You may have noticed that Facebook is aflutter this week with red boxes containing two pink horizontal parallel bars (an equal sign) and wondered “why now is the gay marriage debate picking up steam?” The reason is chiefly due to a lawsuit filed by Edith Windsor, which has made its way to the United States’ Supreme Court and is currently being argued there. At issue is the constitutionality of the Defense of Marriage Act commonly referred to as DOMA.
As has always been the case, we don’t do politics at the Insurance Pro Blog, but we figured in the interest of financial literacy and education, this was a wonderful time to discuss some of the technical details surrounding financial benefits enjoyed by married couples vs. non-married couples and individuals.
First, some History
The Defense of Marriage Act was signed into law in September of 1996 by then President Bill Clinton. It was a relatively popular bill and passed both houses of Congress with impressive margins for a congressional bill. DOMA sought to define marriage at a Federal Level as a legal union between one man and one women, it further defined the term spouse as being a person of the opposite sex of their married partner.
Practical Application for Financial Planning
The applicable results of DOMA on same-sex couples is the fact that while individual states may recognize their union as a legal marriage et. al. The Federal Government does not. At first this might not sounds like a big deal, but diving a little deeper into the circumstances, we quickly find there are a whole host of benefits afforded to married couples that are not extended to someone whose marriage is not recognized at the federal level. In fact, the Government Accounting Office has identified 1,100 benefits that are contingent on marital status (i.e. if the marriage was federally recognized it would be afforded wedded same-sex couples).
United States v. Windsor, one such example
The case currently being heard before the Supreme Court was filed originally in the State of New York by Edith Windsor. Windsor filed the suite when her wife (as recognized by NYS law) Thea Spyer died and Windsor found herself owing over $300,000 in federal estate taxes.
The U.S. Federal Estate Tax allows for an unlimited spousal deduction (think transfer), which would have avoided the tax liability faced by Windsor had her marriage been recognized at the federal level. However, due to DOMA’s definition of marriage, the marriage is not recognized and the spousal privilege regarding estate taxes is not allowed. Windsor has taken issue with this, and is seeking to find the definition DOMA places on marriage (found in section 3 of the Act) as unconstitutional in direct conflict with the Fifth Amendment.
Who is Right?
That’s not for us to say. And while we all have an opinion to some degree on this, we’ll leave that at home. Instead we’ll accept that neither Brantley nor I make the rules, we just follow them. And I’ll take the time for the rest of this article to highlight the planning aspects of DOMA when it comes to those whose marriage is not federally recognized.
Keep in mind this isn’t just about same-sex couples. The rules here can be extended to those who have chosen for whatever reason not to marry.
Things you don’t get when the Fed’s don’t think you’re Married
Besides the not so obvious but now apparent Federal Estate Tax problems, here are other items those who aren’t married don’t get. This is by no means an exhaustive list, but it’s some of the major financial planning considerations:
- No married filing status. In some cases, there may be a head of house hold qualification, but for the most part, filing single is what will happen. This results in not so insignificantly higher income tax liability
- Health Insurance tax implications. Just like non-married heterosexual couples where one member has health insurance that can cover the girlfriend or boyfriend, homosexual couples continue to incur taxes on the income realized by the insurance benefits even after marriage.
- Federal Pensions limited benefits. This doesn’t apply to private sector, state, or local pension benefits, but federal pensions do not extend to a same-sex partner after the death of the pensioner
- Limited social security benefits. There are no survivor benefits paid under social security, nor will social security typically pay the lump sum death benefit to the surviving spouse of a same-sex marriage. To be clear, the lump sum death benefit (all $255) does get paid, but the SSA will attempt to locate a federally recognized next of kin. Most people ignore this, since funeral homes have become so efficient at getting this money signed over to them
- Different military benefits. Married same-sex couples do not receive the same benefits heterosexual couples do for housing benefits and legal representation.
- IRA eligibility: Because IRA’s have an earned income requirement to open and contribute, a non-working spouse in a same-sex marriage cannot open nor contribute to an IRA
- ERISA benefits: ERISA (the Employee Retirement Income Security Act) has a few default protections for married couples. A big one is the default spousal beneficiary for qualified retirement plans (e.g. 401k plans), this doesn’t happen if your marriage isn’t federally recognized.
You Can Complain, or you can Prepare
Again, I’m not interested in having a debate on whether or not DOMA is constitutional, moral, or otherwise. Where ever you fall on this debate is your business. But if your situation is effected by DOMA, I’d strongly encourage you to ensure that you have planned to address the potential complications DOMA poses. Hoping that things will change to make your life less problematic, or refusing to deal with them because you think it’s unfair, is imprudent no matter the circumstances.