In one of its most important decisions of 2013 (U.S. v. Windsor), the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA), providing estate planning, income tax and other federal benefits relief for same-sex married couples. The section previously barred same-sex couples from being recognized as “spouses” under federal law, denying them from receiving benefits available to married couples. Among other things, this prevented same-sex couples from filing joint income tax returns, or claiming the unlimited marital deduction for gift and estate tax purposes, or using a spouse’s unused applicable exclusion amount (i.e., estate and gift tax exemption) on the death of the first spouse. The denial of these benefits had created anomalous and inequitable results in tax and estate planning for same-sex couples.
The Court threw out the notion of a federal definition of marriage as a union between one man and one woman. Notably, DOMA was signed into law during President Clinton’s tenure. In a close 5-4 decision, the Supreme Court now defers to the state law definition of marriage as controlling whether a couple is deemed to be married for federal benefits purposes. As a result, a same-sex marriage that is valid under applicable state law will be recognized to the same extent as an opposite-sex marriage. This would include 12 states and District of Columbia, plus two additional states in which same-sex marriage legislation is pending. By contrast, six states prohibit same-sex marriage by statute and another 29 states prohibit same-sex marriage under their constitutions. The biggest (unanswered) question is what happens if a couple is legally married in one state (where same-sex marriage is permitted) and resides in another state where it is not? Which law applies for purposes of determining whether the couple qualifies for ederal benefits?
In addition to the tax issues cited above, the repeal of Section 3 of DOMA will allow same-sex spouses (and in many cases their children and step-children) to exclude the value of employer-provided health benefits from income, take advantage of the myriad benefits available to spouses under ERISA that apply to qualified retirement plans (such as being able to roll over an inherited 401(k) or 403(b) plan balance income tax free), qualify for health care continuation coverage under COBRA, deduct alimony payments and exclude child support payments on divorce, qualify for pre-tax coverage (i.e., income tax exclusion) available for participants in flexible spending accounts, and enroll in group health plans.
Moreover, many of the benefits available under the federal securities laws that apply to spouses now apply to same-sex couples. For example, for purposes of determining whether an individual is an “accredited investor” (allowing many securities offerings and issuers to avoid securities law registration), the net worth and income of an individual in a same-sex marriage can now be combined with his or her spouse making it easier to meet the test. Also, the benefits available to spouses under the Family and Medical Leave Act now are available to same-sex couples.
Whether or not you agree with the end result of the decision, one thing is clear. Absent a federal constitutional amendment, the Congress and the President cannot define marriage for purposes of federal laws or receiving federal benefits. Only the states can, leaving open the question raised above. Section 2 of DOMA remains in effect (i.e., it was not ruled unconstitutional in the Windsor case). This section allows states to refuse to recognize same-sex marriages performed under the laws of other states. So, if a couple is married in the District of Columbia and resides in Virginia (where marriage is defined under the Virginia Constitution as a union of a man and a woman), will their marriage be recognized under Virginia law for federal or state benefits purposes? Clearly, Virginia employers are now allowed to offer private insurance coverage for employees’ same-sex partners, under legislation signed into law by Governor McDonnell in 2010; this legislation only deals with a small subset of the overall issues affecting same-sex couples. Only time will tell how the Virginia and other states as well as the courts deal with the changing tide involving same-sex marriages.