2013 and 2014 are proving to be landmark years for many same-sex spouses, ones they’ll likely remember for years to come.
In United States v. Windsor the United States Supreme Court ruled that the portion of the federal Defense of Marriage Act that allowed the federal government to discriminate against same-sex married couples was unconstitutional. The IRS issued Revenue Ruling 2013-17 announcing that it would apply the nation’s tax laws equally to legally married same-sex and heterosexual married spouses.
The Department of Labor issued Technical Release 2013-04 requiring ERISA retirement plans to treat all married spouses equally regardless of gender or state of residence. And, the number of states that recognize same-sex marriages continues to increase.1 In February the Justice Department extended to same-sex spouses the same rights heterosexual spouses have had in bankruptcy applications, federal prison visits and exemptions from testifying.
These events combined to give same-sex spouses rights and opportunities they’ve never had before. When the American Taxpayer Relief Act of 2012 (ATRA) was signed into law in January, 2013, same-sex spouses could not enjoy all its benefits. The Windsor decision and Rev. Ruling 2013-17 changed that. They now have “tax parity” with heterosexual spouses and can take advantage of the more than 1,000 tax benefits the Internal Revenue Code gives to spouses. Among these valuable benefits are:
Spousal IRA rollovers
The gift tax marital deduction
Spousal annuity rollovers
The estate tax marital deduction
Portability of the estate tax exemption
Life insurance will be easier to use
These changes may have a big impact on how same-sex spouses purchase and use life insurance. For many years life insurance policies have helped people accomplish a number of financial goals. Cash value life insurance policies can provide both income tax-free death benefits and potential supplemental retirement income. In previous years, many same-sex spouses had to consider federal estate taxes in deciding how to own and manage their life insurance policies. Before the ATRA and IRS Revenue Ruling 2013-17, there was always a possibility same-sex spouses would have to pay estate taxes when either of their estates was worth more than $1,000,000, including life insurance death benefits.
The inability to use the estate tax marital deduction meant that many shouldn’t own their own life insurance policies. Consequently, many created Irrevocable Life Insurance Trusts (ILITs) to own them. This made life insurance decisions more complex and more costly to implement.