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Posts from the ‘Couples: Traditional & Non-Traditional’ Category

2
Jun

Some reasons to review your estate documents.

There are many reasons why estate documents should be reviewed periodically.  Life events are often a reason to review estate documents.  These events may change circumstances, goals and priorities.  Another reason is changes in the applicable laws.  You may not be aware of the changes.  Following area few changes that make it advisable to have your estate documents reviewed.

Privacy regulations were issued after the passage of the  Health Insurance Portability and Accountability Act (HIPPA).  There are  situations when you want others to be able communicate with your employer, insurer or health care provider.  A written authorization with specific language is required to allow such communications.  You should have your estate documents reviewed if they do not include this authorization.

Changes in the federal estate tax in 2010 reduced rates and increased the exclusion.  Provisions in estate documents to minimize and/or postpone the estate tax may no longer apply.

Estate planning documents for married couples prior to 2013 often had provisions designed to minimize and/or postpone the estate tax until the death of the surviving spouse.    The cost of assets for purposes of determining gain for assets sold by the surviving spouse was generally the value at the death of the first spouse to die (“step-up basis”).  This may not be the  preferred strategy as a result of the above changes.  There are new strategies that will allow a “step-up basis” at the death of the surviving spouse.

You should contact your estate planning attorney if you are sure if these changes apply to you.

 

22
Nov

Tax and Planning Impact of Supreme Court’s Ruling in the Defense of Marriage Act (DOMA) Same-Sex Marriage Rights Case

Background

On June 26, 2013, the U.S. Supreme Court ruled on a landmark case related to same-sex marriage (SSM) (United States v. Windsor).  The 5-4 decision changes the application of federal tax rules for married same-sex couples.  Generally, the ruling should enable same-sex married couples to obtain the same treatment under federal rules as has been available to heterosexual married couples.  Federal agencies are working on issuing guidance on the effect of the Windsor decision, including whether federal rules treat a couple as married based on the state of celebration (where the marriage was performed) or state of domicile (where the couple lives).  In late August, the IRS released guidance stating that for federal tax purposes, a marriage is recognized if validly entered into in a domestic or foreign jurisdiction that has the legal authority to sanction marriages.  Thus, for federal tax purposes, the IRS is following the state of celebration rule to determine if a couple is marriedThe Departments of Labor, Defense and Homeland Security have also adopted a state of celebration ruleHowever, it is important to realize that the Social Security Administration, by law, currently uses a state of domicile rule.

 Same-sex couples who have not been legally married are unaffected by this ruling until their marital status is legally changed according to domestic or foreign country law.

This discussion will provide:

  • An overview of the Supreme Court’s decision and what it may mean for you;
  • Considerations with respect to estate, retirement, income tax, and health and welfare benefits plans; and
  • Actions to consider with respect to long-term planning and tax return preparation.

Tax Implications

Federal tax treatment now available to legally married same-sex couples includes:

  • Joint filing of federal income tax returns
  • Amending of prior tax returns
  • Pre-tax basis of employer-provided health-care benefits
  • Deductible and includable alimony
  • Income tax-free transfers between spouses
  • Lifetime gift tax-free property transfers to spouses
  • Estate tax relief for surviving spouses
  • Spousal IRA contributions, rollovers, required minimum distributions

 Filing of Tax Returns

Guidance from the IRS issued in August 2013 provides that any original return, amended return, claim for refund or credit, filed on or after September 16, 2013 by a same-sex married taxpayer must use a married filing status.  So the married filing joint or married filing separately status, must be used for 2013 returns and beyond. 

Amending of Tax Returns

Consideration should be given to amending federal income tax returns and gift and estate tax returns (for years that are still open under the tax law’s statute of limitations) to change marital and filing status and other information that will alter the tax calculations and potentially result in a lower tax liability.  State tax implications also should be reviewed.  Returns may be amended to correct filing status, dependents, income, deductions, or tax credits.  Couples may want to estimate the income tax liability that would have been due in previous years if the couple had been able file a joint return.  Even basic items are impacted, such as standard deductions, child-related tax credits, and phase-outs of certain benefits, such as the education expense deduction.  Another example of a tax change is where one spouse could have had capital losses on investments in prior years that the other spouse’s gains would offset if they could have filed joint federal returns.  However, the “marriage penalty” could be applicable for some couples and the married filing joint or married filing separate filing status may result in a higher tax liability, especially high-earning couples where both spouses are working.  Each situation will need to be reviewed carefully.  The guidance from the IRS does not require the filing of amended returns for 2012 and earlier years.

