The Supreme Court's ruling making same sex marriage legal in every state has implications on tax, estate and retirement planning. Now all legally married couples are afforded spousal and survivor benefits from the Social Security Administration and the Internal Revenue Service and will no longer need to file different state and federal tax returns or use cumbersome estate planning techniques to protect themselves and their families in times of illness or when a spouse dies.
TAXES
In the past, a same sex married couple could file a federal return as married, filing jointly, but would file either a single or head of household return if the state didn't recognize their marriage. Now, as a result of the ruling, filing statuses would match and the following scenarios apply.
*A two-income household with a significant difference in income will result in a lower overall
tax bill.
*A two-income household with more equitable incomes could result in higher taxes, due to a
higher marginal rate, phase-outs of personal exemptions and certain deductions, as well as
phase-outs for participation in certain individual retirement accounts (IRAs).
*Limitations with regard to income and federally subsidized health insurance premiums also
now exist.
*And, the marriage penalty could now apply to certain tax filers.
RETIREMENT PLANNING
Prior to the ruling, a surviving (legally unrecognized) spouse could only receive his or her deceased spouse's Individual Retirement Account by being named as beneficiary of that IRA and for the surviving spouse to create an Inherited IRA (not as a direct rollover). A surviving spouse can now be named as a beneficiary of that IRA and receive the funds as a direct rollover, which can potentially extend the life of an IRA and provide for tax deferred growth until the spouse is required to begin taking IRA distributions Additionally, such a transfer is a nontaxable event for the survivor.
SOCIAL SECURITY
Same-sex marriage is now recognized by the Social Security Administration. As a result,
*All married couples benefit from the file-and-suspend strategy, in which the higher earning
spouse can file for Social Security, suspend the receipt of those funds, and the other spouse
can file for spousal benefits immediately allowing for current cash flow and an above-market,
risk-free accrual of benefits to access at a later date.
*All married couples can enjoy the Social Security survivor benefit which allows the surviving
spouse the greater of his or her own Social Security benefit or that of his or her deceased
spouse.
*And, in the case of divorce, married couples can, after 10 years of marriage, receive 50% of
their former spouses' Social Security benefits, at no cost to the ex-spouse. Interestingly, this
applies to all ex-spouses for an individual who can simultaneously receive the same
benefit with no cost or reduction of benefits to any of the other ex-spouses.
ESTATE PLANNING
The match that lit the marriage equality "firestorm" began on June 26, 2013 when the Supreme Court ruled that Edie Windsor was entitled to be treated as any surviving spouse who inherited from the death of her spouse, Thea Spyer. The Court said that Edie shouldn’t have had to pay estate tax on her inheritance; specifically the substantially appreciated New York apartment that Thea had purchased some 30 years previous. As a non-recognized spouse, she was forced by the IRS to pay the estate tax on her inheritance, a penalty she faced because her marriage was not recognized.
A significant benefit from the ruling is that all married couples now enjoy the unlimited transfer of family wealth from one spouse to another without current taxation. Same-sex spouses may now move to the front seats on the bus and enjoy the benefit of an unlimited marital deduction from federal estate tax and gift tax for transfers. One word of caution: Beneficiary designations on file at the time of death controls who inherits an asset at death, regardless of the current status of the relationship. All beneficiary information should be confirmed to ensure that the intended recipient remains accurate since the ruling.
The current value of an estate that can pass to a surviving spouse is unlimited. As a married couple, the first $10,680,000.00 will pass to others after the death of both spouses. The limit that can pass to heirs from an unmarried person's estate tax free is $5,340,000.00. These changes significantly alter the landscape for couples of high net worth. In order to avoid estate taxes several options may be available. Considering the significance of the unlimited marital deduction, same-sex married couples might consider restructuring their insurance programs in order to benefit children or other intended heirs.
TAXES
In the past, a same sex married couple could file a federal return as married, filing jointly, but would file either a single or head of household return if the state didn't recognize their marriage. Now, as a result of the ruling, filing statuses would match and the following scenarios apply.
*A two-income household with a significant difference in income will result in a lower overall
tax bill.
*A two-income household with more equitable incomes could result in higher taxes, due to a
higher marginal rate, phase-outs of personal exemptions and certain deductions, as well as
phase-outs for participation in certain individual retirement accounts (IRAs).
*Limitations with regard to income and federally subsidized health insurance premiums also
now exist.
*And, the marriage penalty could now apply to certain tax filers.
RETIREMENT PLANNING
Prior to the ruling, a surviving (legally unrecognized) spouse could only receive his or her deceased spouse's Individual Retirement Account by being named as beneficiary of that IRA and for the surviving spouse to create an Inherited IRA (not as a direct rollover). A surviving spouse can now be named as a beneficiary of that IRA and receive the funds as a direct rollover, which can potentially extend the life of an IRA and provide for tax deferred growth until the spouse is required to begin taking IRA distributions Additionally, such a transfer is a nontaxable event for the survivor.
SOCIAL SECURITY
Same-sex marriage is now recognized by the Social Security Administration. As a result,
*All married couples benefit from the file-and-suspend strategy, in which the higher earning
spouse can file for Social Security, suspend the receipt of those funds, and the other spouse
can file for spousal benefits immediately allowing for current cash flow and an above-market,
risk-free accrual of benefits to access at a later date.
*All married couples can enjoy the Social Security survivor benefit which allows the surviving
spouse the greater of his or her own Social Security benefit or that of his or her deceased
spouse.
*And, in the case of divorce, married couples can, after 10 years of marriage, receive 50% of
their former spouses' Social Security benefits, at no cost to the ex-spouse. Interestingly, this
applies to all ex-spouses for an individual who can simultaneously receive the same
benefit with no cost or reduction of benefits to any of the other ex-spouses.
ESTATE PLANNING
The match that lit the marriage equality "firestorm" began on June 26, 2013 when the Supreme Court ruled that Edie Windsor was entitled to be treated as any surviving spouse who inherited from the death of her spouse, Thea Spyer. The Court said that Edie shouldn’t have had to pay estate tax on her inheritance; specifically the substantially appreciated New York apartment that Thea had purchased some 30 years previous. As a non-recognized spouse, she was forced by the IRS to pay the estate tax on her inheritance, a penalty she faced because her marriage was not recognized.
A significant benefit from the ruling is that all married couples now enjoy the unlimited transfer of family wealth from one spouse to another without current taxation. Same-sex spouses may now move to the front seats on the bus and enjoy the benefit of an unlimited marital deduction from federal estate tax and gift tax for transfers. One word of caution: Beneficiary designations on file at the time of death controls who inherits an asset at death, regardless of the current status of the relationship. All beneficiary information should be confirmed to ensure that the intended recipient remains accurate since the ruling.
The current value of an estate that can pass to a surviving spouse is unlimited. As a married couple, the first $10,680,000.00 will pass to others after the death of both spouses. The limit that can pass to heirs from an unmarried person's estate tax free is $5,340,000.00. These changes significantly alter the landscape for couples of high net worth. In order to avoid estate taxes several options may be available. Considering the significance of the unlimited marital deduction, same-sex married couples might consider restructuring their insurance programs in order to benefit children or other intended heirs.
RSS Feed