Your Money: If Pa. allows same-sex marriage, check benefits

State Rep. Brian Sims (D., Phila.) said last week that he would cosponsor a bill to legalize same-sex marriage in Pennsylvania. For local financial planners and trust-and-estate lawyers, a change in the state law on gay marriage could mean a lot of new recommendations for their clients.

Pennsylvania currently defines marriage as being between one man and one woman, while Delaware does permit same-sex marriage and New Jersey has civil unions.

If Sims' bill passed, Pennsylvania would give married same-sex couples access to the same tax breaks and retirement benefits as married heterosexual couples. Here are some things to consider:

The Supreme Court ruling last week regarding the Defense of Marriage Act (DOMA), which basically leaves it up to the states to decide whether same-sex couples can be legally married, changes the status of those couples under employer retirement plans so that a retirement account now automatically rolls over to the spouse when the worker dies.

The Supreme Court decision also opens options for same-sex couples when it comes to inherited IRAs, since a spouse has more rights than a non-spouse beneficiary.

Married same-sex couples are now able to file for federal Social Security spousal and survivor benefits. But they would also be able to employ a number of strategies to maximize total household benefits.

"Suppose a same-sex couple marries, and one gets hit by a bus, leaving the IRA to the surviving spouse. They can now take a spousal rollover, and they don't have to take distributions until age 701/2. That means another 40 years of tax-free growth," says White & Case L.L.P. partner John Olivieri.

Before the Supreme Court decision, same-sex spouses were treated like any other beneficiary. "They would have to take distributions immediately and pay taxes as the money came out," Olivieri adds.

Being able to file a joint tax return means many same-sex couples may find their federal tax bill changing. Married couples sometimes pay less in taxes than those who file individually, or if they are high-income earners, their tax bill can be much higher. Also, by filing jointly, the couple may be eligible for certain tax breaks and will be able to share capital gains and capital losses, for example.

The Supreme Court case hinged on the issue of federal estate taxes. Edith Windsor, a New York resident, married Thea Spyer, her longtime partner. When Spyer died, Windsor was required to pay $363,000 in federal estate taxes. The estate would have paid nothing had the federal government recognized their marriage. Windsor sued and won when the Supreme Court struck down DOMA.

Now, if you are a spouse in a same-sex couple, you can leave all of your property to your spouse and the estate will not owe any tax, no matter how large the estate. Limits on gifts are also raised.

At the death of a spouse, says Philadelphia lawyer Lindsey Ermey, "if one dies with less than $5.25 million in assets to their name, the survivor can elect to make the unused tax exemption portable. . . . The deceased spouse's unused exemption would be tacked on to the survivor's federal estate and gift tax exemptions."

Lindsey Ermey, an attorney with Ballard Spahr L.L.P.'s family wealth management group, says her clients who are residents of states allowing same-sex marriage "now need to take a long look at their estate, their will, who has power of attorney, any insurance designations, health-care proxy, anything that will clearly benefit your partner."

Are there any future burdens for same-sex couples in financial or estate planning? Ermey says that there are many unanswered questions and that financial planners are awaiting some clarity from the IRS.

"Let's say you get married in New York, where same-sex marriage is recognized, and you move to Pennsylvania, where it is not yet recognized," Ermey explained. "Can you still file a joint federal income tax return? We don't know yet."