In late June, the Supreme Court revealed its much-anticipated decision on the Defense of Marriage Act (DOMA), striking down a portion of the law as unconstitutional and forcing the federal government to recognize the validity of certain same-sex marriages. You might be thinking to yourself, “How many clients does this change apply to? Is it really worth my time learning about it?” Whether or not it’s “worth your time” is up to you to decide, but consider this as you do… you’ve probably spent a fair amount of time learning about the estate tax rules over the years and probably thought that worthy of your time and effort, but with the federal estate tax exemption now at $5.25 million per person; far, far more people will be impacted by DOMA than by any federal estate tax issues.
With that in mind, it’s important to realize that there are still a lot of questions that need to be answered. Some of those answers are likely to come soon in the form of guidance from IRS and other federal agencies. Other answers will take longer to find out, perhaps playing themselves out over many years in our court system.
The reason why, despite having a Supreme Court decision on DOMA – a decision that cannot be appealed – we still have so many unanswered questions is primarily due to the fact that the Supreme Court’s DOMA decision did not say that it was unconstitutional to prevent same-sex couples from getting married. Instead, the decision said it was unconstitutional for the federal government not to recognize states’ rights to define marriage. This difference is important to understand.
It’s pretty clear then now, in light of this decision, legally married same-sex couples that are living and working in states that allow same-sex marriages will be entitled to the same rights and privileges as heterosexual couples. On the other hand, it’s unclear how things will work when it gets a bit more complicated. For instance, if a same-sex couple is legally married in New York, but moves to another state where same-sex marriage is not allowed and such marriages from other states are not recognized, what marital/spousal rights do these couples have under federal law, if any?
While those questions will be answered in time, for now advisors working with legally married same-sex couples should begin to review the planning strategies those couples may now take advantage of. Below is a snapshot of just a few of the many retirement account benefits that should be a part of that discussion.
New Post-Death Options
Under the Tax Code, the rules for a beneficiary of an IRA can be very different, depending on a number of factors. One of those factors is whether or not the beneficiary is the spouse of the deceased IRA owner. In what should come as no surprise to advisors, the rules for a surviving spouse beneficiary are far more beneficial than for a non-spouse beneficiary inheriting the same IRA. In fact, there are many planning moves that only a spousal beneficiary can make. Many same-sex couples now have the potential to take advantage of these options whereas pre-DOMA, they did not.
One such move is known as the “spousal rollover.” This is where the spouse of a deceased IRA owner takes their inherited funds and puts them into their own account. Once this is done, the funds are treated as though they were always in the surviving spouse’s own IRA. This can provide a benefit, by allowing some younger spouses to defer RMDs longer, but it can also create problems if those beneficiaries will need to take distributions of the inherited funds prior to age 59 ½. Therefore, advisors should carefully evaluate whether such a rollover makes sense before making the move.
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