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Post-DOMA Planning Update

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What is—and isn’t—allowed
by Grace S. Yung, CFP

June 26, 2013, was an historic day for many in the LGBT community—the day the U.S. Supreme Court ruled that the federal same-sex marriage ban was unconstitutional.

In addition to being a substantial step toward marriage equality in general, key aspects of the ruling mean that same-sex spouses are finally able to benefit financially from a partner’s Social Security and retirement plans, as well as other tax-related advantages that come with marriage.

But nearly two years later, just how far have we really come in terms of being able to take advantage of these spousal benefits—especially in states like Texas that do not currently recognize same-sex marriage? While the DOMA ruling has opened many positive doors, there is still a great deal of confusion about what is—and isn’t—allowed.

Here we will take a look at a few updates regarding retirement benefits, as well as what couples must do in order to take advantage of these situations.

Social Security Retirement Benefits

When Section 3 of the Federal Defense of Marriage Act (DOMA) was declared unconstitutional, it meant that a person who was married to someone of the same sex who lived in a state that recognizes same-sex marriage may be eligible to claim a spouse’s Social Security benefits.

These benefits include the following:

  • Spousal retirement benefits
  • Spousal disability benefits
  • A lump-sum death benefit
  • Survivor benefits

Social Security’s spousal retirement benefits are based on the earnings record of your spouse, and they can be claimed when both of the spouses are living. As the spouse of a retired worker, you are eligible to receive your own Social Security retirement benefits or 50 percent of your spouse’s benefit—provided that age and other requirements are met.

As of the June 2013 ruling, the eligibility requirements for Social Security spousal benefits state that at the time of application for Social Security, the spouse—the wage earner on whose record the benefits are being sought—must be domiciled in a state that recognizes marriage to a spouse of the same sex. Temporary residence in such a jurisdiction will not be considered sufficient.

In addition, the couple must have been married for at least 12 months prior to their application for Social Security spousal benefits. And, as with all other applicants for Social Security benefits, the individual on whose earnings record you are applying must be “fully insured.” This means that he or she has worked and paid into the system long enough to qualify for benefits. In 2015, a fully insured status requires 40 “credits,” which equal 40 quarters of work. A person can earn up to four work credits per year.

If you meet all of the qualifications for these benefits, you can go ahead and apply for them now. However, if the spouse who was the wage earner lives or lived in a state that does not recognize your marriage, then it is likely that the spousal benefits will be denied.

If so, you could appeal the benefit denial in order to keep your claim “open.” Doing so could allow more time for additional same-sex-related benefit rulings to change or be amended. The time limit for filing an appeal is 60 days from the Notice of Denial.

For additional information regarding Social Security benefits and same-sex couples, visit socialsecurity.gov/people/same-sexcouples.

Retirement Plan Funds

The 2013 DOMA ruling has also raised issues with regard to investing and retirement planning. One of the biggest changes has to do with the passing of funds from one spouse to another upon death.

When you pass away, what happens to the money in your retirement fund will depend on whether a beneficiary has been named, as well as who that beneficiary is. For example, if the deceased owner of a 401(k) plan was married at the time of death, then typically his or her spouse will receive the benefits. In fact, even if the person designates someone other than the spouse to receive the funds, unless the spouse specifically signs a waiver relinquishing all rights to the plan, the spouse will still receive the funds when the 401(k) participant passes away.

There is also some good news for those with Individual Retirement Accounts (IRAs). Prior to June 2013, married same-sex couples did not have all of the same privileges that opposite-sex married couples have when it comes to IRA accounts.

Now, however, a working same-sex spouse can fund a spousal IRA account for his or her non-working spouse, up to the annual maximum contribution limit. In 2015, that amount is $5,500 for those who are age 49 and under, and an additional $1,000 annually for those 50 and older.

Same-sex widow(er)s may also benefit from another spousal advantage with regard to inheriting a spouse’s IRA account upon the partner’s passing. Here, a surviving same-sex spouse is no longer forced to immediately roll over the inherited IRA funds into his or her own IRA account. By waiting to take the deceased spouse’s Required Minimum Distributions (RMDs) from a Traditional IRA account until he or she reaches age 70½, the surviving spouse may enjoy greater earnings and a smaller tax bill on inherited funds.

The surviving same-sex spouse may also roll over an inherited Roth IRA into his or her own Roth IRA without taking immediate tax-free distributions, as would be required by a non-spousal beneficiary.

Here again, just like with Social Security’s spousal benefits, it is important to be aware that these retirement account benefits are only available to those who reside in states that recognize same-sex marriages.

The Bottom Line

Although the DOMA ruling was passed nearly two years ago, there are continual updates and changes being made. This is why it is essential to work with an advisor who focuses on the LGBT community when doing any type of tax, legal, or financial planning. This way, you can be better assured that your specific needs are being met.

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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