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Financial Planning > Tax Planning

With DOMA defeated, new issues arise

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The U.S. Supreme Court’s ruling last month striking down provisions of the Defense of Marriage Act is undeniably a huge victory for same-sex couples. But it also raises questions — some that could fester for years — for federal and state governments, advisors and the couples themselves. Let’s review some of them.

Benefits aplenty

Among the outstanding issues is which of the 1,000-plus federal benefits married same-sex couples living in non-recognition states are eligible to receive. Frederick Hertz, an attorney,, San Francisco, says that a federal task force has been assigned the job of determining benefits that can be extended to places of celebration (states where couples were married) by executive order, agency rule-making or Congressional legislation.

“Each federal benefit will have a different solution,” says Hertz. “What we anticipate is that by the end of this year, there will be rulings on benefits that can be provided by executive order, among them benefits for federal employees.”

Those that require court action or legislative changes (the ladder most likely including Social Security survivorship benefits and federal tax benefits) will likely take years to resolve. In the interim, says Hertz, same-sex couples seeking such benefits would do well to relocate to a recognition state to secure them.

And, as necessary, upgrading their relationship. Couples that now have a marriage-equivalent relationship in a non-recognition state (such as a domestic partnership or civil union) can only be assured of benefits as married couples.

Also likely to upgrade are those in more peculiar situations, such as older gays and lesbians who adopted younger partners to avail the ladder of certain rights or protections (e.g., access to health insurance or the proceeds of a life insurance policy). Should these couples now wish to marry, says Hertz, they will first to have to invalidate their adoptions through the courts.

In the wake of the SCOTUS decision, should advisors expect a mass migration of same-sex couples from non-recognition to recognition states? John Davidson, principal of Davidson Insurance and Financial Services Inc., Thousand Oaks, Calif., believes this.

But I suspect a more modest uptick in relocations is likely. Couples considering such a change must, after all, weigh the pros of relocating against potentially significant cons: moving away from family and friends, losing good-paying jobs, and having to reestablish personal and business networks in new communities.

Those who do relocate will gain not only access to federal benefits, but also greater clarity as to state or federal treatment of their married or marriage-equivalent status. For remaining in a non-recognition state entails uncertainties that could have major financial or legal consequences. Married same-sex couples may believe, for example, they’re not jointly liable for debts incurred because they’re domiciled in a non-recognition state.

But if that state should decide to recognize same-sex marriage — as now seems likely in several states — then such debts (such as a mortgage on a home) could retroactively become joint liabilities. Depending on the state, observes Hertz, the debt liabilities could be very burdensome (as in community property states like California) or comparatively light.

Post-DOMA, married couples already living in recognition states will have their own issues to consider, such as whether to amend federal tax returns for prior years. This question will turn on whether couples will derive greater tax savings by checking off on an IRS 1040 “married filing jointly” or “married filing separately.” Depending on their financial situation, a jointly filed return can reduce couples’ taxable income by placing them in a lower tax bracket; or increase taxable income because they’re now subject to a marriage penalty.

For advisors and their clients, assistance on this question is readily available. Hertz notes that qualified accountants have developed formulas to quickly determine (and, at $200 or so, for a modest fee) the tax impact of filing jointly versus separately.

Ramping up business

Post-DOMA, life insurance and financial service professionals will also have opportunities and challenges. These include, for instance, whether and how to more effectively target gay and lesbian couples as client prospects for tax and estate planning.

Many of those catering to the LGBT community (which also embraces bisexual and transgender people) are themselves in same-sex relationships, and therefore well attuned to the community’s financial and legal issues.  But Debra Abbott-Walker, a Fairfield, Conn.-based agency recruiter and registered representative at Pruco Securities, (a unit of Prudential Financial) says the key to building a LGBT-focused practice is to become involved in the community.

This may entail networking at events hosted by LGBT organizations, becoming an advocate of the community’s causes and contributing financially.

Advisors also need to partner with fellow professionals, such as CPAs and estate planning attorneys, who are well versed in the tax and legal issues respecting same sex couples. And, if they themselves are lacking in the requisite expertise, they should pursue designations that can provide it, such as the College for Financial Planning’s Accredited Domestic Partnership Advisor program.

 The time to kick-start all these practice-enhancing initiatives, I would argue, is now.

For more from Warren Hersch, see:

Surveying the post-DOMA landscape

Many workers fear critical illness more than death

Employees favor companies that offer voluntary benefits


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