After the DOMA Ruling

Impacts of the Supreme Court’s Decision are Wide-ranging

By KATHRYN von SCHOELER, Esq., CARLA NEWTON, Esq., and MICHAEL SIMOLO, Esq.
On June 16, the U.S. Supreme Court issued a 5-4 decision in the case of Windsor v. United States holding that Section 3 of the Defense of Marriage Act (DOMA), enacted by Congress and signed by President Clinton in September 1996, was unconstitutional. In essence, the court held that Section 3, which provided the federal definition of marriage as a union between a man and a woman, deprived same-sex couples of equal liberty.
As a result, for all federal purposes, same-sex marriages are to be treated in the same manner as heterosexual marriages.
Massachusetts, of course, was the vanguard in the same-sex-marriage arena in 2004, when its own Supreme Judicial Court held in Goodridge v. Department of Public Health that it was unconstitutional (referring to the Massachusetts constitution) to allow only heterosexual couples to marry. Notwithstanding that decision, however, no same-sex couple married in Massachusetts (or in any other state that allows same-sex marriage) enjoyed the federally created benefits (and burdens) of marriage. In essence, such couples were married for state purposes, but not for federal purposes.
With the Supreme Court’s historic Windsor decision, however, all same-sex couples legally married under state law will be treated as legally married under federal law. The consequences of this ruling range from the truly historic to the mundane, but they are all important, and they will all have an impact well beyond the same-sex couples directly affected. This article will explore, on a basic level, some of those consequences for both individuals and businesses.

Business Considerations
The Windsor case raises several issues for employers and employees:
• Couples in federally recognized same-sex marriages may now file joint tax returns. As a result, affected employees may want to consider amending their IRS Form W-4 so that their employers can withhold the correct federal income tax from their pay;
• Employees who were previously precluded from including their same-sex spouse from their health plan may now add their federally recognized spouses and their stepchildren;
• Employers who already offered health benefits to same-sex spouses, but were required to treat the value of that benefit as taxable income to their employee, are no longer required to do so, which will reduce both the record-keeping and overall tax burdens of both employer and employee;
• Employers who previously ‘grossed up’ the affected employees’ pay to compensate for the taxed health benefit will no longer need to do so to achieve net pay equity for employees in same-sex marriages;
• Employees who have access to flexible spending accounts may now use the accounts to cover the expenses of their same-sex spouse and step-children;
• Individuals in same-sex marriages will now be entitled to survivor benefits from a federally recognized spouse’s pension or other tax qualified plan;
• Employees in federally recognized same-sex marriages who work for employers subject to the Family and Medical Leave Act (FMLA) will be entitled to the benefits of the act to care for a federally recognized same-sex spouse, and employers who had created FMLA-like policies for their employees in same-sex marriages may now abandon those policies; and
• The immigration status of individuals in federally recognized same-sex marriages will change, and in many cases, this will eliminate administrative burdens on the immigrant employee and his or her employer.

Changes for Individuals
The Windsor case involved an estate-tax dispute, and the court’s decision brings about numerous changes in the estate-planning and individual income-tax realms. Initially, it is important to note that, because Section 3 of DOMA has been ruled unconstitutional, it is deemed void from its inception. As a result, same-sex married couples may want to amend earlier tax returns as discussed below.
Those amendments may be curtailed, however, by applicable statutes of limitation. These limitations issues do add some urgency to considerations of amending previously filed returns. The changes now in effect include the following:
• Married same-sex couples now enjoy the unlimited marital deduction for both gift- and estate-tax planning. As such, all sums gifted during life, or bequeathed at death, by one spouse to the other will pass gift- and estate-tax free. It should be possible to amend previous estate- and gift-tax returns to obtain these benefits, subject to the applicable statute of limitations.
• Married same-sex couples may now ‘gift split’ during life to third parties for gift-tax purposes.
• Married same-sex couples may now enjoy the so-called ‘spousal rollover’ for certain retirement and IRA plans. This provides more tax advantages than previously available to same-sex couples. Also, married same-sex couples will now be automatically entitled to the survivor benefits of certain of their spouse’s retirement accounts absent a signed waiver.
• Married same-sex spouses may now enjoy ‘portability’ for estate-tax purposes — that is, the use of their deceased spouse’s unused estate-tax exemption, even absent the use of a so-called ‘shelter trust.’
• Most obviously, married same-sex couples now have the ability to file joint federal income-tax returns, as well as to amend previously filed separate income-tax returns, subject to limitations issues. Note that, for certain high- and low-income couples, the elimination of the ability to file as a single individual may actually result in a tax increase.
• Married same-sex couples will now be entitled to spousal and survivor Social Security benefits.
Inevitably, any law that impacts marriage will also have some impact on both marriage planning and divorce. While divorce is a matter of state law, DOMA had the effect of both limiting the options available when couples divorced and imposing tax burdens not suffered by heterosexual couples.
Options now available for prenuptial planning or for divorcing couples include:
• Spousal support (alimony) and unallocated family support will be recognized and treated as taxable to the recipient and deductible by the payor.
• Retirement benefits can be assigned and transferred by a qualified domestic-relations order without creating a taxable event.
• Marital assets can be assigned to either spouse at the time of divorce without creating a taxable event.
• Spouses will enjoy greater options for coverage of health benefits at time of divorce.
• Parties to marriages which exceed 10 years will qualify for spousal Social Security benefits after divorce under the same criteria as have been in place for heterosexual married couples.
Numerous questions remain on several issues relating to DOMA, including tax issues for previously divorced same-sex couples (impacting alimony and ‘basis’ for capital-gains purposes in certain transferred property). The exact resolution of some of these questions will play out over time as the IRS and related entities issue guidance on them.
It is clear, however, that the impact of this ruling will be wide-ranging, both on employers and individuals, and that care must be taken in exploring, understanding, and implementing the changes that the Windsor case has brought about.

Kathryn von Schoeler is an attorney with Robinson Donovan, P.C., specializing in employment law; (413) 732-2301. Carla Newton is an attorney with Robinson Donovan, P.C., specializing in employment law; (413) 732-2301. Michael Simolo is an attorney with Robinson Donovan, P.C., specializing in estate planning, estate and trust administration, business law, and fiduciary litigation; (413) 732-2301.