By: Andrew Mackerer, Esq.; Pamela Quattrone, Esq.; and Daniel Del Collo, Esq.
New Jersey was the 14th state to legalize Gay Marriage, which creates both opportunities and challenges for same-sex couples planning for retirement. Three attorneys from the Law Offices of Nancy M. Rice explain three important issues same-sex couples should consider after marriage: having qualified retirement plans and IRA’s in place, spousal impoverishment rules regarding Medicaid and whether there is marital deduction for Federal Estate Tax and New Jersey Estate Tax.
DOMA’s constitutionality came before the U.S. Supreme Court in July 2013 because the law prohibited the IRS from recognizing same-sex marriages that were valid under state law. U.S. v. Windsor, 570 U.S. 12 (2013). As a result, New York resident Edie Windsor had to pay Federal Estate Tax on the money she inherited from her late spouse, because Edie had been married to a woman, Thea Spyer. Had Thea been Theodore, Edie would have inherited everything tax-free; as it was, the estate paid $363,000 to the IRS. She’ll now be getting a refund, plus interest.
Subsequently, in New Jersey, Judge Mary Jacobson in Mercer County ruled that, after Windsor, New Jersey same-sex couples were being denied equal access to federal benefits, and the state must therefore allow same-sex marriage as of October 21, 2013. Garden State Equality v. Dow, No. L-1729-11 (N.J. Super. Sept. 27, 2013). Although it seemed as though Governor Chris Christie’s appeal of the Court’s decision in Garden State Equality v. Dow might be another hurdle in the recognition of same-sex marriage, he dropped his appeal on October 21, 2013- and same-sex marriage became legal on that day.
Despite these advancements, many same-sex couples are still in civil unions or domestic partnerships, or have not yet entered into any form of legal union. While these changes mean that same-sex marriages are treated just like any other marriage for the purpose of federal and now New Jersey law, 31 states still have laws or constitutional amendments that deny the freedom to marry to same-sex couples. Therefore, it is particularly important for same-sex couples to have an estate plan. Even in Pennsylvania and New Jersey where same-sex marriage is recognized, an estate plan can protect couples against the frustrations of discrimination (despite lack of justification) by authority figures and family members. Furthermore, it is important to consider the treatment of same-sex couples with respect to the following areas: IRAs and qualified retirement plans, marital deduction for Federal estate tax and New Jersey estate tax purposes, and Medicaid.
Qualified Retirement Plans and IRAs
Two recent court decisions have drastically changed the manner in which Federal and New Jersey laws treat same-sex married couples with respect to Qualified Retirement Plans like 401(k) plans and IRAs. When the United States Supreme Court struck down a provision of the Defense of Marriage Act, in addition to making same-sex marriage legal, the Court mandated that same-sex married couples must be treated equally under federal law. As a result, following the death of a spouse, same-sex couples that are married in the State of New Jersey are eligible to rollover their spouse’s qualified retirement plan and IRA assets into their own IRA.
A surviving spouse has two primary options- with respect to the deferral of tax on IRA and qualified retirement assets: 1) Roll those assets into the surviving spouse’s IRA; or 2) Roll the assets into an inherited IRA. By rolling the assets received from the deceased spouse’s IRA or Qualified Retirement Plan the assets that are rolled over will be treated under the same rules as the surviving spouse’s IRA. For example, if the surviving spouse is under the age of 59 ½ years, the rollover funds will be subject to the early withdrawal penalty of an IRA- unless one of the exceptions to the penalty are met. However, the surviving spouse can choose to treat the inherited IRA funds as an “inherited IRA,” which generally requires minimum distributions to be taken each year based on the surviving spouse’s life expectancy. Under this option a spouse may access all of the funds without a penalty; however, any withdrawal is subject to income tax. It is important to note that in order for same-sex couples to have these different options, they must actually be married. For federal tax purposes, a civil union or domestic partnership does not qualify as marriage.
The IRS has taken the position that if same-sex marriage is valid in the state where the ceremony is performed, then for federal tax purposes the couple is married. This applies even if the state in which the same-sex couple lives does not legally recognize same-sex marriage or if the married couple later moves to a state that does not recognize same-sex marriage. For example, if a couple is legally married in the State of New Jersey but then moves to a state that does not recognize same-sex marriage, the couple is considered married for federal tax purposes.
Another important change has occurred with respect to qualified retirement plans: the Department of Labor has stated that the federal law, ERISA (Employee Retirement Income Security Act), applies to same-sex spouses like any married couple. This means that if a same-sex spouse wishes to name someone other than their spouse as the beneficiary of a qualified retirement plan, like a 401(k) plan, the spouse must sign a written waiver of his or her rights as beneficiary.
