The Modern Family Advisor: What the Repeal of DOMA Could Mean for Clients and Your Practice

History has been made for same-sex couples, meaning a new era is also on the horizon for many financial professionals. The recent ruling by the United States Supreme Court to strike down Section 3 of the federal Defense of Marriage Act (DOMA) gives same-sex married couples financial advantages they haven’t been able to enjoy in the past. These couples are now eligible for more than 1,000 federal benefits – but only if they are in a state that recognizes same-sex marriage. Although the impact of the ruling will not be immediate for all same-sex couples in the United States, the repeal of DOMA has implications that are important for all advisors to consider and opens a new not-yet-written chapter for our industry.

Why is the ruling so important? Because the same-sex couple demographic in the United States is significant – both in terms of size and financial status. According to the U.S. Census Bureau, there were a total of 901,997 same-sex households in the United States in 2010 (Households and Families: 2010, United States Census Bureau, April 2010). Of those, nearly 40% had more than $100k in annual household income, as compared to only 17% of opposite-sex couples with the average household income of same-sex couples at $106,753.  As the number of same-sex couples increases, they will need a new level of support for their financial planning.

The good news is that the ruling may eliminate some of the complications involved with taxes and retirement planning that same-sex couples faced prior to the court’s ruling. For example, a domestic partner’s cost of healthcare coverage may no longer show up as taxable income on their W2 if they are married, generating additional income for the same-sex couple. Additionally, the ruling is expected to allow same-sex married partners to roll over qualified retirement plan death benefits of his/her traditional IRA as a spousal option versus the formerly preferred method: using the stretch option. These couples will need assistance in determining exactly how these essential financial issues have changed and what that may mean for their specific financial situation.

As you work with same-sex couples, keep in mind that not all parts of the federal government may be ready to deal with the implications of this new ruling. A recent Forbes article highlighted the fact that, even though the DOMA decision has been an issue of debate for quite some time, the IRS has not come to terms with the onslaught of amended returns that may be coming (“As Taxpayers Scramble To Make Sense of DOMA, IRS Issues Statement,” Forbes, July 1, 2013.) In the same article, author Kelly Phillips Erb recommended that same-sex couples hold off on amending tax returns immediately and wait and see how the IRS will operate going forward.

It’s also worth noting that the majority of states still do not recognize same-sex marriage as being legal, so that limits the impact of the court’s ruling. Currently, only 12 states and the District of Columbia recognize same-sex marriages, so there is clearly a long way to go before same-sex couples across the country can enjoy the financial benefits of marriage.

The key is for advisors to start preparing and familiarizing themselves with the impending changes so you can be responsive in guiding same-sex couples. Demonstrating familiarity with the new legal landscape will show clients that you understand their unique challenges and are ready to help them on their financial journey, whether that includes marriage now or in the future.

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