In 2013, the U.S Supreme Court declared that the 1996 federal Defense of Marriage Act (DOMA) was unconstitutional, clearing the way for married same-sex couples to be treated equally under federal law. As of September 2013, same-sex couples can marry in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington, as well as Washington, DC. Other states could be added in the years ahead, either as a result of state legislation or court decisions.
Following the Supreme Court's DOMA ruling, the Internal Revenue Service said that all legally married same-sex couples can file joint federal income-tax returns, even if they have moved to a state that doesn't recognize their marriage. Same-sex couples can also file joint state-tax returns if they live in a state that recognizes their union, but they will likely have to go to the trouble of filing separate state-tax returns if they live in other states.
Meanwhile, the Social Security Administration (SSA) is studying how the DOMA ruling affects spousal retirement and survivor benefits. The SSA is already paying spousal benefits if couples were married in a state that permits same-sex marriage and they still live in one of those states. What about married couples who live in states that don't permit same-sex marriage? The agency has urged these couples to apply if they want to begin benefits. The agency's rationale: If same-sex couples are ultimately found eligible, they should be able to receive benefits retroactive to their filing date.
Still, even with all the recent changes, same-sex couples need to be careful about financial and estate planning. This is especially true if family members don't approve of their relationship or if they live in a state that doesn't recognize same-sex marriage. Here are some pointers you might discuss with your legal and financial advisors.
- Both you and your spouse ought to have wills. If there is no will, there's a risk property subject to probate may go to blood relatives—and not to your spouse—if you live in a state that doesn't recognize your marriage. Even if you both have wills, they could be challenged by hostile family members, which is why you might also explore other arrangements.
- Same-sex couples may want to own some assets jointly with right of survivorship, including investments, bank accounts and their home. If assets are titled this way, when one spouse dies, the other should automatically become sole owner, even if the deceased's family members try to claim the property. Keep in mind that unraveling joint ownership can be a hassle if the relationship ends. It can also interfere with some estate-planning techniques.
- You can pass property directly to your spouse by naming him or her as beneficiary of your retirement accounts and life-insurance policies. Until the SSA makes a final ruling, your spouse may not be eligible for Social Security survivor benefits, so life insurance could help fill the financial gap.
- You may want to set up one or more trusts. Perhaps the simplest trust is a revocable living trust. As long as you are alive, you control the assets and you can modify or revoke the trust at any time. You can be your own trustee. But you might also name your spouse to serve in this capacity if you become incapacitated. Unlike assets bequeathed in a will, assets in a living trust avoid legal review by the probate court and instead go directly to the named beneficiaries, so it is harder for others to challenge these arrangements.
- Through careful use of joint ownership, beneficiary designations, wills and trust arrangements, you should be able to ensure your assets pass to your spouse. But this doesn't mean you will avoid estate taxes. While married same-sex couples can leave assets to each other free of federal-estate taxes, a surviving spouse may—depending on state law—still face state estate taxes. And as with all couples, after you both die, your heirs could be hit with both federal and state estate taxes.
- For couples living in states that don't recognize same-sex marriage, divorce could prove especially problematic. If you plan to marry but will live in a state where same-sex marriage isn't legal, consider consulting a qualified attorney first.
- If you have children and one spouse dies, parental rights typically extend to the surviving spouse. But you should check with a qualified attorney if you live in a state that doesn't recognize same-sex marriage, especially if the state doesn't allow second-parent adoptions. As a precaution, in the adopting or biological parent's will, you might name the other spouse as guardian, with a backup guardian listed in case you both die prematurely. Similarly, if you live in a state where second-parent adoption isn't available, you might ask an attorney what precautionary steps you might take to ensure you both have custody rights if your relationship ends.
- Another document you may want: a durable power of attorney. This document gives your spouse the power to manage your financial affairs, even if you become incompetent or incapacitated. You may also want an advance health-care directive, also known as a living will, to state what type of medical treatment you want, or don't want, if you are too ill to direct your own care. In addition, you will likely want to draw up a durable power of attorney for health care. That will give your spouse the authority to make health-care decisions, including end-of-life decisions, on your behalf in case you can't make them yourself.
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