Broker Check

Recent Legislative Changes Create Planning Opportunities for Same-Sex Couples

by Darren L. Zagarola, CFP®, CPA, PFS

As published in, January 7, 2014

A Supreme Court ruling and recent changes in laws regarding same-sex marriage have created financial planning opportunities for same-sex couples.

The June 2013 Supreme Court ruling struck down one section of the Defense of Marriage Act (DOMA), giving same-sex couples who marry the same federal benefits as straight couples. The high court’s ruling also preserves individual state laws on the issue, meaning that states in which same-sex marriage is not legal do not have to provide spousal benefits with regard to a wide range of planning issues.

Closer to home, New Jersey became the 14th state to recognize same-sex marriage in October, providing further financial planning opportunities for Garden State residents. The other 13 states include New York, Connecticut, Delaware, Maryland, Massachusetts, California, Iowa, Maine, Minnesota, New Hampshire, Rhode Island, Vermont, and Washington, as well as the District of Columbia.

To be clear, the federal government will not recognize all same-sex marriages, just those performed in jurisdictions where same sex marriages are legal, known as the “State of Celebration” doctrine. In addition, existing civil unions and domestic partnership agreements are not considered marriages, and thus couples living under these agreements are not eligible for treatment as married under the new laws.

The decision to marry is a relationship decision first, rather than a financial decision. Once the decision is made, though, gay and lesbian couples should review their estate plan and tax-planning strategies, as well as update their beneficiary designations on life insurance and retirement plans. This may include amending old income tax returns (up to three years), altering estate plans, and deciding which partner’s name should be on specific investments or assets.

Tax Planning Considerations

Whether same-sex spouses live in a gay marriage state or not, they can file a joint Federal return as long as they were married in a jurisdiction that allows same-sex marriage. And for those that have been married for years, they are now able to file amended tax returns for the past three years. For those residing in states same-sex marriage states such as New Jersey, same-sex spouses can also file state taxes jointly as well. If they move to a state where gay marriage is not legal, they would not be able to file state taxes jointly as long as they live there.

The most obvious financial benefit of the new laws for couples is that they can now file a joint tax return for Federal purposes. The best tax break associated with filing jointly is that a couple’s combined taxable income is subject to more favorable tax rates. Although the same six tax rates of 10, 15, 25, 28, 33 and 35 percent apply to all taxpayers, the income tax brackets that determine how much of your taxable income is subject to each rate are much wider for joint than single taxpayers.

One of the other benefits of filing jointly is the elimination of “phantom income” (a charge of the value of the benefit for tax purposes, although no cash was actually received) for spousal health benefits. Because it was included as Adjusted Gross Income, that amount can be removed by amending the tax return.

Gaining access to spousal tax rules also comes with some tax burdens – namely the marriage penalty – as well. Dual-income couples with high incomes will pay income taxes at an increased rate if they are married than if they were single (thus the so-called marriage penalty). Whether to file married jointly or married separately is a decision that should be made with input from a financial planner or accountant.

Estate Planning Considerations

Same-sex spouses will now be able to utilize the marital deduction for the estate tax exemption, as well as the portability of the exemption. Those that have gifted while they have been married may want to file amended gift tax returns as well. Same-sex spouses can now transfer property in order to equalize estates since marital transfers are unlimited.

With regard to gifting, all gifts made by one spouse can be treated as if half was given by one spouse and half by the other, thus doubling the amount of the gift tax exclusion, which is $14,000 for 2013 and 2014. Additionally, spouses can transfer property to their partners free of the federal gift tax.

It is also advisable for same-sex spouses to review beneficiary designations on retirement plans and group life insurance plans, as new rules allow for defined contributions plans to be rolled over to spousal accounts, for favorable treatment of non-qualified inherited annuities and for spousal rollovers to IRAs.

When one spouse in a same-sex married couple passes away, the surviving spouse will now be entitled to claim the marital deduction from the estate tax and to make a ”spousal rollover” of the deceased spouse’s IRA or 401(k).

Employee Benefits

For those couples preparing for retirement, the surviving spouse is now eligible for joint and survivor pension options. In addition, although certain companies and institutions allowed spousal benefits to those couples with civil unions or domestic partnerships, married same-sex spouses also may be eligible for medical benefits. You may still have to wait for open enrollment periods since the ruling does not represent a qualifying event, although some employers may be lenient. Additionally, flexible spending account and health savings account distributions can now be used for spouse and family members.

Pension and Social Security Considerations

Prior to retirement, decisions are to be made regarding pension options: payable over single life, period certain, or joint and survivor benefits. Not all of these options had been available to the surviving partner.

Under the new rules, the same-sex spouse is entitled to the same benefits, allowing them the option of the joint and survivor pension benefit which is payable over both of the spouses lives and could provide a longer benefit period. Same-sex spouses can now be made beneficiaries of their partner’s federal pension. For those who have already made the pension choice under the old laws, there may be nothing to do to change their choice.

Social Security benefits on the other’s work history are now an option. In states that allow gay marriage, same-sex spouses are eligible to collect social security spousal benefits after one year. If a spouse who did not work or could collect more if their own social security benefit is less than 50 percent of your spouse’s benefit, they could use the spouse’s work history and begin receiving benefits. The file and suspend technique is also available now. For those that have opted for benefits within 12 months and want to repay and reapply, they can now do so.

Unintended Consequences and Considerations

Same-sex marriage is a moving target of sorts. Federal agencies are not uniform in their definition of how to determine whether a gay couple is considered legally married. The Social Security Agency uses the state of residency to determine a marriage’s legality. The Immigration Department uses the state of celebration, that is, where the marriage occurred. States can approve it, only to have that approval overturned. Rules are being made and interpreted in an accelerated manner, and all the consequences and side effects are not yet fully known.

Couples traveling throughout the country (for business or pleasure) should bring documentation when traveling to a state that does not approve of same sex marriage to remove risk as it relates to power of attorney and medical directives. The hospital may not recognize the marriage from another state.

Couples relocating to states that don’t recognize same-sex marriages could face challenges. It may be impossible to get divorced if the state does not recognize a marriage in the first place. And this consequently could render estate planning useless, since the state does not recognize the marriage, although it would not impact financial planning from federal standpoint.

How to Review a Financial Plan

As with any couple, it’s important for same-sex spouses to review retirement plans and projections given any changes to their circumstances or with regard to court rulings and new tax rules. For gay New Jersey residents planning on getting married, they face all three.

Below is a short list of possible considerations for same-sex married couples:

  • Review estate planning documents to determine what, if any, revisions should be made
  • Consider the availability of portability of a deceased same-sex spouse’s unused federal estate tax exemption amount.
  • Review titling of assets to ensure efficient asset transfer on death.
  • Consider gift splitting for annual exclusion or other gifts.
  • Consider amending previously filed federal income, gift, or estate tax returns (within three years)
  • Consider reviewing life insurance planning opportunities now that second-to-die policies may be considered.
  • Review beneficiary designations for life insurance and retirement accounts.
  • Consider spousal rollovers for retirement assets passing from a deceased spouse.