Stern Advice-Gay couples get new world of retirement, tax benefits

Wed Jun 26, 2013 1:52pm EDT

By Linda Stern

WASHINGTON, June 26 (Reuters) - Same sex couples are rejoicing after today's Supreme Court ruling declaring the Defense of Marriage Act unconstitutional. It offers federal recognition of the unions and invites them into a new and potentially lucrative world of shared tax, retirement, estate and employee benefits.

"It will be less costly to be gay," said Debra Neiman, an Arlington, Massachusetts, financial adviser and author of "Money Without Matrimony."

But those financial benefits won't be delivered automatically, and couples will need to take specific actions to make the most of their new legal status. They are very likely going to need professional guidance on items like taxes and estate plans because the ruling creates almost as much uncertainty as it resolves.

"This is going to be a multi-stage process," says attorney Nicole Pearl of McDermott Will & Emery, in Los Angeles. "The U.S. will have to deal with some of the cleanup on this."

There are two major points of uncertainty that will have to be clarified via new federal and state rules and - no surprise here - future court cases.

First, it isn't clear whether couples who were wed in states that sanction same-sex marriage, but reside in states that do not, will be recognized by the federal government. Based on related marital case law, Pearl expects that to be a patchwork. A couple who marries and lives in New York for 10 years and then moves to Texas may be recognized, while a Texas couple who fly to New York only to get married may not, Pearl speculates.

The second issue involves retroactivity. While gay married couples, widows and widowers can go back and file amended income and estate tax returns, it's not clear whether they can go back longer than three years, the time currently allowed by the Internal Revenue Service for tax returns to be amended.

So, look for a flurry of regulations from the IRS and other federal agencies, and call your accountant and your lawyer while you wait.

Here are some other financial implications of the ruling:

ESTATE TAXES

Wealthy people have the most to gain from federal recognition. It will mean that spouses can leave each other as much money as they want - billions of dollars, if they fall into that select class - without paying federal estate taxes, just as married heterosexual couples can. A couple together will also be able to leave as much as $10.5 million, free of estate taxes, to their heirs.

Under current law, even state-married gay couples don't have those spousal exemptions. Instead they each have a $5.25 million limit on the amount they can leave each other without paying federal estate taxes. And while each person can leave $5.25 million to the kids directly, the second spouse can't leave more than that, even if the first spouse didn't "use up" his or her own exemption.

What does that mean? You may be able to drop your life insurance if you've been carrying a pricey policy just to pay estate taxes, says John LeBlanc, a financial adviser with Modera Wealth Management in Boston.

Not all the new changes will save you money. If one of you is wealthy and the other is not, you may have to spend time, money and emotional energy considering a prenuptial agreement. Rather than hiring lawyers to combine your financial lives, you may have to spend money on lawyers to keep them separate, if you are married or want to marry.

NEW RETIREMENT STRATEGIES

The hottest retirement strategy among heterosexual married couples involves optimizing Social Security benefits, in which one spouse takes benefits early and then switches to spousal benefits later. That strategy will become available for same-sex couples.

There is an even bigger benefit coming your way with federal recognition. Same-sex widows and widowers would be eligible for spousal Social Security, meaning that when one spouse dies, the second one can switch to that person's benefits if they are higher.

Pension benefits are more tricky, says Kyle Young, a financial adviser in Short Hills, New Jersey, and a vice president of Wells Fargo Advisors, where he specializes in gay, lesbian, bisexual and transsexual (GLBT) clients. Big companies may find themselves required to give spousal pension benefits to workers in states that sanction gay marriage but not in states that don't, he says.

It's not clear whether those companies will give all same-sex couples parity on pension issues, even if they don't live in the right states. And if they do? That could actually hit some companies' pension funds hard enough to push them into underfunded status.

AMENDING THOSE TAX RETURNS

The Supreme Court giveth, and it taketh. Moving to a joint federal tax return could cost same-sex couples, since they would no longer be able to optimize their deductions by giving them all to one partner or the other. Meanwhile, there is the "marriage penalty" - the tax code is structured with progressive tax brackets so it can penalize married couples who have roughly equivalent income.

And there is no requirement for married couples to file amended tax returns following this ruling, says Pearl. But some may find that worthy - a couple with disparate incomes can find that joint filing lowers their tax burden.

Depending on whether effective dates for the decision are in the future or the past, there may be moves to make as soon as the court acts. Separate filers who will eventually file jointly could make sizable charitable gifts now and apportion them to the partner who will save the most by making them. A retroactive decision that goes back beyond January could prompt some to file amended tax returns for previous years.

Says LeBlanc: "I'm going to literally be looking at every single tax return and estate document for all my same-sex clients."

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