The U.S. Supreme Court's decision last week declaring the unconstitutionality of the Defense of Marriage Act (DOMA) will have significant estate and long-term care planning impacts for gay and lesbian couples who choose to marry, most positive and few negative.
The decision makes it very clear that the federal government can no longer discriminate against married couples for being gay or lesbian. This opens the door to spousal benefits under Social Security, the Veterans Administration, federal pensions, the INS and the IRS.
One of the cases before the Supreme Court (Windsor, No. 12-307 (U.S. 2013)) in fact involved a challenge brought by a widow to an estate tax due on her wife's estate which would not have been owed had the IRS permitted her to take the marital deduction which exempts all property passing to a surviving spouse from estate taxation. The ruling last week saves her $363,053 in estate taxes. (This no doubt would not be owed in any case if the spouse had passed away now since the estate tax threshold has been raised to $5.25 million, but this important decision will same many wealth widows and widowers from paying taxes and will protect non-citizen gay and lesbian spouses at much lower levels of wealth as long as they do the necessary advance planning.)
This decision will certainly make estate planning easier in states like Massachusetts that permit gays and lesbians to marry. They have already been subject to the same rules as male-female unions with respect to the Massachusetts estate tax and other laws. But up until now estate tax planning has had to take into account the different treatment under state and federal rules. No more.
Much less clear is the effect of the decision on state benefits, especially for couples who reside in states that don't permit gays and lesbians or who are entitled to benefits, such as public pensions, from such states. While in Windsor the Supreme Court declared DOMA to be unconstitutional, in its companion case (Hollingsworth, No. 12-144 (U.S. 2013)) it simply ruled that supporters of Proposition 8 that would ban gay marriage in California did not have standing to bring their appeal. This means that gays and lesbians in California may marry, but it says nothing about the right to marriage nationally. It appears that this will continue to be left up to state option.
But what about state benefits in states that bar gay and lesbian marriages? Article IV, Section 1, of the U.S. Constitution, known as the "full faith and credit clause" reads as follows:
Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof.
This means that the laws of one state must be honored by other states. Presumably, this would mean that any marriage in any state should be honored in every other state and spouses should have the same benefits and obligations, no matter their sexual orientation. However, in what now seems like a different era, between 1996 and 2004 39 states passed laws stating that marriages are only between "one man and one woman" and in some cases explicitly stating that other marriages will not be honored. In those states, public officials will have to follow state laws until they are changed legislatively or by court order.
More complicated than purely state laws are programs such as Medicaid (MassHealth in Massachusetts) which are joint state and federal programs. This is especially important in the area of long-term care planning because Medicaid is the primary source of payment in the United States for both nursing home and at-home care. The Medicaid program has very specific eligibility rules for married couples which can be protective in some cases and force the spouse to provide support in others. These include:
While nursing home spouses in most states are limited to $2,000 in "countable" assets, their healthy spouse is limited to about $115,000. That limitation does not apply to unmarried partners. Depending on who has more assets, this may be protective or create a support obligation as the couple spends down to $117,000.
However, while most applicants for Medicaid coverage are barred from transferring assets to third parties in order to get down to $2,000, there are no restrictions on transfers between spouses.
There are special rules for protecting the family home for spouses which do not apply to those not treated as married.
For lower-income nursing home residents, spousal impoverishment protections permit the healthy spouse to keep some or all of the nursing home spouse's income. There is no such protection for unmarried partners.
Each state has its own Medicaid program which must comply with federal guidelines. If it does comply, the federal government pays half or more of the state's Medicaid expenditures. It seems now that the federal guidelines must honor gay and lesbian marriages for all states and those states that do not do so should lose their federal cost sharing. But then again, the state Medicaid officials may be bound by their state laws requiring that they do not honor such marriages. This is undoubtedly going to be resolved by litigation, perhaps reaching back up to the Supreme Court.
To learn more about the effect of DOMA's defeat on estate and long-term care planning, click here.