What does the Supreme Court’s DOMA decision mean for same-sex couples’ finances?

When Edith “Edie” Windsor and Thea Spyer met in 1963, they likely didn’t envision changing the status of same-sex marriage for the entire nation. The couple was married in Canada in 2007. At the time, Spyer was seriously ill and she died in 2009.1

Although the State of New York recognized Windsor and Spyer as legally married at the time of Spyer’s death, the federal government levied about $360,000 in estate taxes on her estate. When Windsor inherited Spyer’s assets, she was not considered a surviving spouse under federal law and the estate was not, therefore, allowed a federal estate tax marital deduction.2

The Defense of Marriage Act (DOMA) is a federal statute that defines marriage for purposes of other federal laws as a legal union between one man and one woman as husband and wife for the purposes of all federal matters. Even if a same-sex marriage was legally recognized in a particular state, the federal government did not view it similarly, resulting in a widely different set of rights and benefits for same-sex couples than for heterosexual couples.

Windsor challenged that statute in a case that eventually went to the Supreme Court. On June 26, 2013, the part of DOMA that limited the definition of marriage and spouse to opposite-sex couples was ruled unconstitutional. This ruling impacts the definition of marriage and spousal status for purposes of more than 1,000 laws and regulations.

Currently, 15 states (California, Connecticut, Delaware, Hawaii, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington) plus Washington, D.C. have legalized same-sex marriage. As of November 2013, Illinois was expected to legalize gay marriage soon.

Subsequently, married same-sex couples gained greater clarity on financial planning issues with guidance issued by the U.S. Department of Treasury and the Internal Revenue Service (IRS) in August 2013, and the Department of Labor (DOL) in September 2013. The government-issued guidance stated that same-sex couples who were legally married in jurisdictions that recognize same-sex marriages will be treated as married couples for federal tax purposes, regardless of whether the couple lives in a state that recognizes same-sex marriage or not.

If you are involved in a same-sex relationship, what the Windsor decision means to you depends a great deal on whether your partner and you are legally married and whether the marriage is recognized by the state in which you reside.

If you live in a state that allows or recognizes same-sex marriage:

Your partner and you may now have access to a myriad of new rights, responsibilities and benefits that may affect everything from your tax and immigration status to your eligibility for family leave and public housing assistance. For example, in some situations married couples may file taxes jointly, which could significantly alter your tax bracket for better or for worse. In addition, possible federal recognition of your marriage may impact past federal income tax and estate tax filings – you should consult your tax advisor for more information on how the result in the Windsor case may impact you from a tax perspective. Other rights that may be impacted include:

  • U.S. residency rights for same-sex spouses from other countries
  • Access to joint insurance policies, such as health, automobile, and homeowners insurance
  • Parental rights such as joint parenting, foster care and adoption
  • Protection against having to testify against one’s spouse
  • Hospital visitation rights and next-of-kin status for same-sex spouses
  • Joint responsibility for each spouse’s debt
  • Spousal benefits through Social Security and Medicare
  • Estate planning rights of inheritance and estate tax benefits for a surviving spouse
  • Retirement plan rights granted to spouses, including Qualified Joint and Survivor Annuity, hardship distributions, and rollovers.

Remember, there are many others, as well, ranging from access to adoption tax credits to changes in how income is considered for loans and financial services. This is an important time to consult your financial advisor as you begin to understand how the ruling affects you.

If you live in a state that allows or recognizes civil unions or domestic partnerships:

Our reading of the Windsor case indicates that these new rights and protections are only available to legally married couples, rather than those who have been joined in civil unions or who hold other similar status. While the judgment doesn’t appear to impact civil unions today, this is an evolving and dynamic area of the law that should continue to be watched closely.

If you live in a state that does not currently recognize same-sex marriage:

The ruling provides that the federal law that limits marriage to one between a woman and a man, and limits a spouse to a person of the opposite sex is unconstitutional. However, it does not address whether the Constitution requires a state to recognize same-sex marriages.

If your marriage is not legally recognized by the state in which you reside, there are still a number of recommended best practices to protect your property, rights and family. Legal documents such as wills, trusts, powers of attorney, health care directives, and others can offer important protection to unmarried same-sex couples. In addition, proper estate and retirement planning may be able to help you plan for your later years and protect you against large inheritance taxes, such as those Windsor faced upon Spyer’s death.

In a state that does not recognize a same-sex marriage, the importance of coordinating beneficiary designations for your partner, titling bank and investment accounts, ensuring hospital visitation and the right to make medical decisions, all remain critical components of a well-designed financial and estate plan.

The recent ruling creates an important opportunity for all same-sex couples to revisit their current planning – regardless of whether you reside in a state that recognizes same-sex marriage or does not. As the legal landscape continues to evolve and in some instances change significantly, these are important times to work closely with your advisor to ensure your planning is in good order.

The ruling in Windsor will surely have implications and outcomes that will unfold in the coming months. Starting now to consult with your financial advisor who is knowledgeable and up-to-date about the issues that same-sex couples face will prove beneficial to you and to your family.

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