Since 2003, Massachusetts no longer discriminates between same and opposite sex couples to define marriage, but under the 1996 “Defense of Marriage Act” (DOMA), the federal government does. That federal law defines marriages as the “legal union between one man and one woman.” So even legally married same-sex couples in Massachusetts are not afforded the basic privileges and favorable treatments under federal law their opposite-sex spouse peers are.
For examples, unlike opposite-sex spouses, same-sex spouses:
• cannot file joint tax returns;
• cannot use the capital gains exclusion from tax on the sale of their principal residence;
• cannot roll over their deceased spouse’s IRA or qualified retirement plan account; and
• are not entitled to the federal gift tax marital and estate tax deductions.
Same-sex spouses have a much more complicated and more expensive path to filing their taxes than opposite-sex spouses. Generally, same-sex spouses in Massachusetts will have to file differently for purposes of state and federal taxes and should seek the advice of a well-qualified tax professional who has experience with same-sex spouse filings.
Federal Capital Gains Tax
Under federal law, opposite-sex spouses can exclude from capital gains tax up to $500,000 on the sale of their home regardless of each spouse’s income. Same-sex spouses, however, are treated as single taxpayers and can only exclude half that amount, so if only one of those spouses earned income sufficient to file taxes and qualify, even if the couple owned the property together, they would only be able to exclude $250,000.
The federal Employee Retirement Income Security Act of 1974 (ERISA), which governs most employee benefit plans, preempts state law. ERISA does not define “spouse” and prior to DOMA, that was left up to state law definitions. DOMA now specifically requires all references to “spouse” under ERISA to mean only an opposite-sex spouse. Opposite-sex spouses can roll over the deceased spouse’s retirement plan distributions into another retirement plan or account and defer taxes until after the deceased spouse would have reached 70.5 years of age. Yet same-sex spouses are not entitled to tax-free rollovers and distributions, so distributions to the same-sex surviving spouse will be taxed fully as of the date of distribution.
Federal Gift Taxes
The federal tax code will not recognize same-sex spouses’ right to own bank and investment accounts jointly, so for example if they have a joint checking account, unless each spouse makes withdrawals precisely matching his or her deposits, the rest will be treated as a gift and subject to federal gift taxes on anything over the applicable exclusion amounts ($13,000 per year).
If one spouse in a same-sex couple owned property individually and later added his or her spouse to the title, unless the second spouse could prove having contributed to the value of the home, half the value will be treated as a gift and subject to federal gift taxes.
Federal Estate Taxes
If a same-sex married couple buys and owns a home together, titled in both of their names, as “tenants by the entirety” then on the death of the first of them, the property will automatically pass to the surviving spouse. The trouble is that if the surviving spouse cannot prove he or she contributed up to 50% of the fair market value of the home, the entire value of the home will be considered for purposes of federal estate tax calculations and estate taxes may be due at that time. Unlike opposite-sex spouses who are able to defer payment of estate taxes on the death of the first of them, same-sex spouses have to pay estate taxes when the first of them dies.
Other Estate Planning Challenges for Married Same-Sex Spouses
Even the most carefully designed estate plan may not be enough at times. Even if someone doesn’t want to recognize as valid the legal relationship between same-sex married spouses, when one spouse is named as legal agent for the other he or she will have the legal authority to make important financial and health care decisions for the other spouse. Unfortunately, other states, to which a same-sex couple might for example travel on vacation, might not be willing to recognize a same-sex spouse as the other spouse’s agent under a valid health care proxy or advance directive (a.k.a. living will).
Where there are children of the relationship who were conceived artificially by means of reproductive technology, or nontraditionally with at least one biological parent who is not of the relationship, it is extremely important to address guardianship issues. Also, certain family members may be more likely to challenge elements of a same-sex couple’s plan. There are things your estate planning lawyer can do to help prevent such challenges from being successful and ensuring that your wishes are followed.
If you would like to further explore your estate planning options to protect your partner or spouse, children and/or other family and friends, as well as your hard-earned assets, please call DGVE law at: (781) 740-0848.