Life After DOMA :: We’re Not in Kansas Any More
It seems like such a short time ago I mused that perhaps in my lifetime we would see DOMA overturned, and such a short time before that such musings seemed unimaginable! As we celebrate the Supreme Court's recent rulings, we should be grateful for a legal system that enforces justice for a minority. What a wonderful country we live in!
While recent rulings will lead to monumental changes, some of those changes will require time for implementation. This is more than just a huge social shift. Not all of the changes will be good financially. Keep in mind that from a legal perspective, these rulings will mean different things to each of you. Some of you will undoubtedly decide to marry. All of you, I hope, will give the many issues significant thought before you radically modify your relationship.
THE DOMA RULING
At the risk of oversimplifying, the decision does not guarantee a right to marry. In short, it simply provides that if you are married under state law, your marriage will be recognized for Federal purposes. At stake are well over 1,000 federal statutes that apply to married individuals, including tax rules, Social Security, federal pensions, immigration and bankruptcy.
It is important to note that these changes may apply only if you are married. While some states recognize registered domestic partnerships (RDPs) and civil unions as the equivalent of marriage, federal statutes likely will not apply unless you are married.
There is a great deal of confusion regarding couples who married in a state or country that recognizes same-sex marriages, but now live in a state that does not. The state in which you live can apply its own rules for local purposes, but the Federal government has not decided in all cases, which rules will apply. For example: Social Security law determines benefits based on whether you are married in the state in which you live. So, if you married in California and now live in a state that does not recognize your relationship, you might not be seen as spouses when applying for Social Security benefits. On the other hand, the Office of Personnel Management, which handles benefits for Federal employees, the IRS, and The Department of Homeland Security, which handles immigration, have all announced they will determine such things based on whether your marriage was legal where it was performed, regardless of where you reside now.
THE PROPOSITION 8 RULING
The Supreme Court simply left the lower Court's decision intact, ruling that the proponents of Prop 8 lacked the ability to defend the proposition before the Court. Because the lower Court had ruled that Prop. 8 was unconstitutional, this meant that marriages could begin again. Proponents of Prop. 8 appealed the decision to the California Supreme Court, asking that the Federal District Court's ruling only relate to the jurisdictions where the ruling applied; Alameda County and Los Angeles County. The Court rejected the appeal and marriages are continuing statewide.
Following are some brief highlights of things to consider as you plan your future after these decisions:
WILLS, TRUSTS AND INHERITANCE
Inheritance and the workings of your will and/or trust are governed by state and local law, not Federal law. So the bare mechanics of how you expressed your wishes may not need dramatic revisions, just some fine-tuning. If you marry, you may not need to amend just to indicate a change in your marital status, but if other changes are in order or if you want to strengthen the statement of your relationship in the event of a move to a non-marriage state, it may be a good time to change the language.
If you are married or plan to marry, you might also want to discuss adding marital trust provisions to your documents. Federal estate taxes allow an unlimited marital deduction for property transfers to a qualified spouse. While estate taxes typically only apply to large estates, planning for the marital deduction can provide great flexibility and was never before available to same-sex married couples.
Discuss with your attorney possible provisions to your trust that allow the place it will be administered after your death or disability to be changed to a state that recognizes your marriage. You might also consider adding provisions that your marital status should be determined by the location in which you married, not where you currently reside. It is unknown at present how useful such steps might be in the event you end up in a state that does not recognize your marriage, but such steps might be helpful.
If your marriage was performed in any state or country recognizing same-sex marriage, you will be required to file as married on your 2013 Federal income tax return. The IRS will not treat Registered Domestic Partners (RDP) or those in a Civil Union the same way because they are the equivalent of marriage under state law but not marriage.
While the IRS is mandating that same-sex married couples file as married for 2013, they consider it optional whether you amend your returns for prior years. An article on cnn.com recently suggested that sizeable refunds might be in order for same-sex married couples filing jointly. The article was based on some flawed assumptions, at least for taxpayers in California. Many couples in fact may owe more money filing as married. This occurs because most same-sex married couples in California were already splitting income between returns and thus driving themselves into lower brackets and because married couples are often subjected to a well-known "marriage tax penalty."