Excludable Employer-Provided Fringe Benefits

Employer-provided fringe benefits for the same-sex spouse of an employee will now be excludable from gross income.  Employers should stop including this benefit in income as of September 16, 2013.  The IRS issued guidance on September 23, 2013, on how employers can claim a refund of Social Security and Medicare taxes that they and the employee paid on these benefits for prior years, as well as amounts withheld during the current tax year.

Also, now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices.  One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.  You should check with your employer to see if perhaps an open enrollment period was created for this purpose.

Also, even if not changing health plans, you can file an amended return to obtain a refund of taxes you paid on those benefits in previous years that are still open for amending (generally returns filed within the last three years).  We can discuss this option with you in more detail so you can see the tax effect of other changes that would occur on the amended return when you change your filing status.

 Adoption Credit

Some couples will need to consider the impact of amending past returns on the adoption tax credit and whether the change in federal filing status will have an impact on the credit.

Deductible and Includable Alimony

Married same-sex couples who later divorce should be able to take a deduction for alimony, which would be includable in the income of the recipient.  Previously married same-sex couples who are now divorced may be able to amend returns for the same reason.

Income Tax-Free Transfers of Property Between Spouses

Gain or loss should not be recognized on the transfer of property between same-sex spouses or between former spouses incident to a divorce.  It remains unclear how previous transfers and the basis of those assets will be affected.  The IRS may issue further guidance on this point.

Gift and Estate-Tax Free Transfers/Unlimited Marital Deduction

 Married same-sex couples may claim the unlimited marital deduction for federal estate and gift tax purposes, allowing a spouse to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift and estate taxes.  The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to a surviving spouse without incurring estate or gift tax liabilities.  Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust is no longer necessary now that assets can be passed directly to a spouse tax-free.  Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option this is now available to married same-sex couples.

 In addition, married same-sex couples can now elect to split gifts in order to take advantage of doubled annual gift tax exclusion ($14,000 for 2013, for a total tax-free gift of $28,000).  Married same-sex couples may also share assets without being subject to gift taxes.  For example, prior to the ruling, couples that owned a house together but did not equally split mortgage payments and other expenses may have had those expenses covered by one spouse be subject to gift taxes if they exceeded $14,000 annually.  Now that same-sex marriages are recognized for federal tax purposes, some married same-sex couples may feel more comfortable adding their spouse’s name to the property title, knowing that they have more flexibility on how they choose to split those expenses and with no gift tax implications.

 Portability of Unused Estate Tax Exemption Amount

 The American Taxpayer Relief Act of 2012 extended permanently the concept of portability, which generally allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount ($5.1 million in 2012, and $5.25 million in 2013) of his or her last predeceased spouse.  Now, the surviving spouse of a married same-sex couple can take advantage of portability of the unused estate tax exemption amount of his or her deceased spouse.

Related Party Rules

Same-sex married couples who are now considered married for federal income and gift and estate purposes are subject to related party rules.  This could impact the tax consequences of transactions between same-sex spouses.  Prior to this ruling, married same-sex couples were treated for tax purposes as not related for certain transactions such as selling property between them and recognizing a loss.  After this ruling, recognition of this same loss would not be allowed under the related party rules.

Spousal IRA Contributions, Rollovers, and Required Minimum Distribution

Married same-sex couples now have many more retirement plan options and issues to consider, including spousal IRAs, contributions, beneficiary designations, rollovers, and required minimum distribution (RMD) rules.  Married same-sex couples with the only beneficiary a spouse who is more than 10 years younger can now use the joint table rather than the “uniform table” for distributions.  A surviving spouse can now consider whether to make a spousal rollover of a deceased spouse’s IRA or 401(k).  The IRS has promised further guidance regarding both prospective and retroactive changes to pension plans, IRAs and retirement distributions.

Other Federal Benefits

In addition, below are some of the federal benefits or protections that may now be available to legally married same-sex couples:

  • Social Security, Medicare, and Medicaid  benefits
  • Certain veterans benefits, such as pensions and survivor’s benefits
  • Military spousal benefits
  • Family medical leave rights
  • Spousal visas for foreign national spouses
  • Private pension benefit options (e.g., survivor annuities)
  • Application of the thresholds for the tax penalties and health insurance subsidies available under the Patient Protection and Affordable Care Act

Income and Estate and Gift Tax Planning Issues

Some of the specific individual income tax and estate and gift tax planning issues that may be impacted and should be considered are:

