How Same-Sex Finances Change After Supreme Court Rule

How Same-Sex Finances Change After Supreme Court Rule

Wedding vows taken by same-sex couples will now mean a bigger break for their finances.

Thanks to a ruling by the U.S. Supreme Court that struck down the 1996 Defense of Marriage Act, all married citizens will now have access to federal marriage benefits previously reserved for opposite-sex couples.

“The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and injure those whom the State, by its marriage laws, sought to protect in personhood and dignity," Justice Anthony Kennedy wrote in the ruling announced Wednesday.

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The Supreme Court also ruled Wednesday on Hollingsworth v. Perry, which will likely make same-sex marriage legal in California once again. But "the decision in the DOMA case will have a much clearer and more immediate practical effect," says Margaret Russell, professor of law at Santa Clara University in Santa Clara, Calif.

What the Rulings Mean for Benefits

The issue of DOMA's constitutionality was brought to the court in Windsor v. United States. Edith Windsor originally filed the suit after she was charged $363,000 in estate taxes following the death of her wife because same-sex couples previously did not qualify for the federal tax exemption available to opposite-sex couples.

In accordance with the court's ruling, the 40% tax on estates over $5.25 million, which originally cost Edith Windsor, will now be a thing of the past for same-sex couples.

At least 82,500 gay couples have wed in states that allow it since same-sex marriage was first legalized in Massachusetts in 2004, according to The New York Times.

Among the other benefits that will be extended to same-sex couples in states that allow them to marry is the ability to file a joint income-tax. By filing together, the spouse who earns less will qualify the couple to be included in a lower tax bracket, meaning big savings for couples with disparate incomes.

RELATED: What's Your Tax Bracket? 

Exemption from the gift tax could also be a boon for same-sex couples. Under DOMA, same-sex couples were subject to a $5.25 million lifetime gift limit, to which any transfer of funds over $14,000 was considered a contribution. Anyone who gives an amount above this cap is charge 40% in gift taxes—but same-sex couples will now be able to gift to their spouses freely without this concern.

RELATED: Estate Planning for Same-Sex Couples: What You Need to Know

Survivor annuity coverage under pension plans, including both qualified joint and survivor annuity and qualified pre-retirement survivor annuity, will pay out to same-sex spouses as well, says Todd Solomon, a partner in the Employee Benefits Practice Group at McDermott Will & Emery.

Same-sex spouses will also be considered the automatic beneficiaries for their partners' 401(k) plans unless the partner names another beneficiary approved by the spouse, he says.

With access to these benefits newly available, same-sex couples will have more incentive to move to a state in which same-sex marriage is legal.

Many couples will enjoy newfound health care and death benefits following the ruling. Same-sex couples can now be covered by a partner's employer-sponsored health insurance plan without having to pay a federal income tax. Same-sex spouses will also qualify for Social Security survivor benefits and for Family and Medical Act leave, Solomon says.

Though independent health plans are not required to provide spousal benefits, those that do will presumably no longer be able to deny coverage to same-sex spouses, Solomon says.

RELATED: Dos & Don'ts of Estate Planning

Financial Questions Remain

However, the court's decisions still leave some financial questions left unanswered. It is unclear which rights will be available to couples who move to states in which same-sex marriage is not legal, Solomon says.

With access to these benefits newly available, same-sex couples will have more incentive to move to a state in which same-sex marriage is legal. To complicate matters, same-sex couples may only be able to be divorced in the state in which they were married.

The court's ruling "is not a broad decision on the right to marriage at all, it only applies to already married couples," Russell says, adding that a portion of the majority decision recognized that jurisdiction over marriage has traditionally belonged to the states.

The Supreme Court could have used Hollingsworth v. Perry to levy a decision on a civil right to marry, potentially legalizing same-sex marriage nationally. Instead, the Supreme Court decided that opponents of same-sex marriage didn't have the right to defend Proposition 8 in federal court after an appeal had been refused.

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For California, "I don't think that marriages licenses will be available immediately, but the path was set by today's decision for that to occur," Russell says.

She says she believes that the current Supreme Court won't address the issue on a national level again in the near future, though polls show a majority of Americans now support same-sex marriage.

RELATED: How Does Marriage Impact Your Finances? Tax Benefits and More

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