Now that the Supreme Court has issued its landmark ruling to overturn the Defense of Marriage Act (DOMA), same-sex couples should be hammering out joint financial plans, much like those that heterosexual pairs create when they marry.
The plus side is that same-sex married couples nationwide are now afforded benefits that can lower the cost of health care and cut taxes. But it's still not a completely level playing field: While 19 states recognized same-sex unions, as of the end of May 2014, 31 still didn’t. The rift means that couples must take special precautions to have the right estate and emergency-health care legal documents in place – and often on hand.
“It’s a big bucket list,” says Philadelphia attorney Angela Giampolo. “But I tell clients, in a sense it’s really your welcome to the adult world.”
Whether you're already married or plan on tying the knot, make sure you and your partner have reviewed where you stand on the following issues:
The IRS made it clear only weeks after the Supreme Court decision came down: On a federal level, same-sex marriages now get the tax benefits – and in many cases the biggest headache – that come with tying the knot.
The good news: Same-sex couples now enjoy many of the privileges that were previously out of reach. They include:
- Employee benefits, such as employee health insurance, can be shared with your spouse tax-free and are no longer treated as taxable compensation.
- It’s now possible to use one spouse’s loss – investments, income or others – to offset another spouse’s gains.
- Couples with a large gap in incomes – sometimes the result of one spouse staying home to tend to children while the other works – can potentially lock in a lower tax rate on a joint return, what’s commonly known as the “marriage benefit.”
- Federal estate taxes no longer apply to assets that pass to one spouse when the other dies, up to a threshold of just over $5 million.
The change also makes it possible to file amended forms for up to three years back to claim refunds, says Rosalind Sutch, a CPA with the Philadelphia firm Drucker & Scaccetti. You may be eligible for taxes you paid for health coverage or marriage-benefit breaks you missed out on – provided you were married and depending on how you filed your returns. You may also have grounds to file for a refund on federal estate taxes you paid on what you inherited from your same-sex spouse – again, provided you were married.
The downsides: Alas, the new guidelines mean you may also find yourself staring at the dreaded marriage penalty, especially if you and your spouse both earn high incomes. That may push you to file separate returns to trim your obligation.
Another issue: If you live in a state that doesn’t recognize your marriage and whose taxes do not conform to federal guidelines, you may have to file your federal return under one status and your state return under another.
Next steps: Meet with your tax accountant to examine which filing status to take and what you may be entitled to claim as a refund.
Being married mandates the paperwork (wills, powers of attorney) that all couples have to set up in the event of death or a grave medical emergency. If you live – or have a serious health crisis – in a state that doesn't recognize your marriage, health-care directives and authorizations are even more crucial. Without the proper legal documents, a same-sex spouse can be locked out of a hospital room or blocked from key treatment decisions.
Be sure you create the documents everyone needs:
- A will for each of you - the bedrock of estate planning that lays down directions to care for your spouse and loved ones.
- A durable power of attorney, health-care power of attorney and HIPAA waiver, which can name your spouse as the person in charge of critical financial and medical matters when you’re physically unable to handle them.
- A living will, which spells out what you want to happen in the direst circumstances.
Two additional documents take on added importance in places where your marriage is not recognized. Each of you needs:
- A hospital visitation authorization to ensure that your spouse can be by your side during an emergency. Outside the “marriage equality” zone, if you will, your license won’t establish you as a patient’s next of kin. Giampolo actually laminates a miniature PDF copy that she has clients carry in a wallet or purse. “If you don’t have access to it when you need it, you’re simply helpless,” she says.
- Paperwork to appoint an agent for the disposition of remains. Funeral directors in non-marriage equality states are barred by law from speaking to you without legal authorization – that’s where the disposition of remains comes in.
Next steps: Meet with an attorney to review your estate and health-crisis documents – or to draw up a new set. Place copies in an eVault and give to your spouse, attorney, financial planner and primary-care physician, depending on the document.
Benefits, Retirement, Estate Planning
The obvious advice is to review the beneficiaries you’ve listed for all benefit and retirement accounts to make sure they’re in line with your current household and financial plan. When the time comes, you are now entitled to your partner’s Social Security benefit.
Be sure to review how your combined marital income affects contribution limits to tax-advantaged retirement accounts such as IRAs.
Estate planning: Federal estate taxes are now much easier to manage. In marriage-equality states, they’re less of an issue as well. If you live in one of the 31 states that don't recognize your marriage, consult an attorney and your financial planner or accountant to look into trusts and other ways to guarantee that you pass your wealth to your spouse.
Next steps: Meet with your employee benefits manager and tax accountant. Review all beneficiary designations. Examine IRA/401(k) choices and contribution limits.
The Bottom Line
Despite positive federal changes, same-sex couples still face a lot of uncertainty – and inequity. “Things haven’t been completely simplified," says Lynne Wright, senior vice president of investments at financial advisor Raymond James. "But with a team composed of an attorney, tax preparer and financial planner, we’re able to take a more mainstream approach to the planning work we do for same-sex marriages.”
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