The tax, estate and retirement planning ramifications of the Supreme Court's ruling on same-sex marriage

The Supreme Court's ruling in Obergefell v. Hodges means it is now unconstitutional for states to ban same-sex marriage. This ruling affords advisers an opportunity to review and update clients' financial and tax plans. The details are still being implemented, and it is likely that more guidance will be provided by the IRS, Social Security Administration and Labor Department. But here's a quick overview of the tax, retirement, Social Security and estate planning ramifications of the ruling. TAXES One of the primary benefits of the ruling is a simplification of the number of returns needed for a same-sex married couple. Prior to the decision, a same-sex couple could file a federal return as married filing jointly, but would file either a single or head of household return if the state didn't recognize their marriage. Today, filing statuses would match, and as such, there is a consistency of computation and strategy. It would be important to note, however, that the marriage penalty could now apply to certain tax filers. For example, in the case of a two-income household where there is a large income discrepancy, the overall tax bill could be lower. In the case of a two-income household where the two incomes are in parity, it could be the case that their taxes are higher, due to a higher marginal rate, phase-outs of personal exemptions and certain deductions, as well as phase-outs for participation in certain individual retirement accounts (IRAs). There are also certain limitations with regard to income and federally subsidized health insurance premiums. In addition to current filing issues, amended returns could play an important part of financial and tax plans. For example, a return that was filed single when in a same-sex marriage could have an impact on income-related monthly adjustment amounts for SSI payments. RETIREMENT PLANNING Of all the major subgroups of a financial and tax plan, Obergefell v. Hodges might have the smallest impact on retirement plans. However, there is a very meaningful adjustment with regard to IRAs. Previously, the only way for a surviving spouse to receive their deceased spouses' IRA is to be named as beneficiary of that IRA and for the surviving spouse to create an Inheritance IRA (not as a direct rollover). Now, a surviving spouse can be named as a beneficiary of that IRA and receive the funds as a direct rollover. This can potentially extend the life of an IRA by years, if not decades. Along with that extension comes tax deferred compound interest throughout the period. This is a meaningful financial event that has substantial economic ramifications. (Related read: Clearing up the new once-per-year IRA rollover rule) SOCIAL SECURITY Social Security now recognizes same-sex marriage for the purposes of determining entitlement payments as well as eligibility for supplemental security income (SSI) payments. The benefits of Social Security for a same-sex married couple should not be underestimated. This allows the file-and-suspend strategy, in which the higher earning spouse can file for Social Security, suspend the receipt of those funds, and the other spouse can file for spousal benefits immediately. This allows for current cash flow and provides an above-market, risk-free accrual of benefits to be enjoyed at a later date. Of course, with marriage comes divorce. Married couples can enjoy, after 10 years of marriage, 50% of their former spouses' Social Security benefits, at no cost to the ex-spouse. Interestingly enough, multiple ex-spouses can enjoy the same benefit at no detriment, cost or reduction of benefits to any of the other ex-spouses. Finally, same-sex couples can enjoy the Social Security survivor benefit where the surviving spouse can enjoy the greater of their own Social Security benefit or that of their deceased spouse. ESTATE PLANNING One of the biggest benefits that same-sex couples can now enjoy is the unlimited transfer of family wealth from one spouse to another without current taxation. The unlimited marital deduction from federal estate tax and gift tax for transfers between same-sex spouses now means that same-sex couples no longer need to rely on the "Applicable Exclusion Amount" — currently $5.43 million, adjusted annually for inflation, per person. This does leave an interesting ministerial task to be completed. Clients would be well served to double check their beneficiary information and confirm that the intended recipient pre-ruling is indeed the same intended recipient post-ruling. Also, considering the significance of the unlimited marital deduction, same-sex married couples might consider restructuring their insurance programs. If the onus is now on the surviving spouse to pay the tax, potentially, on a large inheritance, then insurance policies that were formally structured to pay upon the death of the first spouse might now be obsolete. One might consider installing a second to die policy, and/or installing a policy in an irrevocable life insurance trust (ILIT). This will remove the proceeds of the insurance policy from the surviving spouse's estate, thus creating liquidity to pay for any potential tax liability. Andrew Samalin is the principal of Samalin Investment Counsel. (More insight on the Supreme Court ruling from Morgan Stanley's Michael Pellman Rowland)