  • Income Tax Planning Issues
    • Joint tax returns
    • Amended income tax returns
    • Estimated tax payments for 2013
    • Income tax returns beyond the statute of limitations
    • Rollover IRAs at death
    • Spousal IRA contributions and rollovers
    • IRA required minimum distributions
    • Review of the designated beneficiary on retirement and other benefits provided by an employer
    • Divorce tax issues
    • Application of the adoption tax credit
  • Estate & Gift Tax Planning
    • Updated estate plans and documents
    • Inter vivos gifts
    • Amended gift tax returns
    • Gift and estate tax returns beyond the statute of limitations
    • Portability of unused applicable lifetime exemption
    • Grantor trusts
    • Spousal rollover
    • Beneficiary designations
    • Retirement plans
    • Community property rules
    • Marital Agreements

Guidance From the Federal Government

The Supreme Court’s DOMA ruling generally means that married same-sex couples are entitled to the same federal benefits as heterosexual couples, but it does not necessarily make financial planning and tax compliance for married same-sex couples less complicated.  Also, it may take time to fully implement the Supreme Court’s decision.  Marriage is the “trigger” for more than 1,000 tax and benefit provisions in the Tax Code and other federal statutes.

Federal government agencies, including the Treasury Department and Internal Revenue Service, will continue to review and modify rules and regulations.  Employers will need to review and revise their policies and procedures regarding benefits and withholding.  Married same-sex couples will need to consider the new rules and policies, including their tax situation.  Affected couples should consider updating their estate plans based upon the estate and gift tax impact, as well as their financial plans.

There may be some state tax issues to address as well.  For example, federal employees may be entitled to certain benefits that others are not, and states likely will need to clarify what the state tax treatment is if the state does not recognize same-sex marriage.  Also, for couples living in states that do not recognize same-sex marriage, the state will likely provide guidance on how to obtain the federal tax amounts to file state income tax returns. 

It is expected that the IRS publications and website information that provide guidance to married individuals will be revised.
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29
Aug

IRS provides guidance for recognition of same-sex marriages

IRS recently ruled (Rev. Rul. 2013-17) that all legal same-sex marriages will be recognized for Federal Tax purposes.  This applies to all taxes including: income, gift and estate taxes.  That would include qualified retirement plans and other employee benefits.  The determination is based on the status under the laws of the state where the marriage was established.  This is the rule even if the state of their domicile does not recognize the marriage.

 The ruling does not apply to registered domestic partnerships, civil unions or similar relationships recognized under state law that are not denominated as marriages.  Currently Illinois has authorized civil unions but does not denominate them as marriages.  Individuals that have had a civil union in Illinois are not considered married for Federal tax purposes.

The ruling was triggered by the recent decision of the Supreme Court in “United States v. Windsor”.  That case ruled that a portion of the “Defense of Marriage Act “ (DOMA) relating to the definition of “marriage’ was unconstitutional.  

Following are excerpts from the ruling:

“There are more than two hundred  Code provisions and Treasury regulations relating to the internal revenue laws that include the terms ‘spouse’, ‘marriage’ …” husband and/or wife.  “The Service concludes that gender-neutral terms in the Code that refer to marital status, such as ‘spouse’ and ‘marriage, ‘include, respectively, (1) an individual married to a person of the same sex if the couple is lawfully married under state law, and (2) such a marriage between “individuals of the same sex.”

“Given our increasingly mobile society, it is important to have a uniform rule of recognition that can be applied with certainty by the Service and taxpayers alike for all Federal tax purposes. Those overriding tax administration policy goals generally apply with equal force in the context of same-sex marriages.”

“For Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.”

“Except as provided below, affected taxpayers also may rely on this revenue ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, provided the applicable limitations period for filing such claim under section 6511 has not expired. If an affected taxpayer files an original return, amended return, adjusted return, or claim for credit or refund in reliance on this revenue ruling, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.”

Taxpayers may rely (subject to the conditions in the preceding paragraph regarding the applicable limitations period and consistency within the return or claim) on this revenue ruling retroactively with respect to any employee benefit plan or arrangement or any benefit provided there under only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income under sections 106, 117(d), 119, 129, or 132 based on an individual’s marital status. For purposes of the preceding sentence, if an employee made a pre-tax salary-reduction election for health coverage under a section 125 cafeteria plan sponsored by an employer and also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by that employer, an affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same-sex spouse on an after-tax basis as pre-tax salary reduction amounts.”

 IRS recognizes marriaged based on state of the ceremony
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12
Jul

DOMA RULING POTENTIAL TAX IMPACT

The Supreme Court’s Ruling in the Defense of Marriage Act (DOMA) Same-Sex Marriage Rights Case impact planning.

