The Supreme Court's ruling to strike down Section 3 of the Defense of Marriage Act (DOMA) last year has far-reaching implications for same-sex couples across the U.S.
Prior to the court's decision, DOMA had barred same-sex married couples from being recognized as spouses for the purpose of federal laws. They also were not able to take advantage of the benefits of marriage as recognized by the federal government.
With an increasing number of states recognizing legal marriage for same-sex couples, the primary impact of the ruling has to do with federal recognition of those marriages, which ultimately can have financial implications for these couples.
Below are some of the most important considerations:
Income-tax filing status. Legally married same-sex couples will generally file their federal tax return as a married couple, either married filing jointly or married filing separately. It's important to note that many federal agencies, including the Internal Revenue Service, will recognize same-sex marriage based on the "state of celebration" standard. This means that as long as their marriage took place where it is legally recognized, the couple will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized. If this applies to you, it's important to review your tax withholding. If you live in a state that does not recognize same-sex marriage, you will need to check your state's rules for filing. Depending on the state, you may need to file as a single tax filer.
Estate-tax marital deduction. Same-sex couples with a recognized legal marriage can take advantage of the unlimited marital deductions for estate taxes and for gift taxes at the federal level. This means that if one spouse dies, the other can inherit any amount of cash or assets with no federal estate-tax liability, among other benefits.
Social Security benefits. Same-sex couples can now apply for spousal Social Security benefits and may be able to claim a survivor's benefit when one spouse dies. The Social Security Administration is also processing some claims for Supplemental Security Income for individuals in a same-sex marriage. While the Social Security Administration is still working to finalize all the rules regarding same-sex couples, you should apply for benefits that you may qualify to receive, in order to reserve your filing date even if your eligibility status is uncertain. Visit www.ssa.gov/same-sexcouples for updates on rules and policies.
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Aside from the tax and Social Security considerations, there are additional factors same-sex couples should be thinking about:
Beneficiary designations. You should review all workplace retirement plans, individual retirement accounts (IRAs), insurance policies, bank accounts, health-care directives and powers of attorney to assure that appropriate individuals are named as beneficiaries. Special rules apply to certain workplace retirement plans that state a legally recognized spouse is automatically considered the beneficiary of your account unless the spouse signs a consent form allowing you to name a different individual. Beneficiary destinations are important because they supersede any designations listed in your will and are given legal priority in most situations. If you have an old boyfriend or girlfriend listed on your IRA, the money in your IRA could go to them, regardless of what you say in your will. This scenario is commonly overlooked by many people.
Marriage later in life. Many same-sex newlyweds are tying the knot later in life. Getting married at a more mature age means you likely have accumulated more assets. Because of this, some are considering a premarital agreement to protect investment assets, real estate and business interests should the marriage end.
What it means to combine your assets. Think about the implications of combining assets before you are married. Make sure you understand your partner's financial history and spending habits. If your long-term financial goals or day-to-day spending habits are not aligned with those of your partner, pressure and friction in your new marriage could be the result. Growing up, people learn different lessons about money, spending and saving. Many of those differences are not uncovered until you are married and begin to share a home and build a life together. It's best to be open about your goals and expectations for your financial life together. Couples who have open conversations about financial matters stand a better chance at a successful marriage.
Because marriage was not an option for many people in the LGBT (lesbian-gay-bisexual-transgender) community until recently, some may not have considered all of the financial implications. With many of my clients recently married or planning to be married, it's been good to help them think through all of these implications.
Make sure you ask for professional advice—it can help strengthen a marriage. Contact your financial advisor, and tax and legal advisors, to make sure you fully understand all of the ramifications of this post-DOMA world.
—By Michael Sangirardi, a certified financial planner and financial advisor at Bryant Park Wealth Advisors.