Legally married same-sex couples in the United States just got a huge boost to the bottom line. The Supreme Court’s recent decision in the case United States v. Windsor to struck down the Defense of Marriage Act, which means legally married same-sex couples are now eligible for federal benefits just like other married couples. This significantly changes their financial planning, estate planning and tax planning options. As a direct result of the decision, the surviving spouse in the Windsor case got back over $360,000 in federal estate taxes. Legally married same-sex couples now have access to the same retirement/tax benefits and health coverage as married heterosexual couples.
A few things all legally married same-sex couples should be considering right now…
Legally married same-sex couples where at least one person has a high-net worth now has more financial planning tools available. They can now consider using the estate tax exemption. This could allow them to leave one another an unlimited estate without being taxed.
Portability – A surviving spouse from a legally married same-sex couple now has the option to add an unused estate tax exclusion ($5,250,000 as of 7.2.13) from the spouse who died to their exclusion. This idea is called Portability. To properly use portability, the executor in charge of the estate of the deceased spouse will transfer the unused exclusion to the survivor. The surviving spouse can then use it to make lifetime gifts or pass along assets through their estate. The KEY to using portability is filing the estate tax return after the first spouse dies. This must be done, even if no tax is owed at the time. The return is due 9 months after death, but a six-month extension is possible. If the executor doesn’t file the return or misses that deadline, the surviving spouse loses the option to use portability.
Make a Gift – Now legally married same-sex couples can give as much as $14,000 each year to as many people as they like without incurring a gift tax. Spouses can combine this annual exclusion (gift-splitting) to give $28,000 in any year to any person tax-free. Spouses can do this by giving $14,000 each, $28,000 from a joint account or $28,000 from an individual account. The restrictions apply whether you make outright gifts to individuals or put funds into a trust for their eventual benefit. Any gift above the annual exclusion counts against the lifetime gift tax exclusion. Once you have passed that limit, which is $5,250,000, a gift tax up to 40% will apply. Legally married same-sex couples could also gift-split with their exclusion amount and jointly transfer up to $10,500,000 in lifetime gifts.
Income Tax Planning – *Filing Status
Legally married same-sex couples may now have a refund awaiting from the IRS! In the states that recognize legally married same-sex couples, they no longer have to file with the IRS under a “single” status. The option to file “Married Jointly” is now on the table hence the opportunity to save a lot in Federal income tax. Couples forced to file single can go back two years (3 years in some cases) and file amended tax returns with a new filing status and receive a refund of the overpaid taxes!
How much in savings are we talking about?
Bob and Jeff were legally married in 2011. Bob made $100,000 in wages for 2011 & 2012.
Jeff was a full-time student and had no income for 2011 & 2012. Bob filed as “single” for Income Tax purposes in 2011 & 2012.
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Same facts except Bob made $200,000 total wages in 2011 & 2012.
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Social Security/Retirement Benefits, IRA’s and other Retirement Accounts
If a legal spouse dies with higher Social Security benefits than the surviving spouse, the surviving spouse can now claim them. It’s also important to look at your IRA account. If a legal spouse dies with the surviving spouse as beneficiary for an IRA or retirement account, the surviving spouse can claim the account as his or her own. That spouse doesn’t have to take the account. If they are not of retirement age, it can be stretched out further… The surviving spouse could roll the assets into his or her own IRA and postpone required minimum distributions until the year after he or she turns 70½.
If a legal spouse passed away in the last three years, a Federal Estate Tax Return filed, and estate tax paid, the return can be reviewed along with the applicable estate plan documents to see if an amended estate tax return can be filed to secure a refund of the overpaid taxes.
Resources to contact regarding this matter:
Board Certified Tax Attorney – Jeffrey Kahn – 1.866.494.6829
San Diego Estate Lawyer – Jarod Cauzza – 619.238.1712
San Diego Financial Planner – Dan Osgood – 1.888.710.4911
This article was written by Jeffrey Kahn and edited by Derrick Evens, “Mr. Credit”.