Seven Tips for Financial Planners Advising Same-Sex Couples in a Post-DOMA World

By Sheryl Rowling, CEO, Total Rebalance Expert on Friday, July 12th, 2013

Originally posted on July 5th, 2013. View original post here.

The Defense of Marriage Act (DOMA), which defined marriage as the union of one man and one woman, has been overturned by the Supreme Court and ruled unconstitutional. The federal government will now grant full legal status to marriages valid under state law, including same-sex marriages.

The media has been quick to report on the big benefits of this ruling on gay men and women: Same sex couples can file as married for federal tax purposes and get tax benefits afforded to married couples; filing as single is no longer an option and "married filing separate" can often prove more costly. Additionally, joint returns can sometimes result in higher taxes than if the couple is not married.

However, additional advantages to the new law can be significant and will need to be considered by planners. With marriage recognition, the couple is now entitled to the spousal exemption for gift and estate tax purposes. Military benefits are now available to same-sex spouses. And, Federal tax will no longer apply to employer provided health coverage for an employee’s same sex spouse.

Less-discussed benefits center on potential retroactive aspects of the ruling, and some of those issues will take some time to sort through and get settled. For example, it seems likely that same-sex couples will be able to amend prior tax returns to file as married. How far back can they go? Should protective filings be done to avoid possible statute of limitations issues? Will amending be required or optional? We don't know yet.

Based on the past precedent, permitting optional retroactive filings seem likely. When the Supreme Court held that the federal government had to recognize state community property laws for same sex married couples, they were given the option of amending but were not required to do so.

Divorced same sex couples who split retirement plans under a Qualified Domestic Relations Order (QDRO) might have an opportunity for tax refunds. Under prior law, these couples would have recognized taxable income because the spousal exemption didn't apply. Under the new rules, a QDRO transaction would not be taxable. Recognizing that amending tax returns could be problematic now that the couple has divorced, the enticement of a refund could generate cooperation.

Clearly same sex spouses can now claim Social Security benefits based on spouse’s earnings. However, we don't yet know if this will be retroactive.

As financial planners, it can be difficult to advise clients in the midst of uncertain interpretations and lack of detailed guidance. However, financial planners should regard it as a professional responsibility to help clients navigate these uncharted waters. I'll offer updates here as these questions get answered.

In the meantime, here are seven tips for advising same-sex married couples in this new environment:

  1. Project current year taxes considering filing as married, now that single or head-of-household status is no longer available. Be sure to factor in combined carryovers such as capital loss carryovers and passive loss carryovers.
  2. Consider how the new filing status will affect potential Roth conversions.
  3. When managing investments, remember that wash sale rules will now apply between the spouses.
  4. When preparing financial plans, the possibility of greater Social Security income must be evaluated.
  5. When advising on IRAs and retirement plans, note that naming a beneficiary other than the spouse will now require the spouse's sign off.
  6. Be mindful that inherited IRAs from a same sex spouse can provide greater tax deferral opportunities under the new law.
  7. Encourage same sex couples to revisit their estate plans with a knowledgeable estate attorney.

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