Over the past two decades, the U.S. has experienced a tremendous sea change on the stance of same-sex marriage.

With the Supreme Court's ruling last week requiring all states to perform and recognize same-sex marriages, same-sex married couples are no longer "consigned to an instability many opposite-sex couples would deem intolerable in their own lives," as Justice Anthony Kennedy wrote. The decision provides security and stability to same-sex married couples irrespective of state of residency or state of travel. In addition, same-sex married couples can no longer be "denied the constellation of benefits that the states have linked to marriage."

Same-sex married couples must now navigate through the financial and estate planning opportunities created by the Supreme Court decision. For those same-sex married couples living in the 36 states that already recognized same-sex marriages, there may be little to no financial and estate planning changes necessary. However, for the 13 states that did not recognize same-sex marriages and Florida (which recognized same-sex marriage starting in January 2015 as a result of Brenner v. Scott), there are myriad financial and estate planning issues that must be re-evaluated to ensure tax efficiency and wealth transfer continuity.

TAX PLANNING

There will be a tremendous amount of income tax planning that must be analyzed for same-sex married couples in Florida and the 13 states that did not recognize same-sex marriages (Arkansas, Georgia, Kentucky, Louisana, Mississippi, Massachusetts, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee and Texas).

Advisors should help clients:

  • Analyze prior year federal and state income tax returns to determine if there is a positive tax arbitrage worth the time and costs associated with amending prior year returns. Consider the impact of the change in the adjusted gross income limitations, which may prevent a same-sex married couple from making Roth IRA contributions or receiving tax deductions and/or credits during this period of time.
  • Analyze current year federal and state income tax planning opportunities to ensure that there is enough tax withholding done to mitigate tax withholding penalties. This may require updating 2015 Form W-4 with the employer to decrease the number of personal allowances (line 5) and/or withhold an additional amount from each paycheck (line 6).
  • Analyze Roth conversion strategies, financial aid assistance for children going to college, HSA contributions and employee benefit programs to determine the most tax efficient strategy to achieve the stated goal/objective.
  • Analyze worker compensation benefits, child support payments and spousal support payments.

ESTATE PLANNING

For same-sex married couples in the 13 states that did not recognize same-sex marriages and Florida, there will be estate tax planning opportunities that must be considered as well. Advisors should pay attention to the following issues and opportunities:

  • Spousal elective share, which provides a surviving spouse with the right to receive a fraction of the deceased spouse's probate estate in "separate" property states like Florida.
  • Prior year wealth transfer to a surviving spouse in states that have an estate tax or inheritance tax (such as Kentucky, Nebraska and Tennessee) may result in a refund. Current and future wealth transfer to a surviving spouse in these states will not be subject to inheritance taxes.
  • Asset titling and beneficiary designation coordination within the updated estate plan that is reflective of current law will be paramount.
  • Same-sex married couples will now have child custody rights, hospital visitation rights, adoption rights and access to a spouse's birth certificate and death certificate.

While financial and estate planning will become easier to oversee over time, there is an influx of current planning opportunities that must be considered today by financial advisors to ensure that same-sex married couples they work with maximize their tax efficiency and align their assets with their estate and wealth transfer objectives. 
Scott Grenier is the senior vice president and senior estate planner for Baird’s Private Wealth Management group.

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