The Supreme Court decision to strike down the federal Defense of Marriage Act (DOMA) is likely to propel more same-sex couples down the aisle toward marriage. But before rushing to say "I do," same-sex couples may want to consider the financial consequences.
The court decision doesn't completely level the playing field, and by getting married, you embrace one of the biggest woes that traditional married couples have always had to confront: joint debt.
Wednesday's ruling that the federal government must accept states' definitions of marriage is expected to ripple through federal law, affecting important areas such as how same-sex married couples file for taxes and collect benefits, legal experts say. The government estimates that more than 1,100 laws mention marriage -- but not all of them have positive financial consequences for couples.
"Today's ruling strikes down the federal definition of marriage used for every federal law," said Mark Purpura, a business-law attorney with Richards, Layton & Finger in Wilmington, Del., and head of the Equality Delaware Foundation, "But it's not all benefits -- some of them are actually duties."
While Purpura views Wednesday's rulings as a landmark decisions for gay equality, he said there are some circumstances in which having the federal government recognize same-sex marriages can be financially detrimental, as they are with opposite-sex marriages. For instance, married people might qualify for less federal financial aid for college, pay more in taxes because of the "marriage penalty" and forfeit certain Social Security survivor benefits.
Previously, same-sex married couples did not have to consider such issues, because federal law did not recognize their unions.
Emily Doskow, an attorney in Oakland, Calif., said gay couples there are often shocked when they find out what they're on the hook for if they get married. "Many same-sex couples are very used to having separate lives and being separately responsible for their own stuff," she said, "so when they find out that being married means they will be connected to their partner in this legal and financial way, it can be a very heavy blow."
Debt and same-sex marriage
As with heterosexuals, how much of your gay spouse's debt you can be held responsible for largely depends on where you live.
In most states, if the debt isn't in your name and you're not a joint account holder or a co-signer, it's usually not considered your responsibility. But if you live in one of the nine community property states (Alaska has an "opt-in" community property election), any property acquired during the marriage is considered to belong to both partners, and creditors could go after it. You could also be jointly responsible for any debt your spouse racks up during the marriage.
Of those nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), three have laws that allow either same-sex marriage (Washington) or domestic partnerships that are the equivalent of marriage (Nevada and California), meaning creditors could go after same-sex partners in those states. Wisconsin allows civil unions, but they do not confer all the rights of marriage.
"In those states, you want to be really careful about acquiring property together," said Brett Weiss, a Maryland bankruptcy attorney. "Let's say Mr. Smith has debt, and then Mr. Smith and his husband, Mr. Jones, open a joint bank account or buy a house together during the marriage. That's clearly community property, and in most cases, although the debt is Mr. Smith's, the creditor can go after that property."
See an attorney
Following Wednesday's ruling, gay couples might want to consult an estate lawyer to see how they might want to restructure their wills. Previously, same-sex couples had trouble leaving money to each other free from estate taxes and often took measures to minimize those taxes, but the Supreme Court decision should make it easier to leave money tax-free.
In fact, the DOMA case the court decided sprang from the estate tax inconsistency: Edith Windsor was hit with a $363,000 federal estate tax bill after her same-sex partner of 44 years died in 2009. Windsor sued in New York district court, arguing that DOMA violates the equal protection clause of the Constitution. On Wednesday, the Supreme Court agreed.
In addition, because community property laws vary, it's a good idea to talk to an attorney before getting married in Washington or entering into a domestic partnership in Nevada or California, Weiss and Doskow say. You may want to keep separate bank accounts, avoid co-mingling your assets and possibly get a prenuptial agreement that identifies debt racked up before the marriage as belonging only to the person who acquired it, indemnifying the other person.
Even in states that aren't community property states, creditors can still go after a same-sex spouse's interest in jointly owned property. "How you title an asset is really important," said Doskow, co-author of "Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnerships & Civil Unions." "People tend to just go ahead and title things jointly even if one person contributed everything and the other contributed nothing. But if there's no written agreement of who contributed what share or what each person will get back upon the sale, there's nothing to protect you from creditors."
In some jurisdictions, specific assets, such as retirement plans and primary residences, are shielded from creditors through a form of special joint ownership available to married couples. It's called "tenancy in entirety."
If you already own property or financial accounts with your same-sex partner and hold it as joint tenants with rights of survivorship (often abbreviated to "JTWROS" on brokerage statements), once you marry, you should talk to an attorney about re-titling the property as tenants in entirety, Weiss said. "In most cases, property that's held as tenants by entirety is protected from creditors, so they wouldn't be able to go after it except to collect on a joint debt."
If you end up needing to file for bankruptcy in order to dig out from your debt, the Department of Justice no longer opposes joint petitions from homosexual couples who are legally married in their state. "It usually makes more sense to file a joint petition if you can," Weiss said. "The main advantage is that you save on fees and it simplifies the administration."
Effects of court ruling
The Supreme Court decision promises to alter the financial landscape for gay couples in the 13 states (plus the District of Columbia) that recognize such marriages.
However, Steve Sanders, an associate professor at Indiana University's Maurer School of Law, cautions that it's unclear how the ruling applies to same-sex married couples who have moved to states that do not recognize those marriages.
"Will the federal government follow the marrying state's understanding, or the new state's understanding?" said Sanders, who teaches constitutional law. "That's a big wrinkle the courts will have to resolve."
Still, he said, the ruling will bring more clarity and certainty for same-sex couples who are married or contemplating the move.
Some of the areas affected include:
- Income taxes. The court ruling should clear the way for same-sex couples to file joint federal tax returns. In many cases, that will mean lower taxes. But in other cases, especially with high-income couples, filing jointly could result in higher taxes than filing separately.
Ken Weissenberg, a CPA and attorney at accounting firm EisnerAmper in New York City, suggests that married same-sex couples talk with their accountants to see if it would make sense to submit amended tax returns for prior years that reflect their married status. "There are major tax benefits to filing a joint tax return, despite the potential of higher tax rates," he said.
If a couple decides the revised tax laws work in their favor, "They can filed amended returns back three years to recoup any of the federal tax benefits they didn't get when they had to file as single or head of household," said Kay Bell, a tax expert who writes the " Don't Mess With Taxes " blog.
- Social Security, other federal benefits. Before the ruling, same-sex spouses were not eligible for the spousal or survivor benefits included with federal programs such as Social Security, and they could not collect their loved one's civil service or military pensions once they passed away. Now, that also cuts the other way: People lose their Social Security survivor benefits when they remarry. So a surviving spouse from an opposite-sex marriage can now lose those benefits if they marry a same-sex partner.
- Health insurance penalty. Previously, even if an employer offered health insurance coverage to a same-sex partner, the federal government charged income taxes on the dollar value of the benefits your spouse received because that person is not your dependent, Weissenberg said. The cost can range from $3,000 to $5,000. Some large employers absorbed the extra cost to promote fairness and equity for their gay employees. Now, those benefits won't be taxed.
- Estate and gift tax. Married couples can give as much money as they want to each other, whether they're living or dead, without having to pay any federal tax. Previously, that benefit was unavailable to same-sex couples. Now, with that benefit, many married same-sex couples can forgo complex estate plans that include trusts. "It totally changes the landscape for estate planning," Weissenberg said.
Of course, for same-sex couples contemplating marriage, financial considerations are probably but a small part of the decision.
"Hardly anyone sits down and does a financial analysis of whether it makes sense to get married," Purpura said. "Opposite-sex couples don't do that, and same-sex couples don't do that, either. You get married because you love the person, not because of the financial ramifications."
See earlier story: Same-sex marriage means gay couples get joint custody of debt