July 2013– U.S. Supreme Court Rules Defense of Marriage Act (DOMA) Unconstitutional
On June 26, 2013, in a 5-4 decision, the U.S. Supreme Court ruled most of DOMA to be unconstitutional. This means that same-sex marriages legalized by the states will now be recognized for federal tax and benefit purposes.
The case (United States v. Windsor 570 U.S. ___ (2013)) involved New York residents whose same-sex marriage was legally recognized by the state of New York. When one of the parties died, the IRS denied a federal estate tax marital deduction for the survivor and accessed $363,053 in federal estate taxes on the taxable estate of the deceased. The U.S. Supreme Court found that DOMA violated the guarantee of equal protection and due process under the U.S. Constitution. The Court went on to state that the U.S. Constitution delegates no authority to the federal government on the subject of marriage and divorce.
Despite the ruling, the case does not require all states and state officials to recognize same-sex marriages. The Court let stand a provision of DOMA which permits a state not to recognize same-sex marriage that is valid in another state. Therefore, many same-sex couples may still be denied certain federal spousal benefits since 37 states currently do not allow same-sex marriage. The 13 states which currently recognize same-sex marriage are: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington.
Federal Tax and Retirement Benefits Now Available to Same-Sex Couples Married in the 13 States Which Recognize Same-Sex Marriage
The Supreme Court decision in the Windsor case opens up a number of federal tax and benefit planning options to legally married same-sex couples in the 13 states which recognize such marriages. Here is a summary of the tax and financial concepts which are now available for same-sex couples:
- •Income Tax Filing Flexibility: File Form 1040 U.S. Income Tax return as married filing jointly or as separate individuals
- •IRA and Roth IRA Spousal Rollovers: Surviving spouses who are named as beneficiaries of deceased spouse’s IRA or Roth IRA may do a “spousal rollover” into their own names and name a new beneficiary.
- •Non-Qualified Annuity Rollovers: A surviving spouse who is a designated beneficiary may roll the non-qualified annuity into their own name, become the annuitant, and designate a new beneficiary
Estate and Gift Taxes
- •Unlimited Gift Tax Marital Deduction: This will allow unlimited lifetime transfers of property between same-sex spouses who are U.S. citizens.
- •Gift Splitting: A spouse has the option to allow the $14,000 gift tax annual exclusion and/or the $5,250,000 lifetime gift exemption to be used by the other spouse. This means the “split-gift” annual gift tax exclusion will be $28,000 and the “split-gift” lifetime gift exemption will be $10,500,000.
- •Unlimited Estate Tax Marital Deduction: Transfers of property at death to a surviving same-sex spouse who is a U.S. citizen will receive a 100% estate tax marital deduction. This was the specific issue decided in the United States v. Windsor case by the Supreme Court
- •Portability for Deceased Spouse’s Estate Tax Exemption: If elected on the Form 706 U.S. Estate Tax return, the surviving spouse may add any unused estate tax exemption of the deceased spouse to their own estate tax exemption to reduce or offset any federal estate taxes due at the death of the surviving spouse.
- •Marital-Credit Shelter Trust Planning: May create a so-called Marital-Credit Shelter type of trust (aka A-B Trust, Family Trust, By-Pass Trust) to utilize part or all of the estate tax exemption / unified credit at the first death.
Social Security Benefits
- •Social Security Retirement Benefits: Married individuals may choose between the larger of two potential benefits: A benefit based on their own work record or a benefit equal to 50% of their spouse’s Social Security benefit based on the spouse’s work record.
- •Social Security Survivor Benefits: A surviving spouse can elect to take the larger of a Social Security benefit based on their own work record or a survivor benefit equal to the benefit the deceased spouse was receiving at death.
ERISA Qualified Plan Benefits
- •Spousal Pension Benefits: Spousal benefit provisions of an employer’s qualified retirement plans (Defined Benefit, Profit Sharing, 401(k) etc.) and other welfare benefit plans should apply to same-sex spouses in the same way as are applied to opposite-sex spouses
- •Spousal Pension Benefit Protection: The spouse of a participant in a qualified retirement plan must be the sole named beneficiary of the plan account unless the spouse has consented in writing to waive the right to receive any death benefit.
- •Qualified Domestic Relations Order (QDRO) or Transfer Incident to Divorce (IRA): In a divorce decree, a court can award part of a spouse’s interest in the other spouse’s qualified retirement plan or IRA to be payable for their benefit.
Question: What happens when a same-sex couple is legally married in a state that recognizes same-sex marriage, but later moves their residence to a different state that does not recognize same-sex marriage? Will they lose their federal tax and benefit protections outlined above?
Answer: Currently unknown. The U.S. Supreme Court did not answer this question because this change of residence issue was not part of the case facts in United States v. Windsor. However, a case with this fact pattern is sure to arise in the future. When the Supreme Court eventually rules on such a case, the decision may revolve around Article IV, Section 1 of the U.S. Constitution, the “Full Faith and Credit” clause. This clause states that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State”. Stay tuned for further cases regarding moving the primary residence across state lines by same-sex couples.
Contact the BSMG Advanced Sales with case design and income, gift, and estate tax questions for your same-sex couple clients. The concepts listed above provide opportunities to counsel your clients on how their financial needs may be efficiently financed with tax-favored life insurance, annuity, and long term care products.
Russell E. Towers JD, CLU, ChFC
Vice President – Business & Estate Planning