NEW YORK (MainStreet) While same-gender couples are fighting for equal rights in legalized marriage, they also have to deal with inequalities when their happily-ever-after comes to an end. Though same-sex marriage is legal in 19 states and Washington, D.C., the division of assets in divorce still presents specific financial challenges to gay couples.
Progress in Splitting
Since Section 3 of the Defense of Marriage Act (DOMA), a federal law that barred same-sex married couples from being recognized as spouses and from receiving federal marriage benefits, was ruled as unconstitutional by the Supreme Court last year, gay couples have received numerous financial advantages.
For starters, gay couples on the outs saw significant tax benefits.
"Because the federal government did not recognize same-sex marriage, then transfers of property incident to a divorce would be considered a gift, and there were potential income tax effects," Tracy Craig, partner at Mirick, O'Connell, LLP., a Worcester, MA-based law firm, told MainStreet. The new SCOTUS decision allowed same-sex couples in states where same-sex marriage is allowed to transfer property without paying income or gift taxes.
"Same-sex married couples had bad tax consequences before the DOMA," says Bruce Bell, public engagement and information manager at Gay & Lesbian Advocates & Defenders, "Getting divorced was a trauma for them [and] even more trauma for them to go through tax penalties."
The momentous United States v. Windsor case last March was another turning point that not only had broadened the federal definition of "marriage" and "spouse," but also has implemented financial benefits for same-sex married couples to inherit their assets by deducting estate taxes.
"Prior to the Windsor case, even in states that allowed same sex divorce, federal law didn't allow gay couples to accomplish property transfers on a tax-free basis," says Michael P. Boulette, family law attorney at Minneapolis-based law firm Lindquist & Vennum. "[After the Windsor case] in states that allow same-sex marriage...asset transfers available on divorce are all available to same-sex couples on the same terms as opposite sex couples."
That also includes the tax deduction when dividing retirement accounts. Retirement plans that are owned by one spouse, such as IRA and 401(k), can be split as assets when gay married couples file for divorce, regardless of the state income tax.
Life insurance should be mentioned while drafting prenuptial agreement for same-sex married couple, which could be a benefit to secure one parter's financial life after the other has died. According to Craig, same-sex couples can use life insurance to provide a prenuptial agreement mandated death benefit and do not need an irrevocable life insurance trust to make sure the benefit is paid out free of estate.
"If one person of the same sex couple died and left property to the other person, and you're both U.S. citizens, then you would get the unlimited marital deduction," she said.
Meanwhile, spousal alimony also got a significant boost. According to Bell, of the GLAD, "spouses who pay alimony can deduct that spousal support on their federal income tax returns."
A Long Way to Go
But the nullification of DOMA still carries a bittersweet status for same-gender marriage that goes back to a state-level understanding of gay marriage: generally if your state allows you to marry, the federal government will recognize it; if your state doesn't, the Feds won't. That said, according to Attorney General Eric Holder, there are federal government programs like Rule of Celebration and Rule of Domicile that protect same-sex marriage regardless of the state a couple inhabits. Though this can protect federal taxes, immigration, student loans, bankruptcy and other financial issues, gay couples still do not have equality when it comes to Social Security benefits, veterans' benefits and family medical leave.
As a result, the question now is whether or not same-sex couples are legally married based on an individual state's laws. And, on a countrywide level, that status is extrapolated to the specifics of their finances in divorce.
Despite the fact that same-sex marriage has made tremendous progress to a stage of 19 states out of 50, plus D.C., there is still an ongoing battle for those in the LGBT community and their advocates to fight for a final victory. In the states that still prohibit these marriages, many couples legally married in other states are unable to end their relationships legally despite the fact that federal tax regulations would no longer pose a problem.
In March, it was ruled by a judge that lesbian couple Michelle Richmond and Kirsten Allysse Richmond, despite their legal marriage in Iowa, could not divorce in Alabama, a state that doesn't recognize same-sex marriage. Going back to Iowa to get a divorce seems the only solution; however, nearly all states have residency requirements, including Iowa, which require one or both parties in a marriage to live in the state for a certain amount of time to allow for a change in marital status.
"This has been the hot-button topic given the rise in state law approval of same-sex marriages," says George D. Karibjanian, a Boca Raton, Fla.-based senior counsel at Proskauer Rose, LLP. "Until the rise in same-sex marriages, not many people focused on the fact that most state divorce laws have a residency requirement."
Boulette also pointed out that there are a great number of same-sex couples that may have very recently married, but who have been living together, sharing assets, and perhaps even living under a legally-binding cohabitation agreement for many years.
"The benefits [of marriage] for them is a vexing question we now face, since the law does not recognize periods of cohabitation for the purposes of determining things like property division and alimony," he said, "But same-sex marriage may force us to rethink that issue where many of these couples lived together for many years without being allowed to marry."
Written by Amy Xie for MainStreet