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Now that 2014 has officially arrived, and we close the books on 2013, one could certainly be forgiven for engaging in hyperbole regarding what a banner year this past one has been. After all, the S&P 500 charged through December to end the year up 29%, the best annual performance since 1997 and the halcyon days of the first tech bubble1. In November, the unemployment rate in the U.S. finally dipped below 7% for the first time since 20082, prompting the Federal Reserve Board to begin the dreaded tapering of their bond-buying program; a move which resulted not in an equity market sell-off as so many had feared, but in a strengthening of the current rally. Even Congress wanted to get in on the good vibes at the end of the year, coming together to pass a budget deal for the first time since 2011. While all of these accomplishments may or may not signal actual, sustainable trends, it seems likely that for one segment of the population, same-sex couples, 2013 will be regarded as a real game-changer when looked back at in the years to come.
This past year, support for the legalization of same-sex marriage reached an all-time high with nearly 60% of the country in favor, according to one ABC News/Washington Post poll3. We saw two professional athletes, Robbie Rogers in the MLS and Jason Collins in the NBA, come out publicly, marking the first time a professional athlete has come out in the prime of his career. During 2013 nine states were added to the list where same-sex marriage is legal, bringing the total to 18, plus the District of Columbia. But it was the Supreme Court that gave the biggest boost to the movement for marriage equality for same-sex couples with its landmark ruling in United States v. Windsor, striking down a portion of the Defense of Marriage Act (DOMA) in June. The court also declined to rule on the challenge of California Proposition 8, kicking it back down to a lower court, and effectively re-instating same-sex marriage in the state. The ramifications of these two rulings are not fully known and probably won’t be for many years, but they are far-reaching, and may just be the most important legislation, certainly from a financial and estate planning standpoint, that same-sex couples have yet seen.
In the immediate aftermath of these two decisions, federal regulators and the Department of Defense quickly followed up with some practical guidance, signaling the influence of these rulings. The DOD announced its plan to extend spousal and family benefits to all uniformed service members and Department of Defense civilian employees, regardless of sexual orientation, as long as they provide a valid marriage certificate. Next, federal regulators issued the following rulings/releases:
- IRS Revenue Ruling 2013-17-affirmed that same-sex couples who are legally married will be treated as such for all federal tax purposes, regardless of the law in their state of residence.
- DOL Technical Release No. 2013-04-applied similar principles to employer pension and welfare plans subject to ERISA.
- RS Notice 2013-61-provided guidance on claims for refunds of tax overpayments by same-sex married couples.
Obviously the Windsor decision is important for many reasons, but here are some of the practical ramifications for same-sex couples in terms of retirement and estate planning. To begin with, upon a surviving spouse’s death, the estate will be subject to the 40% estate tax only to the extent that that estate exceeds the combined exemption. In addition, married same-sex couples may now:
- Make unlimited transfers to each other, either during life or at death, without being subject to federal gift or estate tax.
- Combine a decedent spouse’s unused estate tax exemption with the surviving spouse’s estate tax exemption.
- File joint returns to take advantage of the annual exclusion from gift tax, allowing the wealthier spouse to make tax-free transfers to any third party up to $28,000 (couples must file a gift tax return to elect “gift splitting”).
On the retirement plan side, same-sex spouses must now be treated as spouses for all purposes, including qualified domestic relations orders, survivor benefits, and consent requirements for plan distributions. While more guidance from regulatory agencies will surely be coming, employers should:
- Thoroughly audit benefit plans currently in place (e.g. all pension, profit sharing, cafeteria and group health plans) to determine where changes are likely to be needed
- Summarize and communicate the extent to which benefits offerings will change as a result of Windsor and the recent IRS and DOL regulatory pronouncements.
- Review administrative procedures and forms to identify potential areas for revision (i.e. distribution spousal consent and beneficiary designation forms).
While employers will most likely wait to alter their plan documents until they receive further guidance from the IRS and DOL, they should immediately ensure that all legal marriages are recognized in the administration of the employee benefit plans they sponsor.
As a practical matter, any plan sponsors who may have same-sex employees should consult with their tax professionals to make sure they are in compliance with the new guidelines going forward and are staying on top of any new developments which may affect their plans.
Likewise, individual same-sex clients should consult with their providers (including tax professionals, estate planning attorneys and financial advisors) to ensure that they are taking full advantage of the new rules and to see if changes need to be made to their financial and estate plans.
Certainly the fight over marriage equality is far from won, and we are likely to see the pendulum swing back and forth many times in the coming months and years, but this past year may have been the most profound move forward, at least from a financial standpoint, that same-sex couples in this country have yet enjoyed.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor