An Update on Financial & Estate Planning for Same-Sex Couples

First Republic Investment Management
July 10, 2015

In its June 2015 landmark decision in Obergefell v. Hodges, the Supreme Court ruled that marriage between any two persons, regardless of sexual orientation, is a fundamental right protected by the Due Process and Equal Protection clauses of the Fourteenth Amendment and that states cannot infringe upon this fundamental right to marry. As a result, states are now required to permit same-sex marriages and must also recognize same-sex marriages lawfully licensed and performed out-of-state.

Previously, in its June 2013 decision in United States v. Windsor, the U.S. Supreme Court had ruled that the Federal Government was required to recognize a same-sex marriage if the marriage was legal where performed, but the Court notably did not require states to license same-sex marriages or recognize same-sex marriages performed elsewhere. The Windsor decision created potentially confusing marital statuses for same-sex couples that were legally married in a state that recognized same-sex marriages, but resided in a state that did not recognize same-sex marriages. Under Windsor, such marriages would have been recognized for federal purposes, but not for state purposes.

Under the combined effect of both the Windsor and Obergefell decisions, same-sex married couples are now entitled to the same federal and state benefits that have been historically available to married heterosexual couples, including the following:

  1. Married filing jointly and household filing statuses for federal and state income taxation
  2. Dependent exemptions (the ability to claim one’s partner/spouse as a dependent)
  3. Medical expenses
  4. Child, earned income and dependent care credits
  5. Education credits
  6. Taxation of health care benefits provided to non-employee spouses
  7. Capital gains and loss limitations
  8. Retirement plan benefits
  9. Unlimited estate and gift tax marital deductions and portability
  10. Spousal gift splitting

The impact of the Obergefell ruling is most significant for those same-sex married couples who were previously caught in the limbo between federal and state marital statuses (i.e. legally married for federal purposes, but residing in a state that banned same-sex marriage), especially in regards to state spousal rights, state income & estate taxation, and Social Security benefits.

Same-sex spouses now are granted the same state spousal rights as opposite-sex spouses. These state rights include the legal right to make medical decisions for a spouse in the event of incapacity, the right to participate in a spouse’s employee benefits, and, ironically, the right to divorce or dissolve the marriage.

For state income tax purposes, same-sex couples will be able to file a joint state income tax return rather than individual tax returns, regardless of their state of residence. Interestingly, for those same-sex married couples who were previously precluded from filing a joint state income tax return, it may be possible to file an amended state income tax return for prior years to claim a refund for lower tax liability under joint filing status.

Same-sex couples will now be eligible for a state estate tax marital deduction in states that still have a state estate or death tax. The availability of the state marital deduction for estate tax purposes now reduces the need for trusts, life insurance, and other planning strategies that were commonly used to address the additional state estate tax burden previously caused by the unavailability of the state marital estate tax deduction for same-sex couples.

Lastly, the Obergefell decision will now allow same-sex married couples to claim spousal and survivor Social Security benefits, regardless of their current state of residence. Prior to Obergefell, same-sex spouses who resided in a state that did not recognize same-sex marriages were not eligible for spousal or survivor Social Security benefits because, under Social Security law, a married couple’s eligibility for spousal and survivor Social Security benefits is technically based on the couple’s current state of residence. However, Obergefell now affords same-sex spouses the same spousal and survivor Social Security benefits that are available to heterosexual spouses, irrespective of the couple’s state of residence. Further, same-sex spouses can now also take advantage of valuable Social Security claiming strategies afforded to heterosexual spouses, such as filing-and-suspending, filing a restricted application, or claiming benefits based on an ex-spouse’s record. In addition, same-sex spouses that were otherwise eligible for Social Security spousal or survivor benefits had their state of residence recognized same-sex marriages may now have a legal claim to retroactive benefits.

The Supreme Court decisions in Windsor and Obergefell have essentially removed the disparities in financial, income tax, and estate tax benefits for same-sex couples versus heterosexual couples while expanding the array of planning opportunities available to same-sex couples. Given this changed landscape for same-sex couples, we suggest working with your advisor to carefully review and assess your current financial and estate plans and tax situation to make any necessary adjustments.

First Republic does not provide tax or legal advice - Clients' tax and legal affairs are their own responsibility.  Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.