Background

On June 26, 2013, the U.S. Supreme Court ruled on a landmark case related to same-sex marriage (SSM) (United States v. Windsor). The 5-4 decision increases the federal tax (and non-tax) benefits available to married same-sex couples.  The ruling affords same-sex couples, who are married and reside in a state which recognizes same-sex marriages, with the same federal rights and obligations (including tax benefits and rules) as heterosexual married couples.  As discussed further at the end of this letter, there are many remaining issues that need to be clarified, including if and how the right to federal benefits will be protected when a couple marries in a state where same-sex marriage is legal, then moves to a state where the marriage is not recognized.  For many of the possible impacts of this ruling mentioned below in this letter, it may depend on how the federal government interprets the decision and modifies the rules.  The IRS is already working on clarifying guidance, so we expect to know more details in the coming months. 

Same-sex couples who have not been legally married are unaffected by this ruling until their marital status is legally changed according to state or foreign country law.

The case has broad federal tax planning and compliance implications.  This letter will provide:

  • An overview of the Supreme Court’s decision and what it may mean for you;
  • Considerations with respect to estate, retirement, income tax, and health and welfare benefits plans; and
  • Actions to consider with respect to long term planning and tax return preparation.

Tax Implications

Tax benefits that may now be available to and issues facing legally married same-sex couples include:

  • Joint filing of federal income tax returns
  • Amending of prior tax returns
  • Filing of protective refund claims
  • Pre-tax basis of employer-provided health-care benefits
  • Deductible and includable alimony
  • Income tax-free transfers between spouses
  • Lifetime gift tax-free property transfers to spouses
  • Estate tax relief for surviving spouses
  • Spousal IRA contributions, rollovers, required minimum distributions

Filing of Tax Returns

Following the decision, same-sex couples that the federal tax law now recognizes as married may have the option or even be required to use married filing joint or married filing separate filing status.  Filing joint returns may also allow married same-sex couples to exclude up to $500,000 of gain from gross income on the sale of a principal residence, as opposed to $250,000 for unmarried individuals.  Married same-sex couples with foreign assets may want to reconsider their foreign information reporting requirements as filing thresholds for a married couple are often lower than the combined filing thresholds for two unmarried individuals and constructive ownership rules apply to spouses.

Amending of Tax Returns

Consideration should be given to amending federal income tax returns and gift and estate tax returns (for years that are still open under the tax law’s statute of limitations) to change marital and filing status and other information that will alter the tax calculations and potentially result in a lower tax liability.  State tax implications also should be reviewed.  Returns may be amended to correct filing status, dependents, income, deductions, or tax credits.  Couples may want to estimate the income tax liability that would have been due in previous years if the couple had been able file a joint return.  Even basic items are impacted, such as standard deductions, child-related tax credits, and phase-outs of certain benefits, such as the education expense deduction.  Another example of a tax change is where one spouse could have had capital losses on investments in prior years that the other spouse’s gains would offset if they could have filed joint federal returns.  However, the “marriage penalty” could be applicable for some couples and the married filing joint or married filing separate filing status may result in a higher tax liability, especially high-earning couples where both spouses are working.  Each situation will need to be reviewed carefully.

Amending returns most likely means that both spouses need to amend.  It is likely that one spouse will owe taxes (and interest) and the other will receive a refund.  Upcoming IRS guidance may indicate how these returns are to be filed, such as with some explanation or filed together.  IRS guidance may indicate whether amended returns are required or optional.

Filing of Protective Refund Claims

If the right to a refund is contingent on future events (including issuance of guidance by the IRS) and is not determinable until after the time period for amending returns expires, a taxpayer can file a protective claim for refund.  The claim is often based on current litigation (constitutionality); expected changes in tax law; changes in legislation, or regulations. A protective claim preserves the right to claim a refund when the contingency is resolved.  Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid.  Some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.  If the statute is soon expiring on an extended return or estate tax return, we should discuss immediately the possibility of filing a protective refund claim, even if the forthcoming IRS guidance is not yet issued.

 Excludable Employer-Provided Fringe Benefits

Employer-provided fringe benefits used by the same-sex spouse of an employee should also be excludable from gross income.  Now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable. 

Also, even if not changing health plans, some couples may be able to file an amended return to collect the taxes they may have paid on those benefits in previous years.  Consideration should be given to claiming refunds of overpaid income and payroll taxes based on previous denial of tax-free extensions of employer-provided medical and dental benefits.

Adoption Credit

Some couples may want to consider any adoption tax credit and whether a change in federal filing status will have an impact on the credit.

Deductible and Includable Alimony

Married same-sex couples who later divorce should be able to take a deduction for alimony, which would be includable in the income of the recipient.

