Some of the frequently asked questions that my clients have asked are listed below.
How do we handle our individual, non retirement, assets?
The first thing to remember is that the Defense of Marriage Act (or DOMA) is still in force at the federal level. This means that the federal government does not recognize gay and lesbian marriages; even if they're legal at the state level. The Supreme Court is currently weighing a case that could impact the legality of DOMA and its use going forward. Until a decision is rendered, you may want to continue treating your finances the same as you do today.
If you decide to make a joint bank or investment account, remember that anything added to that account may be withdrawn by your partner/spouse. Funds added to joint accounts are considered gifts upon withdraw by the other party and could trigger federal gift taxes. Gift taxes may be due if more than $14,000 is passed in a given year to someone who isn't a legally recognized spouse by the federal government. For example, if you add $100,000 to an account and your partner doesn't add anything, then any withdraw by your partner is considered a gift by you. If your partner withdraws in excess of $14,000 during the course of a year, federal taxes may be due.
If you add your partner/spouse to the title of your home or purchase a home together, keep in mind that anything added above a $14,000 value by one partner in excess of what the other partner has contributed, may be considered a federally taxable gift. For example, let's assume that you own a home and want to add your partner on the title. Half of the equity that you have in the house may be considered a taxable gift to your partner/spouse.
Until your marriage is recognized by the federal government, I highly recommend that you track all contributions to jointly owned assets. This could be cash or investments added to a joint account, down payments on a house, and/or funds used for home remodeling expenses. The tracking could help protect you in the event of an audit or to show proof of contributions to assets when completing estate taxes.
What about taxes?
I recommend that you see your CPA regarding how to handle your state income tax filings because every state is different. Maryland's state income taxes take the information from your federal returns to determine the state taxes due. Because you cannot file jointly at the federal level, it's unclear how gay/lesbian married couples will be able to file joint state income taxes. Maryland appears to be waiting for the Supreme Court's ruling on DOMA before deciding how to handle income tax filings.
Because of DOMA, there are NOT any changes to federal income tax procedures. This means that a gay/lesbian married couple cannot file joint federal income taxes.
What happens if one of us dies?
If you live in a state where your marriage is recognized, the courts may provide the same beneficiary recognition and probate procedures as they would for a traditionally married couple. This means that in many cases, your partner may be the default primary beneficiary for your estate if you do not have a Will or other beneficiary/asset transfer arrangements in place. Your spouse should also be the primary person to make medical decisions on your behalf if you are unable to do so. An attorney will be able to provide better guidance on what rules apply for your state.
If you live in Maryland, your estate may be subject to a 10% inheritance tax. This tax may be waived for receipt by a spouse by not by a partner. Being married and living in Maryland at the time when one of you passes away could save the survivor a fair amount in state inheritance taxes.
Again, due to DOMA, federal estate and income tax will continue to apply as though you are an unmarried couple. While a married couple is typically allowed to gift assets without having to pay taxes, you will not enjoy that same privilege. The survivor may still pay federal estate and income taxes after one of you passes away. I recommend that you have an estate planning attorney work with you to draft an estate plan.
In the event we divorce, what should we know?
Court proceedings should provide a path to separate assets just as they would for any married couple. However, the courts will only have these procedures in place should you divorce in a state that recognizes your marriage. If you move to a state that does not recognize your marriage, you may find that you cannot legally divorce. Remember, if you cannot divorce, you cannot get remarried (among other complications that may arise).
Will we receive survivorship Social Security benefits?
If one of the spouses in a traditional married couple passes away, the survivor may be entitled to some additional Social Security benefits. Because of DOMA, these same benefits would NOT be available to the survivor in a gay/lesbian marriage.
Unfortunately, the same answer would apply to the federal CSRS and FERS pension plans.
Just because marriage may be legal where you live, it does not mean that all of the financial inequalities that exist will go away. I wish that I had better news or could provide simplified guidance, but until DOMA is struck down or taken out of our federal system, financial inequalities will continue for gay and lesbian couples.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