It is important to speak with a tax advisor in order to determine the best option for a surviving spouse when receiving qualified retirement benefits or IRA benefits.
Federal and New Jersey Estate Tax and NJ Inheritance Tax Issues
Windsor granted long-awaited Federal marriage benefits to same-sex couples, including the marital deduction and portability under the Federal estate tax. This means that, upon death of a spouse (whether in a same-sex marriage or otherwise), such spouse can leave an unlimited amount of assets to his/her surviving spouse free of Federal estate tax- as long as the surviving spouse is a U.S. citizen. It also means that same-sex spouses can now combine their individual federal estate tax exemptions ($5.34 million per person for 2014) which enables the surviving spouse to make use of his/her own individual exemption as well as the deceased spouse’s unused individual exemption. This is called “portability” and essentially means that married same-sex couples can now leave $10.68 million upon the death of both spouses free of Federal estate tax.
Since pre-Windsor same-sex couples were limited to the amount of their own individual exclusions only (no portability), any amount that a deceased partner left to his/her surviving partner ate into his/her individual exclusion; without portability, any unused portion of the deceased partner’s exclusion was wasted. Then, upon the death of the second partner, he/she was again limited to his/her own individual exclusion. It is important to note, however, that only legally married couples can take advantage of the Federal marital deduction and portability – domestic partnerships and civil unions are not recognized for purposes of these Federal tax advantages.
With regard to the New Jersey estate tax, the marital deduction now applies to legally married couples and civil union partners, but not to domestic partners. Therefore, upon the death of a same-sex spouse or civil union partner in New Jersey, he/she can leave an unlimited amount of assets to his/her surviving spouse/domestic partner free of New Jersey estate tax. However, New Jersey does not recognize portability for any married couples, so it is important for all married/civil union couples to have a proper estate plan in place for the purpose of minimizing New Jersey estate tax, particularly since the state’s individual exemption ($675,000) is significantly lower than the Federal exemption.
Finally, in terms of New Jersey inheritance tax, same-sex couples (whether married, civil union partners or domestic partners) are treated just like any other married couples – New Jersey inheritance tax does not apply to distributions to a surviving spouse/partner as long as one of the couple has entered into one of these three forms of legal unions. New Jersey inheritance tax does apply to any distribution to a partner outside of a legal union.
Medicaid: Do Spousal rules apply?
Another positive outcome of New Jersey’s adoption of same-sex marriage is that the spouse of someone who is eligible to receive Medicaid benefits (whether in their own home, in an assisted living facility or in a long-term care nursing home setting) is entitled to limited protection of the couple’s assets through Medicaid’s spousal impoverishment rules, which until recently, were only available to opposite-sex married couples.
With Medicaid, the spouse who is not seeking Medicaid is commonly referred to as the “community spouse,” whereas, the spouse who is eligible is referred to as the “institutionalized spouse.” Furthermore, the Medicaid program is based on Federal and State law as a way to provide long term health care coverage to individuals who meet certain state-specific financial eligibility requirements and who also cannot afford the cost of their own care. It is important to note that for married couples, the resources of both the community spouse and the institutionalized spouse, whether owned jointly or individually, are considered together as one resource when determining financial eligibility for Medicaid.
The good news for newly married couples in New Jersey is that pursuant to Medicaid’s spousal impoverishment provisions, a certain amount of the couple’s combined resources may be protected for the community spouse. The general rule for a married couple with one institutionalized spouse is that the community spouse may keep a certain amount of the couple’s combined resources (up to one half of all assets (with a cap of $117,240 in 2014), not including certain exceptions). Also, the institutionalized spouse must meet certain asset limits ($2,000 in 2014) and, depending on the level of care required, he or she may also need to meet monthly income limits. These monthly income limits do not apply to the healthy spouse. Finally, the healthy spouse is also entitled to receive a Minimum Monthly Maintenance Needs Allowance, which is a an amount calculated by the County Medicaid office to determine how much of the institutionalized spouse’s income the community spouse may keep for living expenses.
Lastly, unmarried individuals (or couples in a Civil Union) who are considering marriage should be aware that a healthy unmarried individual with significant individual assets may be required to spend down such assets when he or she becomes married. This is because the couple’s resources will be counted together, whereas, such spend down would not be required if such individual remains unmarried. Also, note that Medicaid rules invoke penalties for transfers of resources that do not fall within a legitimate exception.
Through a strong foundation of seasoned lawyers and a commitment to client service, Rice Elder Law has been a leader in Elder Law for nearly 25 years. The firm’s four attorneys are admitted to practice in New Jersey and Pennsylvania. Rice Elder Law delivers personalized counseling for families and individuals in the South Jersey and Pennsylvania regions.