In June of this year, the Supreme Court overruled key provisions of the Defense of Marriage Act (“DOMA”), thereby eliminating the definition of marriage as one between a man and woman. Not only did this represent a tremendous victory for same-sex spouses and modern families across the country, but it also extended numerous retirement benefits, employment benefits, and tax breaks that were not available pre-DOMA. We understand that it is difficult to read through all of the legalese of the ruling, but everyone should be aware of the following takeaway points. And with the New Year upon us, there is no better time to review and update your estate and asset protection plans.
One of the more notable changes surrounding the Court’s ruling involves estate tax planning for same-sex spouses. Prior to the ruling, couples weren’t able to take advantage of the federal marital deduction. This deduction permits spouses to transfer assets of any kind or value between one another, both during life and upon death, without having to pay a federal tax. Because DOMA previously defined marriage as limited to heterosexual partners, same-sex spouses were forced to pay federal taxes on any transfers made in excess of the exemption. For Edith Windsor, one of the plaintiffs who petitioned the court, this change would not have required that she pay over $300,000.00 in estate taxes upon the death of her spouse because her same-sex marriage was not considered legal. With DOMA now in place, it is essential for same-sex spouses to have their estate plans reviewed or updated as to utilize the same tax-saving devices that were previously only available to heterosexual spouses.
Another protection same-sex spouses will begin to see involves employer retirement plans. If the plan is qualified in nature, the Employment Retirement Income Security Act (“ERISA”) requires a spouse to be named as the sole primary beneficiary of the account. If the employee wishes to name other beneficiaries, such as family members children, etc., the spouse must be notified and consent to this change in writing. If the employee had an old beneficiary designation that was never updated, the spouse would still default as the beneficiary. Pre-DOMA, same-sex spouses were not afforded this protection because their marriage not federally recognized as legal.
Further changes to retirement benefits now permit same-sex spouses to take advantage of the ability to roll over a deceased spouse’s IRA or other qualified plan. Unlike other beneficiaries of a retirement account, such as children, family members, etc., spouses are given the unique opportunity to roll the assets of the decedent into their own retirement plan and postpone the required minimum distribution. Non-spouse beneficiaries are not entitled to this rollover and instead must begin making withdrawals by the end of the year following the plan owner’s death.
In addition to limitations placed on estate tax planning and retirement benefits, the lack of federal recognition has forced same-sex spouses to file separate federal income tax returns, disqualified them from Social Security survivor benefits and Veteran’s benefits, and rendered them ineligible for federally funded programs, including Medicaid. All of this will soon be a thing of the past. Therefore, it is critical for same-sex spouses to review and update their asset protection plans, contact employment plan administrators and speak with an attorney experienced in navigating federal agencies to ensure that they take advantage of every opportunity and right afforded by the overturn of DOMA.