Gay Marriage Ruling Brings New Planning Choices

BEYOND its psychological and political impacts, the Supreme Court ruling last June that married same-sex couples were entitled to federal benefits and tax advantages is prompting many to rethink their financial arrangements.

Financial advisers of such couples say their clients are looking especially into whether to amend old income tax returns, how to alter their estate plans and which partner should officially own their investments or vacation home, if not both. Retitled assets are seen as the most likely changes, although few couples have acted yet.

While the ruling in United States v. Windsor striking down the 1996 Defense of Marriage Act will probably cut the federal taxes of such couples in most cases, the choices before them may not be as clear-cut as they expect.

''You have a whole range of new tax-reduction options that you didn't have before,'' said Bruce Hoffmeister, a senior financial planner at Wilmington Trust, a wealth management firm based in Wilmington, Del.

The ruling means that legally married same-sex couples must be treated the same as heterosexual married couples under federal laws pertaining to income and estate taxes, pensions and the like.

But much remains unsettled or unclear regarding state residency. Gay couples are still subject to the state tax laws where they live, which may not grant the same legal and financial rights. This is particularly a problem for residents of the 27 states that have a state income, estate or inheritance tax and do not treat same-sex marriage, domestic partnerships or civil unions the same as heterosexual marriage for tax purposes, according to the Human Rights Campaign, a major lesbian, gay, bisexual and transgender advocacy group.

''We want to remind people that, as much as there's this great advance with federal recognition, we still have a patchwork of state laws,'' said Brian Moulton, the organization's legal director.

For long-term couples, an important question is whether to redo their last three years' federal income tax returns and file jointly rather than as individuals, as allowed under rules issued by the Internal Revenue Service in August to carry out the court ruling.

The way the math works, experts say, joint filing is usually better for people with a big difference in incomes, but two people with similarly high incomes will probably hit steeper tax brackets faster when they pool their returns. A good number of same-sex couples would seem to fit that second definition, since women earn only about 80 percent of what men do, on average, creating an income imbalance in heterosexual couples. In contrast, two men or two women would be more likely to have similar earnings.

But financial advisers like Mr. Hoffmeister say that generalization doesn't always hold true. For instance, one spouse may be a stay-at-home parent.

Other factors also affect the calculation. If a much wealthier person gave the partner an asset that was then sold, the second partner, filing as an individual, probably paid lower capital gains tax on the increased value than the couple refiling jointly would do now, suggested Ross Levin, president of Accredited Investors, a wealth management firm in Edina, Minn. So amending the return would mean an increased tax bite.

On the other hand, if one spouse had been covered under the other's employer-sponsored health insurance, the employee had to pay tax on the ''imputed value'' of that coverage, so refiling could bring a refund.

The biggest risk is that once a couple has brought the old filings to the attention of the I.R.S., ''it is possible that those returns could be reviewed and audited,'' warned Shari A. Levitan, a partner at the New York-based law firm Holland & Knight, specializing in high-net-worth clients. ''They might choose to let sleeping dogs lie.''

Same-sex couples will also be able to reduce or even eliminate federal taxes on estates and gifts. Nonspouse beneficiaries pay tax on property above certain minimums, currently $5.25 million for estates and $14,000 a year for gifts.

''Now you don't have to create strategies and implement transactions that are complicated, to transfer assets to your spouse,'' said Georgiana J. Slade, a partner in the New York office of Milbank, Tweed, Hadley & McCloy who specializes in trusts and estates.

Before Windsor, one common tactic to avoid estate taxes was for the wealthier spouse to buy a term life insurance policy listing the other as the beneficiary. As long as the annual premiums were less than the gift-tax limit, the second spouse could inherit the benefit tax-free, Ms. Slade said. However, the couple was spending thousands of dollars a year on the premiums.

Nevertheless, couples might want to think twice before transferring legal ownership of assets.

''If you have a spouse who has bad credit issues,'' Mr. Hoffmeister said, ''you may have an issue whether you can qualify for credit in both names.'' This could be a problem in buying a new home, he said, and in adding one spouse's name to a house that the other spouse had previously gotten a mortgage for.

Furthermore, when one spouse dies, an heir whose name is not included on a financial asset that has accumulated long-term value may actually pay lower capital gains taxes, when the asset is sold, than would an heir who co-owned the asset, according to Mr. Levin. That is because a nonowner would calculate the value of the asset from the date of death, while the original owner calculates it from the date of purchase.

And if the happy new marriage breaks apart, it will be more complicated to unwind these retitled assets.

Adding a spouse's name to brokerage accounts and marketable securities is fairly straightforward, albeit with a lot of paperwork. ''Where you might get into issues is with alternative investments like hedge funds and private equity holdings,'' Ms. Slade said. Because each spouse needs at least $5 million in assets to qualify for those investments, the wealthier partner might have to shift some liquid assets to the other.

If the assets are kept separate, ''make sure your spouse is listed as the primary beneficiary,'' to avoid probate headaches, recommended Robert Stammers, director of investor education at the CFA Institute, a trade group for financial professionals, based in Charlottesville, Va.

Ultimately, couples might even alter their investment strategies. True, these strategies are usually based on factors that marriage does not change, including age and risk tolerance. Still, Mr. Hoffmeister pointed out, ''The investors will need less liquidity to pay estate taxes on the death of the first spouse.'' That could free up the couple to invest more in stocks or other long-term investments.

Whether all assets are listed in both names, they should be treated as a single portfolio in setting investment strategy, to ''make sure you're not overextended in one area,'' Mr. Stammers said.

One place where same-sex couples now have less flexibility is with retirement plans like 401(k)'s. Federal pension law requires that the spouse be the primary beneficiary, so the employee cannot simply name someone else unless the spouse specifically waives the benefit.

''In some ways Windsor makes financial planning easier,'' Mr. Levin summed up. ''There are things you can do with a wave of a wand that you had to do with special arrangements before. But it's not automatic. You have to make decisions now.''

PHOTO: CELEBRATION: Supporters of same-sex marriage after the Supreme Court overturned the Defense of Marriage Act. (PHOTOGRAPH BY KEVORK DJANSEZIAN/GETTY IMAGES)

October 16, 2013, Wednesday    Late Edition – Final
Section: F    Page: 4    Column: 0    Desk: Wealth    Length: 1212 words