Marital Benefits: What You Need to Know Now
In the fortuitous circumstance that you live in a state where your marriage is now legally recognized, you certainly have a lot to be thankful for! Apart from the basic financial ramifications of the fall of DOMA, we can all be particularly grateful for gaining essential rights and privileges such as hospital visitation rights, and the right to make medical and/or financial decisions on behalf of our spouse if he or she is incapacitated, just to name a few. But you also have a lot to consider, particularly as far as the financial consequences of your estate planning affairs are concerned.
There is a gray area that keeps popping up around the place of celebration versus place of domicile. Some of these benefits may not extend to you if you were married in a state that recognizes your marriage on a state and federal level -- Vermont, for instance -- but then move to Alabama, where it's not legal on a state level. If you find yourself in one of these limbo situations, extra care will be needed when undergoing estate planning. We'll talk about some of the documents that you can have in place to help protect you in financial situations and beyond, should you fall into this second category.
The Marital Deduction
This is one of the new situations for same-sex spouses who now have legally recognized marriages. Before the fall of DOMA and states coming on board with legalizing same-sex marriage, a same-sex couple would be treated as two single people where tax purposes are concerned, whereas now we have the capability to pass an unlimited amount of assets -- either in life or death -- to [their] spouse without paying federal or gift tax. While this is something that may be easily overlooked, particularly for couples who are not passing a particularly robust estate, it's extremely important.
In the case of Edith Windsor, the inequality before the law played itself out in a very public forum when she took her case against the federal government to the Supreme
Court. Windsor and her partner, Thea Spyer, were legally married in Canada in 2007, although their permanent residence was in New York, where same-sex marriage was not recognized. When Spyer passed away in 2009, Windsor inherited property and assets from her spouse, as spouses often do. Instead of inheriting those assets tax-free, Windsor was slapped with a tax bill of $363,053 for assets that, were she in a legal marriage by law, would have been considered legally hers and not subject to tax.
As with all tax laws, you should check in with your professional advisor to make sure that you are planning for the proper situation. If your spouse is not a citizen, for
instance, your exemption is limited to $145,000, so the spouse should be adequately prepared to pay tax on that estate if it were to be over that amount and not planned for appropriately before death of the resident spouse.
As an individual, you can give $14,000 at one time tax-free to any individual. This is not just for family; you could literally hand a check to a stranger on the street as long as it isn't over $14,000, so you would be able to defer gift tax up to the federal lifetime exemption ($5.34 million). This is still the case for any individual, regardless of sexual orientation or marital status. However, what changed after the recognition of same-sex marriage is, if agreed upon, a couple can combine their individual allowances, gifting up to $28,000 to a nephew or cousin (or stranger on the street!) without having to send two separate checks -- this is termed "gift splitting." It allows a larger gift to take place outside of the limitations of one's individual allowance.
The idea with these marital exemptions and deductions are fairly simple: In your lifetime, the government has said that you should be able to pass $5.34 million to another individual(s) through your life or at death. But if you're recognized as legally married spouses, then that amount, through proper estate planning, can be magnified. If one of you is bringing home the majority of the money or has a larger estate, these changes will allow for a more equitable partnership, more ease in assisting those you love, as well as financially benefitting your legacy once you leave this Earth. Now, legal spouses are able to participate jointly in passing their combined $10.68 million in ways they were not privy to before. Although it's certainly not one of the more romantic parts about receiving marriage equality, it's definitely one of great financial benefit within and beyond the spouses.
Similarly, legally married LGBT spouses now receive equal protection in the area of rolling over their deceased spouse's IRAs. This means that they need not fear the tax
consequences of inheriting retirement assets that are not protected under legal recognition of their marriage. This is due to the option available now of rolling the retirement assets directly into their own retirement account, without being forced to take taxable distributions in a limited time frame after the death of their spouse.
Let's say, for instance, that I have a traditional IRA worth $500,000. My wife, Sophie, also has a traditional IRA. We both have named the other as primary beneficiary. If I pass away, as my legal spouse, Sophie now has the right to roll my IRA into her own without starting to take the required distributions or liquidating the account to a taxable account upon my passing. Now, Sophie can delay that until she is 70 1/2 years of age, meaning that the money can grow tax-deferred in her IRA and give her more control over the distributions during her retirement when she will need the money most. Some people may need the income of required distributions or in some cases an immediate liquidation, and in this case, they can choose according to their needs, but if the surviving spouse is on strong financial footing, they can now roll over the retirement assets into their own retirement account without worrying about immediate tax consequences or foregoing the benefits of tax deferral.
HOLLY HANSON is the principal and founder of Harmony Financial Strategies. She oversees the entire Harmony operation, mentoring and guiding the advisers to provide a unique combination of knowledge, dedication, and service to LGBT individuals, same-sex couples, and modern families. This excerpt is from Hanson's book The LGBT and Modern Family Money Manual: Financial Strategies For You & Your Loved Ones.