The Windsor decision overturning Section 3 of the Defense of Marriage Act ("DOMA") was a huge win for same-sex couples who can now finally enjoy the same federal government benefits as heterosexual couples. While much has been written about the positive impact of the landmark case, there are some negative consequences of which same-sex couples should also be aware.
Overview of Windsor
On June 26, 2013, the United States Supreme Court issued a decision in United States v. Windsor that significantly changed America's legal landscape.1 Thea Spyer and Edith Windsor were married in Ontario, Canada in 2007. In 2009, Spyer died; Windsor had been named as the executor and sole beneficiary of her estate. At the time, the couple was living in New York, which recognized the validity of their marriage pursuant to New York law. While their marriage was recognized at the state level, DOMA prevented the federal government from recognizing their marriage as valid under federal law. Section 3 of DOMA provided that the word "marriage" meant only a legal union between one man and one woman as husband and wife, and the word "spouse" referred to only to a person of the opposite sex who is a husband or wife. With these definitions in place, the IRS's estate tax marital deduction available to heterosexual spouses was not available to Windsor. Due to the non-recognition and ineligibility for the marital deduction, Spyer's estate was required to pay more than $360,000 in estate taxes. After paying the taxes, Windsor sought a refund (and justice) in the United States District Court for the Southern District of New York. The District Court ruled in favor of Windsor, finding Section 3 unconstitutional. The United States Court of Appeals for the Second Circuit agreed. The Supreme Court, in a highly anticipated decision, held that Section 3 did indeed violate the Due Process and Equal Protection Clauses of the U.S. Constitution. The Court emphasized that its holding does not apply to civil unions or legal domestic partnerships and is confined to "lawful marriages," meaning same-sex marriages legally recognized by a state.
While unquestionably a victory for same-sex spouses, Windsor is far from establishing equality and uniformity for all same-sex couples. In fact, in the estate planning realm, Windsor may provide more questions than answers for those seeking to assert their newly-found federal rights. In addition, not every change that Windsor ushers in will be beneficial - as any heterosexual couple knows - there are both pros and cons to having a marriage legally recognized.
Post-Windsor Chaos
Following the Supreme Court's decision, it was unclear whether federal marital benefits would be made available to a married same-sex couple living in a state that does not recognize same-sex marriages, such as Kentucky. The answer depended on whether federal agencies would adopt a "place of celebration" rule, which would provide federal benefits to same-sex couples as long as the marriage was valid where it was performed (and regardless of where the couple currently resides), or a "place of domicile" rule, which would make benefits only available if the marriage is recognized where the couple currently resides. Each federal agency is free to adopt its own rules governing federal benefits, which provides further uncertainty in the wake of Windsor.
On August 29, 2013, the United States Department of the Treasury and the Internal Revenue Service announced that it will rely on the place of celebration rule for purposes of administering all federal tax laws, including those pertaining to income, gift and estate taxes.2 In contrast, the Department of Labor announced that it will follow the place of domicile rule for family and medical leave purposes.3 The Social Security Administration announced that it is "processing some widow's and widower's claims by surviving members of same-sex marriages and paying benefits where they are due,"4 although no official policy has been established and the Administration is still working with the Department of Justice to determine what should be done regarding survivor benefits for those who live in a state that prohibits or does not recognize same-sex marriages.5
It is no easy feat determining what benefits same-sex spouses are now entitled to if they are living in a non-recognizing state; estate-planning attorneys, tax advisors, and human resource managers have their work cut out for them when it comes to making sense of the Windsor aftermath.
The Other Side of the Coin
Much has been written about the benefits that same-sex couples can now enjoy: tax-free employer-provided health insurance; immigration rights; COBRA eligibility; health benefits for military spouses; and, the estate tax benefits that Edith Windsor fought for, just to name a few. These new rights should be celebrated, but the momentous ruling should also encourage cautionary forethought and planning. The less-advantageous changes should be discussed with same-sex couples who seek professional advice. Below are just a few of the potentially adverse consequences:
The "Marriage Penalty"
Same-sex couples will now be required to file federal income tax returns as "married filing jointly" or "married filing separately." In some circumstances, couples filing jointly will incur higher taxes than they would have to pay if they could file with a single status. This is because the same tax rates for a married couple are often imposed at a monetary amount that is far below twice the amount for a single filer. In 2013, for example, the 39.6% tax rate kicks in for a single filer when they earn more than $400,000; for a married couple, however, that same tax rate applies when the couple earns a combined $450,000 - only $50,000 more than the single threshold.
ERISA
With regard to any retirement plans that are covered by the Employee Retirement Income Security Act of 1974 (ERISA), the spouse of a participant in such a plan may automatically be a beneficiary of the retirement plan. Accordingly, participants in an ERISA-covered plan (e.g., a 401(k) plan) who wish to designate someone other than his or her same-sex spouse as a beneficiary must now obtain spousal consent to make such a designation effective. Prior to Windsor, consent was not needed from a spouse of the same sex.
