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7 Ways Same-Sex Couples Can Plan Their Financial and Tax Affairs


Richard Bloom, Jonah Gruda and Cathy Green

On June 26, the US Supreme Court ruled 5-4 on a series of consolidated cases known as Obergefell v. Hodges, that the 14th Amendment guarantees the right of same-sex couples to marry. The landmark ruling found that states are required to issue marriage licenses to same-sex couples and must recognize same-sex marriages performed in other states.

In United States v. Windsor, a 2013 Supreme Court decision, the court mandated federal recognition of same-sex marriage, but it did not require states to follow suit.

Subsequent to the Windsor decision, more states, but not all, established legislation granting state legal protection and recognition for same-sex marriages. While the impact of Obergefell is on the state level, it also creates opportunities for same-sex marriages for those previously unwilling to marry out of state by creating the assurance of universal recognition.

Obergefell will also likely affect the way same-sex couples plan their financial and tax affairs moving forward, including the following seven areas:

  1. Amended income tax returns. Same-sex married couples who previously filed as single individuals for state tax purposes will now have the ability to file amended state income tax returns as married filing jointly. Joint filings may result in higher tax liabilities, so tax projections would need to be prepared as part of the decision process. States may issue guidance regarding how and when taxpayers might file amended tax returns and whether retroactive filings are required.
  2. Retroactive claims for state estate or inheritance taxes. States that impose a separate estate or inheritance tax and previously denied same-sex married couples the use of spousal benefits, such as the unlimited marital deduction, should now allow retroactive claims.
  3. Review of healthcare proxies. A same-sex spouse may want to be added to a healthcare proxy, if previously prohibited under state law.
  4. Review of life insurance. Life insurance policies purchased to alleviate the estate tax burden at the death of the first partner may no longer be needed. Second-to-die policies should now be considered when evaluating life insurance needs.
  5. Employee benefit and retirement plans. Employers with fully insured health and welfare plans issued in states that previously banned same-sex marriage will now be required to recognize and offer coverage to same-sex spouses. Spouses of a participant in a qualified retirement plan due to recent same-sex marriages may automatically be the participant’s primary beneficiary unless a waiver is obtained. Previous designations naming others may not be upheld.
  6. Unlimited spousal gift tax exclusion. Residents of a state that imposes a gift tax may consider filing amended gift tax returns because transfers between spouses are generally not subject to gift tax.
  7. Divorce filings. If the resident state now recognizes same-sex marriages, these couples are also able to divorce.

The Windsor and Obergefell decisions have dramatically changed the financial-planning environment for same-sex couples. Same-sex couples are now equal to opposite-sex couples at the federal and state levels. Therefore, in addition to the areas listed above, same-sex couples can benefit from the full range of income and estate tax-planning techniques that opposite-sex couples have employed over the years.

Taxpayers who may be impacted by the Windsor and Obergefell decisions should reach out to their tax advisor for guidance.

 


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