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Monday, July 13, 2015

Same Sex Couples: Financial and Legal Implications

Financial and legal issues faced by same sex couples, whether married or not, are complex and continually changing. Understanding the rules and advanced planning are critical.

Over the past few years, the planning opportunities for older, unmarried clients have
been continuously changing and, in the case of states permitting same-sex marriage, continuously growing. In light of the Supreme Court’s ruling in U.S. v. Windsor and the subsequent action of thirtysix states and Washington D.C. lifting their statelevel bans on same-sex marriage, the role of advisors now includes planning for opposite- and same-sex
married couples, in addition to couples in a civil union or domestic partnership.

The Demise of Section 3 of the Defense of Marriage Act

The case that succeeded in bringing same-sex marriage to the forefront was U.S. v. Windsor. In WindsorThea Spyer and Edith Windsor, a same-sex couple, resided in New York and were married in Canada (where same-sex marriage is permitted) in 2007. The State of New York deemed their marriage to be valid. Two years later, Spyer passed away, her will leaving all of her possessions to Windsor. Spyer’s estate generated a federal estate-tax liability without the federal estate tax marital deduction, which was not permitted pursuant to Section 3 of the Defense of MarriageAct (DOMA). Windsor sought a refund of the estate tax liability since she and Spyer were legally married. The matter made its way to the Supreme Court of the United States, which held that Section 3 of DOMA is an unconstitutional “deprivation of the equal liberty of persons that is protected by the fifth amendment.” This means that same-sex marriage is now legal, right? Not entirely. Section 3 of DOMA, which defined marriage as a legal union between one man and one woman, pertains only to federal—not state-level—agencies and regulations.

The State of Celebration Rule

Following the Windsor decision, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17, which announced that for federal tax purposes, the IRS will recognize the marriage of a same-sex couple, so long as the marriage was validly entered into in a state that recognizes same-sex marriage. This recognition has become known as the “state of celebration rule,” since the current residence of the same-sex married couple is disregarded. It is also noteworthy that in this revenue ruling, the IRS specifically stated that individuals in a domestic partnership or civil union are not considered to be married spouses. The Department of Labor, the Department of Homeland Security, and the Department of Defense have similarly adopted the state of celebration rule.

Therefore, if your same-sex clients were legally married in a state that allows same-sex marriage, they will qualify for all spousal benefits provided by the IRS, the Department of Labor, the Department of Homeland Security, and the Department of Defenseregardless of their current residence. In conducting your annual review or during your initial planning, it is important to consider how these spousal benefits may benefit your clients.

For federal taxation purposes, same-sex married couples are eligible to receive benefits including, but not limited to: 

• filing joint federal income tax returns,
• the gift tax and/or estate tax marital deduction,
• gift-splitting,
• and portability of the deceased spousal unused exclusion amount.

In light of these tax benefits, your same-sex clients’ estate planning documents should be updated accordingly.

Furthermore, the Department of Labor’s adoption of the state of celebration rule opens the door for one member of the same-sex married couple to have a mandatory right to the qualified plan benefits of the other spouse. This enables a same-sex spouse to create
spousal rollover IRAs, and to thus qualify for smaller required minimum distributions. Also, a spousal IRA may be established if one of the spouses has insufficient earned income.

Additionally, if you have a client who has a noncitizen, same-sex spouse, their marriage will now be recognized. The non-citizen spouse will qualify to receive a reduced residency period for naturalization and all other spousal benefits that depend on a marital relationship. A United States Citizen and Immigration Services professional should be contacted for assistance. 

Lastly, same-sex married couples qualify for spousal and family military benefits, such as healthcare, access to a commissary, preference for employment opportunities, and coverage of moving expenses.

The State of Residency Rule 

While several federal agencies are universally treating same-sex married couples as “married,” there are a few agencies that have restricted their recognition of samesex
marriage through the “state of residency rule.” The agencies that have adopted the state of residency rule include Veteran’s Affairs, Social Security, Medicare, and Medicaid. As the term implies, these agencies will only recognize the marriage of same-sex couples if they reside in a state that permits same-sex marriage. Some of these agencies have expressed interest in adopting the state of celebration rule. However, Congress must change the statutory language for such agencies before the state of celebration rule may be implemented.

If same-sex couples were legally married in, and currently reside in, a state that recognizes same-sex marriage, they may also receive spousal benefits provided by Veterans Affairs, Social Security, Medicare, and Medicaid. Prior to implementing a plan for your client, it is critical to identify the residency requirements instituted by the associated government agency. For example, to receive benefits from the Veterans Administration, the marriage of a same-sex couple is considered valid if the marriage was legal in the place where the veteran or veteran’s spouse lived at the time of the marriage, or if the marriage was legal in the place where the veteran or veteran’s spouse lived when he or she filed an application or claim for veterans benefits. Accordingly, there are opportunities available to ensure eligibility for benefits , such as relocating to a recognition state prior to applying for benefits. 

