When Section 3 of the Defense of Marriage Act was ruled unconstitutional last year, gay and lesbian couples gained access to some federal benefits afforded married couples, but the ruling didn't require states to recognize their unions. Now, state bans on same-sex marriage are dropping like flies, but the legal landscape for same-sex couples is still in flux. It can be especially challenging for married couples who move to a state that doesn't recognize their union.
David Gordon, executive director of The Gordon Financial Group at Morgan Stanley and a former attorney, spoke with ThinkAdvisor about how financial planning has changed for same-sex couples after DOMA was ruled unconstitutional and what planning challenges still exist for those couples and their advisors.
One of the biggest changes, he said, is in Social Security spousal benefits and survivor benefits.
"In a traditional opposite-sex marriage, it's not unusual to see one or the other spouse stay home to take care of kids. That stay-home spouse's exclusion from the work force would mean that they typically wouldn't have enough work experience, or at least enough high-dollar work experience, to qualify for Social Security benefits on their own," he said in an interview on Wednesday. "In a same-sex couple, in the past, the decision to be a stay-at-home parent would come along with the recognition that there was going to be a potential Social Security entitlement disadvantage. Now there isn't."
Same-sex couples also have access to benefits available to them under the "Family and Medical Leave Act, veterans' benefits, immigration rights and everything under the tax code," Gordon said.
He outlined some of the tax benefits gay and lesbian couples can now claim. "You can deduct up to a quarter of a million, $250,000, in appreciation from the sale of a personal residence. A couple could now do $250,000 times two. In a heterosexual marriage, there was no taxation on giving or transferring assets from one spouse to another spouse, but under prior federal tax rules, a gift from a same-sex couple could create a gift tax event. In a heterosexual marriage, there was no taxation at the death of the spouse if the survivor was the beneficiary. That now applies to same-sex couples with the marital deduction."
He continued, "I haven't seen it tested yet, but I presume in the case of income tax evasion that the Innocent Spouse Rule would now prevail in a same-sex marriage as well."
Gordon stressed, though, that "the impact of the law on same-sex couples varies from state to state. It's a fluid area that is still being demarked."
For example, a couple in a in state that doesn't recognize same-sex marriage could file joint federal income tax, but they would still have file single returns for their state taxes, Gordon said. "The real trap comes when you have a married same-sex couple in a state that recognizes same-sex marriage moving to one of the states that do not recognize same sex marriage. That's where the real problem is, when you have a couple that has the impression that everything is fine and dandy and all of a sudden they move to a place where that's not the case."
Most of the legal benefits denied same-sex married couples can be circumvented with "proper drafting and planning," he said, but he suggested partnering with an expert who's familiar with the nuances of the law.
"You really need to be connected or taking advice from someone who is up to speed in the field; someone who's studied the landscape," Gordon said. "Just like law, where each state licenses their own attorneys, and attorneys who are not licensed in a particular state is not allowed to practice — generally, except by special permission of the court — each state will have its own experts that should be consulted before legal or financial decisions are made."
Health care coverage, visitation rights, bankruptcy protection, Medicaid — these are all areas that need to be addressed specifically, he said.
