The Supreme Court's decision allowing legally married gay couples to access federal benefits opens up an entirely new area of financial planning for gay couples. Everything from estate planning to Social Security to income tax returns and retirement benefits will be affected by the rulings.
Financial planning will still be complicated by the fact that individual states may continue to ban same-sex marriages -- and state benefits. That could result in a confusing array of income tax filings and legal issues for couples who marry elsewhere but choose, for work or family reasons, to live in a state that does not recognize their union.
Still, the economic benefits of the decision will be far reaching. Here are just a few of the changes that will occur.
Income Taxes
The ruling means that married gay couples can file a joint federal tax return under the "married couple" status. That could be a mixed blessing since two-income couples with high earnings may pay higher income taxes if they are married, than if they are single (regardless of whether they file a joint return or not). Under the American Taxpayer Relief Act of 2012, this penalty kicks in when each person in a two-income marriage makes more than $73,000.
But at higher earnings levels, the penalty is more severe. An unmarried couple could each make $400,000 before reaching the highest federal tax rate. A married couple pays the highest rate on combined income above $450,000. And those penalties exist, even if you file under the "married, filing separately" status.
Estate Planning
There is a huge estate tax benefit for married couples, and it will now be extended to same-sex marriages. It's called the "marital deduction," and basically it means that on the death of the first spouse, all assets can pass tax free to the surviving spouse, without being subject to gift and estate taxes.
Same-sex couples may need to make new estate plans,as a result of this ruling. That's critical if they live in a state that does not recognize same-sex marriage, because without a valid will or revocable living trust, the surviving spouse may not be automatically be entitled to a portion of the estate.
Social Security
Married couples receive significant benefits under Social Security law. Married couples earn spousal and survival benefits. Once married for ten years, a spouse can claim benefits on a former spouse's record. And when one spouse dies, the other will receive a survivor's benefit. Legal children of the married couple would be equally entitled to a survivor benefit if either parent dies before the child reaches age 18. Now, all those federal benefits will apply to same-sex couples.
Retirement Benefits
Under federal law, your spouse is automatically the beneficiary of a 40l(k) plan -- unless your spouse signs a waiver. Until same-sex spouses were recognized under federal law, each could leave 40l(k) plan assets to anyone. Now, surviving same-sex spouses will be entitled to all of the assets in a spouse's plan, under federal law, unless he or she specifically waives that right.
Also, married couples can do a "spousal rollover" of an IRA, free from estate taxes. The surviving spouse can delay withdrawing from that inherited IRA until age 70-1/2, while a non-spouse beneficiary must start withdrawing in the year after the death occurs. Legalizing these rights for same-sex spouses means that IRA can continue to grow tax deferred for the same-sex spouse beneficiary.
There are literally dozens of federal laws and benefits that will affect same-sex couples, ranging from military benefits to the prohibition against being forced to testify against your spouse. Other issues, including divorce, custody, and even who is "allowed" to marry (i.e. cousins, those under age 16), will still be determined by state legislatures.
The Supreme Court decisions acknowledge that states can determine who can legally married. Attorney John Olivieri, partner at White & Case, LLP, has specialized in giving estate planning advice to same-sex couples in New York, which legalized gay marriage in 2011. Now, says Olivieri, "Same-sex couples who are married in states that have legalized this type of union do not have to deal with the complications arising from being married for state law purposes, but not for Federal law purposes."
The personal financial impact of the Supreme Court rulings on federal same-sex marriage will certainly be life-changing for many people. And that's The Savage Truth.