in excess of those three years, you can go back and amend those tax returns.

The other thing it said is, … if you were legally married in a particular state, no matter where you live, for IRS purposes you're married. So if you go back to your home state where there is no marriage, you are still married for federal purposes.

Benz: So from a practical standpoint for same-sex couples who are married, I assume that this IRS ruling will hurt some couples in future tax filings and help some others.

Let's talk about the profiles that will tend to be most helped by this ruling as well as those that might be actually hurt by it a little bit, from a tax standpoint?

Metz: Now, it applies the same way to same-sex couples as it does to heterosexual married couples. So, if you are a couple in which both people are high-income earners, about the same amount in high-income, you are going to pay more taxes.

Benz: That marriage penalty we often hear about.

Metz: Correct. If you are a couple, though, that has a high earner and a low earner, because you've stepped out of the workplace to raise children, which is why it's arranged this way, you will see your taxes probably go down. You also get head of household, and you get dependency deductions, and it all rolls in together.

Benz: I'd like to touch on state taxes. What's happening with them? Anything in relation to any of these rulings?

Metz: Illinois and other states that have civil unions or domestic partnerships have been allowing people to file jointly married in those states, but then they had to recalculate for the federal government. So, now, they don't have to do that. But if you're in a state where there is no recognition, you're going to have to do a federal tax return married and a single tax return for your state.

Benz: I'd like to touch on the other federal benefits and how this ruling may touch them or not touch them. Let's start with Social Security, because I know that's a hot topic.

Metz: It is. And it's important because it is a huge benefit to people. It's part of how people retire. The Social Security Administration has said, it is not the place that you were married that they are going to take. They are going to take the place that you reside when you apply. Now, we think that that's where it's going to stop, where you apply. So right now, if you live in a state that you are legally married in, you need to apply quickly. So, if you should move somewhere else, the argument should be then, they can't take it away from you because I applied in a state that it was legal.

But if you were someone who went to a state to get married, but you come back to a state where there is no legal marriage, they do not get Social Security benefits. Or if you were in a state you got married and you moved away before you applied because you weren't qualified to apply, you lose those benefits. It's a crazy ruling, but that's the ruling currently.

The other interesting thing about Social Security is that the acting director of the Security Administration has said everybody should apply. Even though, right now, it looks like you might not get benefits because if the law should change, you would be able get retroactive benefits. So, don't give up the right, go ahead and apply.

Benz: Say you are living in a state where your marriage is recognized, would retroactive Social Security benefits apply to your spouse?

Metz: Well, the question is, did you apply? It's the application start that starts the retroactivity. So, if you didn't apply, then no.

Benz: OK. How about the Family and Medical Leave Act, FMLA?

Metz: Well, it's another one where it's based on the state that you are living in. So, again, it's a hodgepodge. If you're in a state where you're legally married, those people now get Family Medical Leave. If you are in a state where there is no legal marriage, no.

Also the veterans administration has got some oddness connected that same way. So, it's evolving.

Benz: Agency-by-agency and state-by-state at this point. Obviously, there is a lot of information for people to sift through, but let's talk about some of the estate planning and financial planning implications for same-sex couples in relation to all of this. Is there any guidance you can give people about steps they should take and how they should think about all these rules?

Metz: You need to review all of your documents if you are legally married. You need to be identified as spouses in your documents, so your wills or trust, so that there is no confusion anywhere that you are spouses. Go back to your beneficiary designations and do the same thing. Don't say "partners" or "life partners," or all the other words we've used over the years, say "spouse."

Also, spouses have some protections in retirement assets and so some of those things are going to start meaning that you can't just change your retirement assets without getting spouses' permission. So, there is a whole new world for people who haven't been able to be legally married before.

Benz: I know inherited IRAs are a big deal as well. So, spouses who are legally married can now get that beneficial tax treatment, correct?

Metz: That's the IRA ruling, and they say once you're married in a state then you are legally married, and all those rules apply. So, yes, that's really valuable.

The other thing you want to look at that becomes easier now is that there is no estate tax for legally married people. So, if your estate is above the exempt amount, you give everything to your spouse without any tax consequence.

Benz: Like $10 million now, I think, between two spouses.

Metz: Exactly. There is no transfer tax. So, if you are a couple coming together later in life where one person owns the home, but they want to have both people on title. If you did that before marriage, you have the possibility that you would have to pay transfer tax--meaning you've sold half of your property, so the government wants half their money. That's not true for spouses. Automobile transfers, you have to pay sales tax. So, all of those things have gone away.

Benz: How about people with minor children?

Metz: Those children now have additional protections, because both people's Social Security are available to them, if they are in those states where they are legally married and they are in those states when the benefits are necessary. It's huge protections for children. A lot of these laws are devised to keep families intact and to support children in disasters. It's all available now.

Benz: Jill, thank you so much. An important topic here, lots of information to sift through. Thank you for providing some clarification.

Metz: Thank you for asking.

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