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Posted: April 05, 2013

The Supremes, DOMA and money

The court's decision could have big financial implications

James Osborne

On March 26, the United States Supreme Court began hearing oral arguments to consider the constitutionality of certain sections of  the 1996 Defense of Marriage Act (DOMA), along with California's Prop 8.

California's Prop 8 is a state constitutional amendment that defines marriage between one man and one woman.  The amendment was enacted to override a state court decision legalizing gay marriage.

The section of DOMA that is in question surrounds excluding same-sex spouses from federal benefits. The issue in question specifically addressed the ability of a deceased spouse to leave unlimited assets to his or her spouse without any estate taxes (this is known as the Unlimited Marital Deduction).

There are several possible outcomes from the Supreme Court's decisions, but for the purposes of this discussion, let's assume that the court decides the provision of DOMA in question is, in fact, unconstitutional under the 14th Amendment's Equal Protection clause.

If the court reached this conclusion, the federal government would recognize same-sex couples as legally married in several states and provide spousal benefits to these couples.  A far-reaching decision could affect Social Security benefits, Veteran's Administration benefits, estate tax provisions, income tax filing, treatment of inherited retirement accounts, insurance product tax treatment and more. We'll examine these below.

1) Social Security: Social Security is a program designed around families and spouses, and a full reversal of DOMA could have significant implications for same-sex couples. Surviving spouses could become eligible for widow's benefits, and a married couple could take advantage of spousal benefits, wherein the lesser-earning spouse is entitled to 1/2 of the higher-earning spouse's monthly retirement benefit. Survivors who care for young children would also be eligible for existing benefits.

2) Veteran's Administration (VA)  and Military Benefits: Much like Social Security, many VA benefits affect spouses, including widow pension benefits and Survivor Benefit Payments, life insurance benefits, funeral and burial arrangements and access to VA hospitals and nursing homes.

3) Estate taxes:  The case in consideration at the Supreme Court surrounds the taxable nature of an estate left to a same-sex spouse.  Recognition of same-sex marriage by the IRS would provide significant tax savings to high net worth same-sex couples and provide better estate and tax planning opportunities. In short, a married person can leave his or her spouse unlimited funds at death with no estate taxes due.

4) Income taxes: Same-sex couples could have the opportunity to file joint tax returns, make spousal IRA contributions, offset one spouse's income with losses from the other spouse, and generally treat their income tax situation the same as a heterosexual married couple.

5) Retirement accounts: Married couples recognized by the IRS have significant tax planning opportunities concerning the treatment of IRAs and other retirement vehicles. In funding retirement accounts, married couples can make spousal IRA contributions and bypass "2-employee" considerations of Individual 401(k) plans. In an inheritance, a spouse can treat the deceased account holder's retirement plan as their own, foregoing the need for mandatory account distributions and delaying the payment of income taxes. This treatment may also apply to a spouse who inherits a variable annuity and may be allowed to take a Spousal Continuation.

Of course, at this stage, this is all speculation.  The public will have to wait until the court has ruled and the ruling is interpreted.  The most significant change could be if these changes are made retroactively - income and estate tax returns could be amended to the benefit of the same-sex couple and the Social Security Administration could be bombarded with applications for spousal and widow's benefits. Time will tell, but the advisors, attorneys and CPAs of same-sex married couples need to be alert for potential planning opportunities.

James Osborne is a Certified Financial Planner ® professional and President of Bason Asset Management, a Lakewood-based Registered Investment Advisor. He has spent his career in the investment management industry, helping clients manage their portfolios and plan for retirement, legacy and lifetime goals. In addition to the CFP ® professional designation, he has an MBA in Investment Management from the University of Colorado. James has previously instructed CPE courses for the Colorado Society of CPAs. Contact James at james@basonasset.com and learn more at http://www.basonasset.com.

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