Edith Windsor is the 85-year-old widow who helped change the definition of marriage in America. She challenged the Defense of Marriage Act, signed into law by then-President Bill Clinton in 1996, which for the first time in American history legally defined marriage between a man and a woman.
Reaching all the way to the steps of the U.S. Supreme Court last June, her case ended in a 5–4 decision that repealed Section 3 of DOMA, declaring it unconstitutional.
The decision meant that, moving forward, the federal government must recognize same-sex marriages that originated in any U.S. state or foreign jurisdiction that legally allows such unions. As of today, 17 states and the District of Columbia recognize gay marriages. Statewide bans on same-sex marriage, or parts of such legislation, have been ruled unconstitutional by federal district courts in a further six states since late 2013, and those cases are currently in litigation.
Interestingly, the legal motivation for United States v. Windsor was based on taxes. When Windsor's wife, Thea Spyer, died in 2009, the federal government did not recognize their union as a legal marriage, per the DOMA edict.This meant that Windsor was required to pay $363,053 in estate taxes after inheriting her wife's assets—a tax that at the time was exempt for married heterosexual couples.
After the ruling came down, Windsor's federal estate-tax bill was thrown out the window, along with those same-sex couples who were married in a state or foreign jurisdiction that legally recognized them.
It has been less than a year since the ruling, but the federal changes are already apparent: 2013 was the first year in which same-sex spouses were required to file their taxes using a married filling, according to the IRS. Therefore, the wheels are in motion for same-sex couples to start planning their financial future in a way that gives them nearly the same protection and benefits of heterosexual couples.
However, there are some significant differences and complications that couples should keep in mind.
Sometimes marriage can complicate finances, especially in long-term relationships where each individual has a significant amount of assets. According to the UCLA's Williams Institute, there are 640,000 gay couples in the U.S., and most likely, a portion of them will have to consider whether marriage is the best financial move to make.
According to Kyle Young, a certificated financial planner at Schmitt-Young Investment Group of Wells Fargo Advisors, if a couple has been together for many years, they are likely to have maintained assets independent of each other. Due to the marriage penalty, which can hit certain couples based on how many dollars are involved, there isn't always a benefit to legal marriage.
Young, whose clients are nearly all LGBT individuals, said that—due to financial liabilities—he is seeing a 50-50 split on whether or not to tie the knot. He doesn't see such hesitation coming from heterosexual couples, he said, thinking it might have to do with age. "If you have assets, it's a harder decision."
DOMA is still on the books and very much alive—except for the Supreme Court's repeal of Section 3. Section 2 is where complications can arise regarding same-sex couples and their financial planning.
The statute allows a state to choose whether or not to recognize gay marriage within its borders, even if a couple has married in another state or foreign jurisdiction that allows it, and even if the federal government recognizes their marriage. Therefore, gay couples who are married and live in a state that does not allow gay marriage will face some federal benefit shortfalls.
"The one [same-sex couples] don't have access to is Social Security spousal benefits, " Young said. The reason for this? The Social Security Administration bases eligibility on state residency. If you don't reside in a same-sex-marriage state, then those spousal benefits will not be offered.
If a couple does hop out of a state that does not recognize gay marriage and moves to one that does in order to gain all their possible benefits, they need to be aware of residency requirements.
"When going to one of the 16 states [as well as D.C.] that will recognize your marriage, be careful: Each state has its own requirements for what is considered permanent residency," advised wealth manager Kimberly Clouse, founder and CEO of Via Global Advisors. She uses California, which recognizes gay marriage, as a prime example. The Golden State requires that at least one spouse maintains residency for six months before being considered a permanent California citizen.
The silver lining, in the unfortunate event of a divorce for gay couples, is that they no longer have to deal with the complicated issues that arise from domestic partnerships or civil unions. These are middle-ground compromises for many states, allowing gay couples to attain some legally recognized status—in total, 21 states and the District of Columbia offer some form of same-sex civil union, domestic partnership and/or marriage.
When couples go a legal route that is not marriage, then splitting assets can become a financial nightmare. For example, retirement accounts, like a 401(k), could result in one partner having to take an early distribution, along with penalties, in order to divide assets upon the termination of a domestic partnership or civil union. The benefit of recognized marriage means that in the event of divorce, couples are able to split assets tax- and penalty-free.
With laws rapidly changing, same-sex couples should consider seeking out a financial advisor specializing in all this red tape. A new space of wealth managers and advisors who work specifically with LGBT individuals is starting to open up; the Pew Research Center estimates a little more than 70,000 same-sex marriages, according to its latest data.
On its website, Wells Fargo Advisors claims that it is the "first in the industry to have Financial Advisors earn the Accredited Domestic Partnership Advisor [ADPA] designation." Earning the ADPA designation means that an individual has completed and passed a course from the College for Financial Planning, qualifying them to advise domestic partners and same-sex couples in planning their financial future.