Archive for category: Estate Planning

On May 20, 2014, the gay marriage ban in Pennsylvania was overturned by U.S. District Judge John E. Jones III.  In addition, Pennsylvania will now recognize same-sex marriages performed in other states that recognize same-sex marriage.  Governor Tom Corbett has announced that he will not appeal the decision, and for the first time in the state’s history, same-sex couples are now permitted to marry.  This is wonderful news for the residents of our state who have been waiting for a long time to marry their same-sex partners, but it also means that some of the information in this book as it relates to Pennsylvania residents has become outdated (as, frankly, I hoped it would become).  Rather than rewrite the book, I thought it would be simpler to provide Pennsylvania residents with a summary of the areas in which their lives will be affected as a consequence of the Pennsylvania decision.

First, if you’re counting, there are now 32 states that do not recognize same-sex marriage – the original text references 33 states.  Chapter 1 states that there are 17 jurisdictions that allow same-sex couples to legally marry, but, as of May 20, 2014, that number has risen – Pennsylvania became the 18^th state (plus the District of Columbia) to do so.

Next, there are several references in the book to the federal criteria of “The State of Celebration vs. the State of Domicile,” as well as recommendations that readers consider marrying in a state that does recognize same-sex marriage.  As of May 20, 2014, same-sex couples who reside in Pennsylvania no longer have to travel out of state to get married – unless, of course, they want to – in order to enjoy the same benefits as straight married couples.  Let’s examine some of those benefits in greater detail.

• Chapters 1, 4 and 5 discuss some odd Pennsylvania conundrums that, I’m sure, legally married same-sex couples will be very happy to see go by the wayside.  In 2013, legally married (in another state) same-sex couples who lived in Pennsylvania were required to file their Federal tax returns as “Married,” but their State returns as “Single.”  Those taxpayers will finally be able to file both their 2014 Federal and Pennsylvania returns as “Married,” and they also have the option to file amended Federal returns for up to three years prior, if it makes financial sense for them to refile as “Married.” (Marital status does not affect the amount of state tax that Pennsylvania residents pay, so filing amended state returns will not be necessary.)  
• Chapter 1 recommends that your wills and trusts be prepared based on current laws, but include special provisions in case same-sex marriage becomes legalized in Pennsylvania.  Now that the state recognizes same-sex marriage, such highly customized estate planning documents likely will not be necessary. 
• The beneficiary of a deceased same-sex partner used to be subject to a 15% Pennsylvania inheritance tax whether they had been unmarried or legally married (in another state), and it was my recommendation that wealthier couples consider either making large financial gifts in order to avoid that tax, or purchase life insurance to pay the tax.  Going forward, those strategies will be irrelevant because those same couples will not pay Pennsylvania inheritance taxes on their spouse’s assets (the same as straight married couples).
• Finally,  from the human perspective, the surviving spouse of a legally married same-sex couple now has, barring extenuating circumstances, sole authority in all matters pertaining to the disposition of their spouse’s remains in Pennsylvania – prior to this ruling, a same-sex spouse couldn’t even be named on a death certificate.
• Chapter 2 discusses the benefits of marriage as it relates to IRA’s and retirement plans.  Indeed, the benefits are so significant that from the federal perspective, including both income taxes and estate taxes, I recommend that all committed same-sex couples consider the financial advantages of getting married.  (Please reread that chapter if you are on the fence about it.)  But now, there is no need to travel to another state to marry to receive the same favorable federal tax treatment that the survivor of a straight married couple would receive on their deceased spouse’s IRA or retirement plan.  Now if you marry in Pennsylvania, you will assure your surviving spouse of a much better standard of living in his or her retirement than if you had not married. 
• Pennsylvania does not currently tax retirement income, so the change in the law will have no effect on your state income taxes.  There will be a significant change with respect to state inheritance taxes, though – an individual who inherited a retirement plan from a legally married same-sex spouse, used to have to pay the state’s highest inheritance tax rate of 15%.  In many cases, this amounted to a significant amount of money. Now, that same individual will pay nothing in state inheritance tax. 
• Chapters 1 and 3 both show, if you are a Pennsylvania resident, the monthly benefit that you would have been eligible for from Social Security, was “in question.”  This was because, unlike the Internal Revenue Service, the Social Security Administration recognizes same-sex marriages in states that recognize same-sex marriages.  If you are legally married, but do not live in a state that recognizes same-sex marriage, you are not currently eligible for spousal Social Security benefits.  The Social Security Administration recognized the inconsistency in their position and encouraged same-sex couples in all states to apply, but asked you to be patient as they develop and begin to implement new policies on this subject.  Well, legally married same-sex couples who live in Pennsylvania don’t need to wait any longer – they can now receive Social Security benefits based on their own earnings record, or the earnings record of their spouse if it is higher.  Remember, though, that the decision about when and how to apply for Social Security benefits can have a far greater impact on your financial security than what the staff at your local Social Security office might lead you to believe. Decisions about timing Social Security benefits should not be done without first talking to a trusted advisor.
• In the same context, please have a second look at the graph on page 80, which illustrates what happens if Dr. Dan had used the “Apply and Suspend” technique for his Social Security benefits, and subsequently died.  This graph takes in to consideration a 15% inheritance tax assessed on Dr. Dan’s retirement plan.    Since Pennsylvania now recognizes same-sex marriage, this tax will no longer be assessed at his death, which would make the difference between those two scenarios even more dramatic.

You should also have a look at the graph on Page 131, which illustrates the difference between taking my advice and ignoring it.  The steep decline in assets at Baker Bob’s age 80 was due to the 15% Pennsylvania inheritance tax he owed on Dr. Dan’s estate.  Now that Pennsylvania recognizes same-sex marriage and the inheritance tax no longer applies to the surviving spouse, the argument for marriage will be even stronger.

It has been a long time coming, but I am happy to see that Pennsylvania has finally made this change to their law.  Same-sex Pennsylvania couples who marry will finally be treated fairly, with the same dignity and respect as straight married couples.  Since this represents new territory for you, I encourage you to talk with a trusted advisor about the specifics of your own situation, so that you fully understand how these changes will affect you and your partner or possibly your spouse.