On June 26, 2013, the Supreme Court’s decision to rule Section 3 of the Defense of Marriage Act (DOMA) “unconstitutional” created a dividing line for integrated financial planning. Marriage for same sex couples is now a reality, even though the reality is still more of an idea or direction than a fait accompli. Nevertheless, the Supreme Court’s decision has major ramifications for same sex couples in a number of different areas, including military benefits retirement benefits, Social Security, and income and estate tax.
While monumental, the court’s decision left many questions unanswered; the incomplete nature of the decision created a multitude of planning issues. As a result, planners need to perform triage with their same sex clients. This article will provide planners with a basic background of the planning issues, practice tips to assess the situation, and a list of resources that that will be beneficial to their practice.
Same sex married couples now have a large number of topics that need to be addressed: are they legally married? This isn’t as simple as a yes or no answer. What Federal programs are they eligible to participate in? How have their existing integrated financial plans changed?
A first step for any financial planner is to review DOMA. The act is short with only 3 sections; what planners need to know is that Section 3 Definition of Marriage was struck down:
“In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word `marriage' means only a legal union between one man and one woman as husband and wife, and the word `spouse' refers only to a person of the opposite sex who is a husband or a wife.”
Section 2 Powers Reserved to the States was left unchanged—and this is where the incomplete nature of the decision occurred. The Supreme Court, by their ruling and by leaving Section 2 unchanged, left each state with the power to determine who is married and who is not married, creating an environment fraught with peril for same sex married clients.
Clients, financial planners, and tax advisers are also confused by this incomplete decision. Literally, on June 26, 2013, clients called me saying they were off to New York state to get married. I had to break the news to them that they lived in a state that neither recognizes same sex marriage nor brings any financial planning benefits. Quite the contrary, getting married in New York may put them at a planning disadvantage because of the conflict between state and federal laws.
Financial planners need to be more than familiar with the issues created by the decision of the Supreme Court. The matters are complex and cover a wide continuum of issues. In addition, planners will need strong interpersonal skills to interact with the couple. For example, our firm’s same sex clients have been on an emotional roller coaster ride. Except for those who reside in a state that recognizes same sex marriage, the ride will continue.
Financial planners need to begin the process of triage. The AICPA’s Personal Financial Planning section recently sponsored a webcast (pre-IRS guidance) I co-hosted with Jonathan Horn, CPA, CGMA. Jonathan suggested that same sex clients now fall into 3 broad financial planning categories:
- Category A: The client’s marriage was celebrated in a state that recognizes same sex marriage and the client resides in a state that recognizes same sex marriage.
- Category B: The client’s marriage was celebrated in a state that recognizes same sex marriage and the client does not reside in a state that recognizes same sex marriage.
- Category C: The client’s marriage was not celebrated in a state that recognizes same sex marriage and the client does not reside in a state that recognizes same sex marriage.
What you’ll want to do is determine which of the three categories your clients occupy and then document the file with that category. Next, schedule a meeting to discuss the opportunities and challenges available.
For example, “A” clients will require a new integrated financial plan. “B” clients will require a discussion about relocation to a jurisdiction that recognizes same sex marriage, or if they have multiple properties, does one of those states recognize same sex marriage? “C” client meetings will be more of an update. Based on present facts and circumstances, there is not much that may be accomplished for “C” clients at present.
Keep in mind this list of topics is certainly not comprehensive, but it’s a start. Remember that no one knows your clients quite as well as you do—if you have worked with them for any period of time. Rely on your own experiences with each couple and help put their fears at ease by explaining their options. An example of a hypothetical same sex couple will illustrate some of the issues:
Alex and Pete, a same sex couple, have resided in the state of Massachusetts since 1996. They were legally married in Massachusetts on July 5, 2004. In 2009, Pete dies and Alex files for benefits from Pete’s employer and the Social Security Administration (SSA). The benefit claims were denied and DOMA was cited as the reason. Now, due to the recent Supreme Court decision, Alex has the opportunity to file for, and receive, Qualified Pre-Retirement Survivor Annuity benefits and Social Security survivor benefits, potentially dating back to 2009.
Presently, the resources available to financial planners are limited, but continually changing. The most critical updates are reviewed below. Please revisit the sources because they change frequently.
Social Security: On August 13, 2013, the SSA posted the following statement: “In the coming weeks and months, we will work with the Department of Justice to develop and implement additional policy and processing instructions. If you believe you may be eligible for Social Security benefits, we encourage you to apply now to protect you against the loss of any potential benefits. We will process claims as soon as additional instructions become finalized. The Social Security benefits are determined by where you were ‘domiciled when you filed for benefits.’"
Department of Defense: Benefits for same sex spouses are available to those who can show a valid marriage license—legally recognized in the jurisdiction where it was celebrated. Service members may be granted special leave in order to be married in a state where same sex marriage is legally recognized. Service members should report their spouse as a dependent as quickly as possible; there is no deadline and this is a best practice.
Department of Labor/ERISA: Spousal status is determined under the laws of the state in which the employee resides.
IRS: Same sex couples who are legally married in jurisdictions that recognize same sex marriage will be treated as married for federal tax purposes. Guidance is provided in Revenue Ruling 2013-17 released on August 29, 2013. Bob Keebler covered this ruling and more in a recent podcast.
The confusion created as a result of the incomplete decision by the Supreme Court will continue for quite some time. Financial planners need to meet as soon as possible with their same sex clients and decide which of the three categories is applicable to their situation. Once a decision is made as to the category, a plan of action can be written, and consulting with the clients’ other advisers is critical.
Perhaps, the way we go about planning is also changing. Many practitioners, myself included, mastered our skills decades ago in a stable planning environment. The financial planning environment contained the usual tax law changes that were mostly predictable in their occurrence. When they were codified, planners were already fully informed and ready to supply solutions and remedies to the changes. Today the changes are coming much too quickly, are not fully formed, and have implications that are far reaching.
About the Author
Thomas N. Tillery, MA, MSFS, CFP®, CLU®, ChFC®, LUTCF, CRPC®, is a financial planner and investment adviser representative with Paraklete Financial, Inc. in Kennesaw, Georgia. Paraklete Financial provides comprehensive financial planning services without asset management or product sales. Contact him at firstname.lastname@example.org.
Resources from the AICPA on DOMA Decision
The Supreme Court’s June 2013 decision regarding the Defense of Marriage Act of 1996 (DOMA) and California’s Proposition 8 impacts a number of issues, from Social Security benefits to retirement planning and income and estate taxes. Because the preparation of a sound financial plan continues to be complex, CPA financial planners and tax practitioners need to be prepared to advise their relevant clients on the financial planning and tax implications facing same sex couples legally married in jurisdictions that recognize their marriages. The AICPA offers resources to PFP/PFS members to help them communicate with, and plan for, their relevant clients, including webcasts, podcasts, Forefield alerts, client communications, and more at aicpa.org/PFP/DOMA.