Income Tax-Free Transfers of Property Between Spouses

In addition, gain or loss should not be recognized on the transfer of property between same-sex spouses or between former spouses incident to a divorce. 

Gift and Estate-Tax Free Transfers/Unlimited Marital Deduction

 Married same-sex couples should be able to claim the unlimited marital deduction for federal estate and gift tax purposes, allowing a spouse to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift and estate tax. The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities.  Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust is no longer necessary now that assets can be passed directly to a spouse tax-free.  Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option this is now available to married same-sex couples.

In addition, married same-sex couples should be able to elect to split gifts in order to take advantage of a doubled annual gift tax exclusion ($14,000 for 2013, for a total tax-free gift of $28,000). The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes.  For example, prior to the ruling, couples that owned a house together but did not equally split mortgage payments and other expenses may have had those expenses covered by one spouse be subject to gift taxes if they exceeded $14,000 annually.  Now that those marriages are recognized by the federal government, some married same-sex couples may feel more comfortable adding spouses name to the property title, knowing that they have more flexibility on how they choose to split those expenses and with no gift tax implications.

 Portability of Unused Estate Tax Exemption Amount

The American Taxpayer Relief Act of 2012 extended permanently the concept of portability, which generally allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount ($5.1 million in 2012, and $5.25 million in 2013) of his or her last predeceased spouse.  Now, the surviving spouse of a married same-sex couple should be able to take advantage of portability of the unused estate tax exemption amount of their deceased spouse.

 Related Party Rules

Same- sex married couples who are now considered married for federal income and gift and estate purposes are subject to related party rules.  This could impact the tax consequences of transactions between same-sex spouses.  Prior to this ruling, married same-sex couples were treated for tax purposes as not related for certain transactions such as selling property between them and recognizing a loss.  After this ruling, recognition of this same loss would not be allowed under the related party rules.

Spousal IRA Contributions, Rollovers, and Required Minimum Distribution

Married same-sex couples now have many more retirement plan options and issues to consider, including spousal IRAs, contributions, beneficiary designations, rollovers, and required minimum distribution (RMD) rules.  Married ame-sex couples with the only beneficiary a spouse who is more than 10 years younger can now use the joint table rather than the “uniform table” for distributions.  A surviving spouse can now consider whether to make a spousal rollover of a deceased spouse’s IRA or 401(k).

Other Federal Benefits

In addition, below are some of the federal benefits or protections that may now be available to legally married same-sex couples:

  • Social Security, Medicare, and Medicaid  benefits
  • Certain veterans benefits, such as pensions and survivor’s benefits
  • Military spousal benefits
  • Family medical leave rights
  • Spousal visas for foreign national spouses
  • Private pension benefit options (e.g., survivor annuities)
  • Application of the thresholds for the tax penalties and health insurance subsidies available under the Patient Protection and Affordable Care Act

Income and Estate and Gift Tax Planning Issues

Some of the specific individual income tax and estate and gift tax planning issues that may be impacted and should be considered are:

  •          Income Tax Planning Issues
    • Joint tax returns
    • Amended income tax returns
    • Income tax returns beyond the statute of limitations
    • Rollover IRAs at death
    • Spousal IRA contributions and rollovers
    • IRA required minimum distributions
    • Divorce tax issues
    • Application of the adoption tax credit
  • Estate & Gift Tax Planning
    • Updated estate plans and documents
    • Inter vivos Gifts
    • Amended gift tax returns
    • Gift and estate tax returns beyond the statute of limitations
    • Portability of unused applicable lifetime exemption
    • Grantor trusts
    • Spousal rollover
    • Beneficiary designations
    • Retirement plans
    • Community property rules
    • Marital Agreements

IRS Guidance Expected Soon

The Supreme Court’s DOMA ruling means that married same-sex couples are entitled to the same federal benefits as heterosexual couples, but it does not necessarily make financial planning and tax compliance for married same-sex couples less complicated.  Even though federal benefits are immediately extended, it may take some time to fully implement the Supreme Court’s decision.  Marriage is the “trigger” for more than 1,000 tax and benefit provisions in the Tax Code and other statutory provisions.

Federal government agencies, including the Treasury Department and Internal Revenue Service, will need to review and modify rules and regulations.  Employers will need to review and revise their policies and procedures regarding benefits and withholding.  Married same-sex couples will need to consider the new rules and policies, including their tax situation.  Affected couples should consider updating their estate plans based upon the estate and gift tax impact, as well as their financial plans.