In planning for Social Security spousal benefits, the same-sex couple must be married and domiciled in a recognition state. A domicile is the permanent place to which you always intend to return, although you may have a residence in multiple states where you spend an extended amount of time. However, once the couple is approved for benefits, there is no longer such a requirement and they can reside or have a domicile in any state. As Social Security administers Medicare, they, too, require that applicants be domiciled in a recognition state to begin receipt of Medicare Part A (hospital insurance), Part B physician coverage), and Part D (prescription drug coverage) benefits.

Lastly, a same-sex married couple may apply for Medicaid benefits. Receipt of such benefits may be advantageous as it includes spousal impoverishment protection. However, it is important to keep in mind that the income of the the spouse not receiving Medicaid benefits may disqualify the spouse applying for Medicaid from receiving benefits. 

Since these agencies provide benefits pursuant to the state of residency rule, same-sex couples should consider changing their place of residence if such spousal benefits would be advantageous. Also, these benefits are not automatic. Your clients must apply to
receive such benefits, and should apply whether they believe they qualify or not since back-benefits could become available at a later time. 

Planning for Domestic Partnerships and Civil Unions

Despite the advances in the recognition of same-sex marriage, there are still individuals who choose not to marry or remain unable to marry. Many of these individuals have entered into domestic partnerships or civil unions. There are several reasons why these couples may not want to marry, such as:

• fear of losing Social Security spousal benefits if they were widowed or divorced,
• fear of losing alimony payments,
• being subject to the income tax marriage penalty,
• assumption of medical debt,
• becoming disqualified for Medicaid.

For tax purposes, if an individual provides health 
insurance for an unmarried partner, the partner must recognize that benefit as income. Similarly, if an individual provides child support to an unmarried partner, a completed gift has been made, which may incur a gift
tax liability.

Because unmarried same-sex couples are ineligible to receive the marital deduction, it may be beneficial to implement a lifetime gifting strategy to reduce their gross estates. However, the form of property ownership is important to consider. For example, if Domestic Partner 1 owns a home and deeds the property to Domestic Partner 2 as joint tenants with right of survivorship without any consideration, Domestic Partner 1 has just made a taxable gift of that partner’s 50 percent interest in the home to Domestic Partner 2. Further, if Domestic Partner 2 doesn’t contribute to the mortgage payments, Domestic Partner 1 is making a taxable gift to Domestic Partner 2 of 50 percent of each mortgage

There are financial advantages for domestic partners or persons in a civil union to marry. Internal Revenue Code Section 121 permits individual taxpayer to exempt up to $250,000 of capital gain from the sale of a personal residence, so long as they own and use the residence as the principal residence for at least two of the past five years before the sale. Domestic partners would each be required to meet this requirement to claim their $250,000 exemptions. However, if they were to marry, they would be able to exempt up to $500,000 so long as one spouse satisfies the ownership and use requirements. Also, if a deceased spouse’s IRA names the surviving spouse as a beneficiary, the surviving spouse may recalculate the required minimum distributions based on the surviving spouse’s life
expectancy. A domestic partner beneficiary would be required to receive required minimum distributions according to the fixed term calculation based on the IRA owner’s life expectancy.

There are also financial advantages for domestic partners not to marry. Internal Revenue Code Section 163 permits each individual taxpayer to deduct the mortgage interest on two homes (a principal residence and a second home). If the properties are titled correctly, individuals in a domestic partnership may deduct the mortgage interest on up to four properties, whereas a legally married couple may only deduct the mortgage interest on up to two properties. 

It is important to review your clients’ estate-planning documents to ensure the domestic partner is named as personal representative/executor of the estate, trustee of a trust, the agent under the general durable power of attorney and medical power of attorney, and as guardian and conservator for your client. Domestic partners typically do not have statutory priority to serve in these capacities without being specifically identified in such documents. A domestic partnership agreement is also beneficial to solidify the rights of each domestic partner in the event that the relationship

The Future of Planning for Same-Sex Couples

The Supreme Court of the United States has agreed to hear four same-sex marriage cases from the 6th Circuit Court of Appeals (Kentucky, Michigan, Ohio, and Tennessee) by the end of June 2015. This ruling, which is expected to define the meaning of marriage for all persons in the United States, will affect the strategic planning performed for your clients. If samesex marriage is legalized in all states, then planning for same-sex married couples will be performed the same as planning for opposite-sex married couples. However,
regardless of the Supreme Court’s ruling, financial advisors should continue to be aware of the advantages of planning for couples in domestic partnerships or civil unions. •CSA

Kirsten Waldrip is an Associate Professor at the College for Financial Planning and is the lead instructor for the Accredited Domestic Partnership Advisor Professional Designation Program. Prior to joining CFFP, she worked as an attorney focusing on estate planning
and administration. She is an active member of the Colorado Bar Association and its Trust and Estate Section. She graduated from Syracuse University College of Law. Contact her at or visit

Same Sex Couples: Financial and Legal Implications was published in the Spring 2015 edition of the CSA Journal. 

Blog posting provided by Society of Certified Senior Advisors