DOMA ruling dramatically changes financial planning for same-sex couples

Supreme Court's striking down of Defense of Marriage Act seen having big impact on Social Security, tax strategies of gay couples

By Liz Skinner

Jun 26, 2013 @ 10:26 am (Updated 11:41 am) EST

DOMA
((Photo: Bloomberg News))

Same-sex couples in the states that allow gay marriage gained access to about well over 1,000 federal benefits with today's ruling by the U.S. Supreme Court that the federal Defense of Marriage Act is unconstitutional.

Key sections of the 1996 law that states that a marriage must be between one man and one woman were declared unconstitutional. That law has made it impossible for same-sex couples who were legally married by their state to receive federal marital income and estate tax deductions, as well as other benefits, such as Social Security spousal and survivor benefits.

The law “places same-sex couples in an unstable position of being in a second-tier marriage,” Justice Anthony Kennedy wrote for the court in a 5-4 decision. “The differentiation demeans the couple, whose moral and sexual choices the Constitution protects, and whose relationship the state has sought to dignify.”

Justice Kennedy joined the court's four democrats in the decision, which spurred hundreds of gay rights demonstrators outside the nation's top court to cheer, “DOMA is dead,” and prompted gay marriage proposals to abound on Twitter.

“The 1,138 rights and obligations that had been taken away from same-sex couples are all back in play,” said financial adviser J.T. Hatfield Charles, an adviser with Raymond James Financial Services Inc. “That includes benefits from the Family Medical Leave Act, estate taxes at death, federal government employees' spousal pension benefits and access to social security.”

Gay couples get other wins from the decision as well. Partners will now be able to file joint federal tax returns together, instead of having to file a joint return with the state and separate individual tax returns with the U.S. government, he said.

Mr. Charles noted he'll have a thorough conversation with his same-sex-couple clients to evaluate whether they should lower their life insurance coverage if they reside in the 12 states and Washington, D.C., which do allow gay marriage. These couples may want to drop any extra life-insurance coverage they carry to cover potential federal estate taxes and lost pension income since those planning issues should no longer apply.

However, he will urge some caution because if clients were to move to a state that didn't recognize same-sex marriages they would not likely retain those federal benefits.

Cathy Pareto, a financial adviser with an eponymous firm, said it's a “ground-breaking decision” for same-sex couples to gain access to the federal rights afforded heterosexual married couples, including spousal Individual Retirement Accounts and untaxed corporate health benefits. She said she communicated today with gay clients through Facebook, including those who reside in Florida and Texas “where the battle is not over.”

For clients in these two states and the 36 other states that don't allow for gay marriage, nothing much changes. In fact, even for those in the 12 states and Washington, D.C. that do allow same-sex marriages and will now have access to federal benefits, Ms. Pareto is urging some caution in case they move in the future.

“It's a case by case thing,” she said. “I will tell them that they could find themselves in a change that they can't forsee at the moment.”

Gay marriage is legal today in 12 states — Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington — and the District of Columbia. Most other states prohibit it in their constitutions or have passed laws against it.

Ms. Pareto said gay married couples who may have been denied federal health benefits in the past because they weren't recognized as “married” should consider going back to the health insurance provider or COBRA administrator and asking again. For instance, one of her clients recently was denied Cobra health insurance coverage from her working partner's company after she stopped working to care for the couple's adopted child."

Additionally, since DOMA was found unconstitutional, married gay couples should be able to seek retroactive tax treatment for tax years that are still open, namely 2010, 2011 and 2012, said George Karibjanian, an estate-planning lawyer with Proskauer Rose LLP.

The Supreme Court decision comes as surveys show more Americans support allowing same-sex marriage. A poll earlier this year by Pew Forum on Religion and Public life found that half of Americans support gay marriage, an increase from 39% in 2008.

The Supreme Court today declined to rule in a second case that revolved around the question of whether a state has the authority to allow or ban gay marriage, centering on California's Proposition 8 law, a voter initiative that requires a marriage be between a man and a woman. The outcome of the court deciding not to weigh in means that gay marriage could be legal again in California pending more legislation, experts said.

In the DOMA case, a federal court in New York had ruled that the federal law was unconstitutional for blocking a same-sex couple from claiming the federal marital estate tax deduction. That judge ordered that Edith Windsor be refunded $363,000 that was taken from the estate of her late female spouse because she wasn't able to claim the marital deduction, even though New York recognized their union. A majority of the Supreme Court agreed with that ruling today.