One tax issue to be addressed is the reality that at least 30 tax rules use the term “husband and wife” rather than married couple or spouses.  Another issue to resolve is whether the federal tax law treats a couple as married based on the law of the state of celebration (where the marriage was performed) or the state of domicile (where the couple resides).  The answers may not be the same for the federal tax law and Social Security law. This may be a matter that Congress may need to address rather than the IRS.

There may be some state tax issues to address as well.  For example, federal employees may be entitled to certain benefits that others are not, and states likely will need to clarify what the state tax treatment is if the state does not recognize same-sex marriage.  Also, if the federal tax law uses the state of celebration to determine if a married same-sex couple is married and the state of domicile does not respect that, the state will need to provide guidance on how to convert the federal joint return to separate state returns.

The day after the ruling, on June 27, 2013, IRS issued a statement that it will “move swiftly to provide revised guidance in the near future,” so we will keep you informed when such guidance is issued and what you should consider doing based on that guidance. We expect that various IRS publications and website information that provide guidance to married individuals will likely be revised.

It may take longer than expected for the IRS to respond.  The IRS has been given increased responsabilities and the congressional  budget process reduced their funding.  With reduced staff and training any resources they devote to these matter will reduce  their ability to administer the tax laws that Congress has passed.
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27
Jun

Two Supreme Court Rulings Boost Same-Sex Marriage Rights

On June 26, 2013, the U.S. Supreme Court announced its rulings on two landmark cases related to same-sex marriage. The 5-4 decisions bolster the federal benefits available to same-sex married couples and clear the way for same-sex marriages in California. 

In the first case, the court struck down Section 3 of the Defense of Marriage Act of 1996 (DOMA), which defined marriage as the union of a man and a woman. This case involved a claim by Edith Windsor, who sought a refund from the IRS of the $363,000 in estate taxes she paid because the federal government did not recognize her marriage to her long-time partner and spouse, Thea Spyer. Her suit contended that DOMA violated the principles of equal protection.

 In their written opinion, the court’s majority agreed, stating that DOMA “violates basic due process and equal protection principles applicable to the Federal Government … Its unusual deviation from the tradition of recognizing and accepting state definitions of marriage operates to deprive same-sex couples of the benefits and responsibilities that come with federal recognition of their marriages.”

 The second case, Hollingsworth v. Perry, concerned California’s Proposition 8, which banned same-sex marriage in that state. The justices ruled that the petitioners did not have standing to defend Proposition 8 in federal court. This left in place a lower federal court decision that threw out the ban on gay marriage in California, effectively legalizing same-sex marriage in that state.

 What effect do the rulings have?

In California
The Supreme Court’s decision allows California to resume same-sex marriages. Marriage licenses will be issued once legal details are worked out, most likely by the end of July.

In states that have legalized same-sex marriage
Because the Supreme Court justices struck down Section 3 of DOMA, couples in the 13 states (including California) and the District of Columbia that have legalized same-sex marriage will be allowed to receive federal benefits and protections that were previously available only to opposite-sex married couples.

 Striking down Section 3 of DOMA means that the legal definitions of “marriage” and “spouse” under federal law now include legal unions between same-sex partners as well as opposite-sex partners. The effect of this change is enormous, because more than 1,000 federal laws reference marriage or spousal status.

 The following list details some of the federal benefits or protections that may now be available to legally married same-sex couples:
Social Security survivor’s and spousal benefits
Certain veterans benefits, such as pensions and survivor’s benefits
Lifetime gift tax-free property transfers to spouses
Estate tax relief for surviving spouses
Military spousal benefits
Family medical leave rights
Spousal IRA contributions
Spousal visas for foreign national spouses
Joint filing of federal income taxes
Private pension benefit options (e.g., survivor annuities)
Employer health-care benefits may be received on a pretax basis

In states that have not legalized same-sex marriage
States still retain the authority to define marriage, and some states may choose to continue to define marriage as a legal union between a man and a woman. In other states, same-sex marriage may eventually be legalized. States still do not have to recognize same-sex marriages as legal if they were performed in other states.

Stay tuned
The Supreme Court’s DOMA ruling means that same-sex couples are entitled to the same federal benefits as opposite-sex couples, but it doesn’t necessarily make financial planning for same-sex couples less complicated. For example, even though federal benefits are immediately extended, it may take some time to fully implement the Supreme Court’s decision. Federal government agencies will need to review and modify rules and regulations, and employers will need to review and revise their policies, benefits, and paperwork. In addition, questions remain. It’s unclear if and how the right to federal benefits will be protected when a couple marries in a state where same-sex marriage is legal, then moves to a state where it isn’t. And along with these new protections, same-sex couples will now have new options and obligations that will need to be considered when developing and executing a financial plan.

