The following is a post by CFP Board Ambassador, J.T. Hatfiedl Charles, CFP(R). J.T. specializes in financial planning for LGBT couples.
Two landmark rulings from the Supreme Court – one overturning the Defense of Marriage Act (DOMA), the other rejecting the appeal of California’s Proposition 8 ban on same-sex marriage – have caused a number of changes for same-sex couples living in various states. The rulings will help extend myriad federal protections to same-sex couples, as well as many benefits that were previously limited to heterosexual married couples.
These changes will have significant financial implications, and require careful planning. Here is a list of key changes for same-sex couples to consider as they revise their existing financial plan, or begin to craft a new one for the first time.
- General Spousal and Family Benefits: With DOMA overturned, legally married same-sex couples will now be covered under the Family Medical Leave Act (FMLA). This allows spouses to take a leave of absence from work to care for a sick spouse. The ruling also could pave the way for improvements in the adoption process for married same-sex couples. Should a married same-sex couple decide to divorce, qualified domestic relations orders (QDRO) governing the former spouses’ retirement plans would be available to ensure both spouses receive their share of the assets. And alimony payments greater than $14,000 per year will no longer be subject to a gift tax.
- Citizenship: When an American citizen marries someone from another country, their spouse is eligible to apply for U.S. citizenship. But because DOMA defined marriage exclusively as that between a man and a woman, same-sex couples with international spouses have not had this option. The court’s ruling could mean a green card or naturalization for tens of thousands of international spouses and the unification of their families.
- Tax Planning: Legally married same-sex couples will now be eligible to file joint federal tax returns. While it will likely take the IRS time to develop and release full filing instructions, same-sex couples should also consider amending previous years’ tax returns.
- Estate Planning: Estate issues were at the heart of the case that ultimately went before the Supreme Court. In United States v. Windsor, Edith Windsor disputed the hefty inheritance tax bill levied following the death of her spouse Thea Spyer. The court decided that estate tax rules for same-sex couples should allow for unlimited spousal exclusion at the federal level, and thus simpler estate planning. For instance, same-sex spouses will no longer be required to pay federal gift taxes when transferring funds to one another. And a surviving spouse will no longer have to pay federal estate taxes following a spouse’s death.
- Social Security and Medicare: Many legally married same-sex spouses will now be eligible for Social Security and Medicare spousal benefits. Further, legal same-sex marriage in some states may allow a spouse to defer Medicare enrollment while on a spouse’s health care plan. In both cases, the legal impacts will vary across states, as not all places recognize gay marriage legally.
- Retirement Planning: The ruling could eventually allow a surviving spouse to roll over a deceased spouse’s IRA funds to their own IRA. It could also allow for same-sex spousal contributions to IRAs. For federal government employees with pensions, legal spouses will be eligible for survivor benefits; private corporations continuing to offer pensions will likely step up to offer similar protections.
As with most legal matters, many of these changes will take time to implement. While DOMA has officially been overturned, more than 1,100 federal laws and regulations apply to married couples, and will need to be reexamined to cover same-sex couples. The Supreme Court’s decision does not require same-sex marriages performed in one state to be recognized by other states. However, more and more states are overturning bans and officially allowing same-sex marriage. All of this means that there are many unknowns to the complete impact of this ruling for same-sex couples, especially those living in the more than 31 states without marriage equality.
And yet in many cases, the court’s DOMA and Proposition 8 rulings were the sea change families have been waiting for. Legally married same-sex couples, particularly those married and living in states that afford marriage equality, should begin planning.