However, there are some situations which will result in refunds. For example, if you were covered under your spouse's health benefits at their work, those benefits were likely being treated as taxable income because the Internal Revenue Code only exempts them for spouses. The IRS has confirmed that you may now amend prior returns to remove that taxable income. Again, this would only apply if you were married in prior years, not Registered Domestic Partners. It is probably best to review your situation with a tax preparer.
Finally, if you are married, or plan to be before yearend, note that married couples traditionally make quarterly estimated payments on a joint basis. This was not allowed previously, so your preparer likely prepared 2013 estimates on the basis of single filing status, leaving you underpaid on said return. I expect that the IRS will reconcile this and avoid penalizing individuals whose filing status changes. But as some of you may have experienced historically, the IRS' way of dealing with things doesn't always work out without later correspondence. If you'd like to play it safe, consider revising your third and fourth quarter payments based on a married filing status.
Bear in mind that details of what follows still have to be worked out within the Social Security Administration (SSA). A July 17 posting on their website indicated that they are working with the Justice Department to determine how to apply the Supreme Court's ruling. To the extent that if you believe your Social Security might change as a result, they encourage you to go ahead and file your application, though they may not be prepared to make a determination at this time.
Social Security is an area of law in which it definitely does matter where you reside. Eligibility is based on where you live at the time of your application. So, if you move to a state where same-sex marriage is not recognized, at least for now, you are not considered married for Social Security purposes.
Why are the spousal benefits important? They allow you to maximize your social security benefits in some ways that have only been available to heterosexual couples. When applicable, spousal benefits essentially allow a surviving spouse with lower benefits to receive payments based on the deceased spouse's higher benefit.
There is also an enhanced benefit that doesn't require death to collect: An individual can elect to receive benefits based on 50 percent of their spouse's amount if it exceeds their own benefit. So, based on earnings at $1,000, and a spouses' benefit at $3,000, an individual could collect $1,500 based on the higher earner's benefit. This is especially useful when one spouse stayed home for most of his or her career to raise the family.
Keep in mind that the rules for calculation of spousal benefits are extremely complicated, and are affected by things such as early retirement at 62. Consider all the variations carefully before making a decision and if you need help, contact a finance or tax professional for assistance.
The potential benefits to same-sex couples now recognized as married in the Social Security arena can be significant and may lead many of you to tie the knot. Be cautious and recognize that other factors may work against you, such as those we've touched on in the income tax area, or planning for possible Medicaid and credit issues.
To assist you in learning more about your options, there are excellent guides on the Social Security website at ssa.gov.
The above issues are only a sampling of the Federal changes in store, which apply broadly to same-sex married couples. Change is further reflected by the Federal employees who have already applied for and are receiving spousal benefits as a result of the Office of Personnel Management's notice that it would give the decision broad application. Many have likewise heard positive indications with respect to immigration issues. And recently, the Pentagon announced that they will not only extend spousal benefits, but if a same sex couple is stationed in a state that does not allow marriage, leave will be granted for travel to a state that does!
The state of many issues changes almost weekly. Recently, the Veterans Administration pointed to a statute older than DOMA which defines spouse for their purpose as only an individual of the opposite sex. But more recently, a District Court ruled that since the language is almost identical to DOMA, it is clearly unconstitutional. Check often on issues of importance to you.
A good friend and client who is 86 is getting married soon. I no longer muse about what might be some day, I just sit back and marvel at the beauty of today.
Larry Conway is the founder and senior attorney in Conway Law Group in San Diego, where his practice focuses on tax, estate planning, probate and general business counsel. He is a frequent speaker at local events discussing issues affecting same sex couples. Mr. Conway lives in the North Park District of San Diego with his partner of 27 years.
This material is for informational purposes only and should not be construed as creating an attorney/client relationship or constitute legal advice. It may not be applicable to individuals outside the state of California without modification. Each individual's circumstances are different. Do not enter into transactions or make changes to your circumstances without seeking the advice of a professional.