 The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
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3
Jan

Personal observations from a widowed retired estate attorney

A friend of mine retired from a multi state law firm about 8 years ago.  His wife died in August of 2011.  He returned to his former law firm to share his observations with the partners.  Following are his notes that he used for the discussion.  

Spousal Preparedness for Financial and Estate Planning Arrangements
My comments are intended to be educational and helpful to couples, whether married or not, regardless of age.  Because of the recent death of my wife, I will share some personal observations, which could be helpful to you, or your parents, grandparents, siblings, friends or even clients.  At the outset, let me say that not every couple may be interested in implementing all of my suggested guidelines.  For simplicity, I will assume the couple is married.  The goal is to create an attitude between spouses which enables each spouse to be FULLY informed about all aspects of the couple’s financial and estate planning arrangements.  I repeat the prior sentence.  These guidelines consist of ten separate points. 

  1. No one knows the order of death, who will be the surviving spouse, the age of the surviving spouse or the health of the survivor.
  2. It is not relevant how wealthy each spouse is, whether there is a premarital agreement or whether this is a second marriage for either or both spouses.  Both spouses must have full knowledge of the couple’s financial information, a clear understanding of the estate planning documents of both spouses, a comfortable relationship with the family attorney, CPA and financial adviser, and be competent using the washer and dryer, and caring for the family pets.
  3. It is essential that a current summary of the couple’s financial assets and estate planning documents be discussed and reviewed annually.  Annually is important because you never know when your spouse will die.  Typically, financial information is available annually as of December 31.  Ideally, by the next March 31, one or two meetings should be held between the spouses to review and discuss the current financial and estate planning summaries.
  4. Both spouses should participate in all financial, estate planning and investment decisions, including the allocation of retirement account investments among growth funds, value funds, international funds, bond funds and other investment options.  It may be necessary for both spouses to attend classes to learn about basic investment principles (even though the more knowledgeable spouse already has a good understanding of basic investment principles).  Thus, both spouses must have at least a basic understanding of the investment principles of asset allocation, diversification and investment risk.
  5. Another aspect of dual spousal participation relates to tax return preparation, regardless of whether tax returns are prepared by a CPA or a spouse.  Both spouses should understand the SOURCE of all entries on the Form 1040: whether from the checkbook, credit card records, the computer, or Forms 1099, K-1 or W-2.  I am not suggesting that each spouse should be able to prepare the tax returns.  God forbid!  Instead, each spouse should know the source of all information needed to prepare the tax returns.
  6. To complete the picture of both spouses being informed, each spouse should also know where all financial records are stored.  Not merely downstairs or in the garage or at the office.  I am suggesting the specific location for all current and prior years financial records, including current and prior year’s tax returns, check books, the original of all estate planning documents, titles to cars and all real estate, annual financial asset summaries and paid invoices (including computer confirmation of paid invoices).
  7. All password and user name information stored in all home computers must be written down in a legible format and placed in a location known by each spouse.



  1. With respect to retirement accounts in the form of IRAs, or with Employers for either spouse, there is a complex set of IRC rules relating to spousal rollovers and commencement of benefits.  There may be a knowledgeable professional who works at the investment advisory firm, although I doubt it.  Every married couple has a unique financial situation.  Therefore, (upon the death of the first spouse) I  suggest that all relevant retirement account and income information be presented to an attorney or CPA who has expertise in this area, so that the surviving spouse, prior to the commencement of benefits, can make informed decisions with respect to the commencement of benefits payable to the surviving spouse.
  2. The distribution of retirement benefits from Social Security, IRAs and employer plans must commence when you attain age 70.  If financially practical, both spouses should delay taking any retirement benefits as late as possible.  This will maximize the likelihood that your surviving spouse will have sufficient lifetime retirement income, and avoid having your adult children being called upon to support you and/or your spouse.  The weekend WSJ (Nov 19/20, 2011) had an excellent article about how to plan the withdrawal of retirement savings.  (kelly.greene @waj.com).
  3. My final guideline is to accumulate adequate retirement benefits for the joint lives of both spouses, assuming that at least one spouse will live to at least age 90.  In order to be successful, follow the same approach to prefund college expenses for your children: start early, live below your means and give this goal a priority status.