Social Security Income
Eligibility for Supplemental Security Income benefits is dependent on one's "deemed-income." Deemed-income is the income of a spouse, parent, or sponsor with whom you share a home. As a result, an individual who previously qualified for SSI may now be ineligible due to the income of their same-sex spouse that is computed to them.
Medicaid Long-Term Care Assistance
Like SSI, Medicaid eligibility may now be hampered for some same-sex spouses. If a spouse is in need of a nursing facility and has applied for Medicaid, the income and resources of both spouses are considered. Medicaid provisions allow an individual in need of care to transfer assets to his or her spouse, so that the spouse may maintain a certain level of income and resources, despite the high costs associated with long-term care. However, if the couple's marriage is not recognized, such a transfer would trigger penalties and delay eligibility.
Medicaid programs are run by the states, but partly funded by the federal government. This unique relationship prompted the Center for Medicare and Medicaid Services to issue guidance stating:
[W]e are permitting states and territories to adopt a different same-sex marriage recognition policy if they do not recognize same-sex marriages consistent with their laws. Under this approach, with respect to Medicaid...a state is permitted and encouraged, but not required, to recognize same-sex couples who are legally married under the laws of the jurisdiction in which the marriage was celebrated as spouses for purposes of Medicaid...
Thus, state agencies will have to determine on an individual basis whether they follow the place of celebration rule for Medicaid purposes. The determination will affect how couples should apply and prepare for long-term care funded with Medicaid monies.
FAFSA
The Free Application for Federal Student Aid ("FAFSA") will now take into consideration the income of a same-sex spouse to determine eligibility for Stafford, PLUS loans, Pell Grants, et cetera. In addition, private institutions may follow suit and begin to consider same-sex parents' income when making financial aid determinations.
Conflict of Interest Rules
An individual's financial interests are now imputed to a same-sex spouse for purposes of federal conflict of interest regulations. This means that information regarding the financial interests of the same-sex spouse of a federal employee who is subject to public or confidential filing requirements can now be collected.
This list is not exhaustive - there are undoubtedly many more ways in which same-sex couples will discover marriage recognition is not always beneficial. But, for those who have longed for marriage equality, taking the good with the bad is a small price to pay.
What Now?
If you are a Kentucky estate planning attorney, you should be prepared to tackle questions from same-sex couples about their benefits and rights after Windsor - despite Kentucky's non-recognition of same-sex marriages. Couples who legally married elsewhere but now reside in the Commonwealth will not receive any state benefits or obligations, but will be subject to the federal-level changes. Here are some simple things you can do to help same-sex couples seeking legal advice in the wake of Windsor:
- Suggest that a same-sex couple have independent counsel so that their individual interests can be adequately represented.
- Explain that the Windsor decision leaves many things uncertain and it will take time for agencies to catch up with the ruling. Likewise, state laws (like intestacy laws) may be unaffected by the ruling.
- Review and complete all beneficiary designation forms - some forms may require special authorization to change the beneficiary to a non-spouse.
- Discuss the benefits of a prenuptial agreement if the couple is contemplating marriage. If a legally married couple moves to a non-recognizing state, then divorce is not an option in that state because the marriage is not recognized in the first place. This can create a legal conundrum, followed by lengthy proceedings. A prenuptial agreement can sort through the assets of each individual beforehand and specify how they should be divided in the event the marriage fails.
- Urge clients to contact a tax advisor about the possibility of being entitled to a refund of income, estate or gift taxes paid during the last three years.
Windsor brought a wave of change to federal law. Deepak Chopra said, "All great changes are preceded by chaos." After examining the effects of Windsor, one might argue that great changes often proceed with chaos. Until the states and federal agencies have time to catch up to the landmark decision, it is the estate planning attorney's responsibility to advise same-sex married couples to the best of our ability, with the same dedication and attention that has been afforded to heterosexual couples for so long.
1 United States v. Windsor, 570 U.S. __, 133, S.Ct. 2675 (2013).
2 IRS Revenue Ruling 2013-17 (2013).
3 Fact Sheet #28F: Qualifying Reasons for Leave under the Family and Medical Leave Act, August 2013.
4 Statement of Carolyn W. Colvin, Acting Commissioner of Social Security on New Payments to Same-Sex Married Couples, December 16, 2013.
5 Social Security Administration FAQs, last modified December 30, 2013, https://faq.ssa.gov/link/portal/34011/34019/Article/3547/Do-I-qualify-for-benefits-if-I-live-in-a-state-that-prohibits-or-does-not-recognize-same-sex-marriages-or-other-legal-same-sex-relationships-or-has-its-own-Defense-of-Marriage-Act-law.