 

Summary


The motto of the Boy Scouts “Be Prepared” refers to being ready to handle all situations you face during your lifetime.  In the context of my comments today, the spousal motto for Financial and Estate Planning is “Be Prepared for Death.”  In summary, I will briefly repeat the ten steps necessary to assure that both spouses are prepared upon the death of the first spouse:

  1. Accept the basic fact that no one knows which spouse will be the first to die or when such death will occur.
  2. Your goal MUST be for both spouses to be fully informed as to all financial and estate planning arrangements, including being comfortable with your family attorney, CPA and investment adviser.
  3. A current summary of financial and estate planning arrangements should be fully reviewed ANNUALLY.
  4. Both spouses should participate in the decision-making process to creating and revising financial, estate planning and investment decisions.  Both spouses should have a good understanding of the three basic principles of investing: asset allocation, diversification and investment risk. 
  5. With respect to tax return preparation, both spouses must be informed as to the sources of all entries on the tax returns, including checkbooks, Forms 1099, K-1 and W-2.
  6. Both spouses should know the SPECIFIC location of all current and prior years’ financial records, including tax returns, checkbooks, titles to cars and the residence, paid invoices and the original of estate planning documents for both spouses.
  7. All password and user name information for data stored in home computers MUST be written down in a legible format and placed in a location known to both spouses.
  8. With respect to the options available to the distribution of retirement accounts, upon the death of the first spouse, the surviving spouse should consult with an attorney or CPA who has expertise with this complex subject matter.


  1. If financially practical, the distribution of Social Security benefits and from IRAs and other retirement accounts should be deferred until each spouse attains age 70.  Such deferral will likely enable both spouses to avoid having adult children provide support for either or both of them.
  2. Accumulate sufficient retirement benefits for the joint lives of both spouses, assuming that at least one spouse will live to at least age 90.

In addition to these ten guidelines, I also note that the annual federal income tax rate schedule for a married couple is lower than for a single person with the same taxable income.  In addition, the deceased spouse’s monthly social security benefit will terminate, as well as the decedent’s exemption deduction.  On balance, there could be an overall federal and Ohio income tax increase for the surviving spouse in future years.

 It is not necessary to be an attorney or CPA to be informed on these subjects.  The only requirement is that both spouses be committed to being informed.  (REPEAT)  To not give it a serious effort as a couple is not (in my opinion) acceptable.  Since you will not know the order of death, it is possible the surviving spouse will become the spouse who refused to put forth a reasonable effort to be informed on these important subjects.
                                                                                                                                               

In summary, my wife and I did all of the suggestions I have shared with you.  Although I will never know if my spouse would have been a prepared surviving spouse, I am confident she would have been because she was a smart, organized and informed spouse.

12/5/2011


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Aug

Financial Planning is a lasting gift

When my wife’s niece’s husband died no one knew what to do first.  He was young, about 37, apparently in excellent health, with 2 young children.  They did not have wills, living trusts, Powers of Attorney and other elements of a financial plan .  If they had a financial plan the financial stress could have been substantially reduced.  It is difficult enough to deal with emotional stress without adding financial stress at such times.
Many people postpone financial planning thinking it isn’t time yet.  They may consider themselves to be too young, are in excellent health, are organized, or they are just procrastinators.  Sometimes parents cannot agree on a guardian for their children or couples cannot agree on a trustee.  If they do not name someone, the decision will be made without their input.  
With out planning, including updating beneficiaries, excess taxes (income and/or estate) may be payable or assets may go to people that do not have the capacity to mange the assets.  There have been situations where retirement accounts went to ex-spouse rather than the current spouse. 
The planning should be communicated.  Your wishes should be discussed with partners, children, or others that are to receive assets or who will administer the plan.  This includes the contact information for advisors, financial institutions and passwords and PINs.
Sharon Epperson, a CNBC correspondent , recently expressed her gratitude to her father for planning.  The article concluding sentences are very powerful “My father left us a wonderful gift.  his desire to make sure he had a ‘Financial Plan B’ in place is a legacy that truly underscores the love he had for his family.”
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Mar

Finding a qualified independent financial advisor

There are many people who look for a financial planner when they have a specific question or problem.  Too often the person they contact concentrates on the question or problem presented without really looking for the cause of the problem or question. 

I believe that is why the solutions do not always work out.  Without trying to identify the problem and identify the consequence the solutions do not provide adequate flexibility.  Sometime they result in worse problems or not enough time to overcome the problem.  We have seen evidence of this in the headlines since 2007.

Fear is often used to create action.  Humans tend to do the wrong thing financially when they are reacting to fear.  This is evident when so many are buying investments when prices are high and selling investments when prices are low. 

The National Association of Personal Financial Advisors (NAPFA) recently released “Pursuit of a Financial Advisor – Field Guide.  It provides advice on how to find a qualified independent financial advisor.  
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