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No ‘Defense’ In Fed Marriage Act

Nasty things sometimes crawl out of legislative bodies in an election year. This year’s prime example is the “Defense of Marriage Act,” a bill that sailed through the House in July that would deny recognition of same-sex marriages. (Webmaster’s Note: The Senate approved the Defense of Marriage Act 85-14 on September 10, 1996 after this issue of Sentinel went to press. President Clinton signed the legislation into law on September 21, 1996.)

Of course, there presently are no U.S. same-sex marriages to worry about. No state has sanctioned such unions, nor has there ever been any federal legislation defining marriage in any way — until now. The commotion is in response to the increasing likelihood that Hawaii’s courts, acting under that state’s Constitution, will require the Aloha State to grant same-sex couples a marriage license on the same terms as heterosexuals.

In anticipation of the Hawaiian developments some 17 states have enacted laws refusing to recognize such marriages. The Defense of Marriage Act endorses these states’ power to disregard another state’s same-sex marriage and adds that for all purposes under federal law those unions will be void as well.

Naturally, since nobody is actually attacking the institution of marriage (unless the desire of some gay people to be included can be considered an attack), the Defense of Marriage Act is not defending anything. It just bashes an unpopular minority, as many other laws have bashed other minorities in the past.

The column on Page 2 (Race Claims Echo in Gay Marriage Debate) examines the parallels between today’s attacks on gays and the assaults in an earlier generation against Americans who sought racial equality. In this article we focus on the practical side: If the government disregards an otherwise legal gay marriage, what happens?

Varied Tax Consequences

Most of the fallout comes, not surprisingly, in the tax arena. Marital status is considered in many places in the federal tax code, although before the Defense of Marriage Act the rule was to define someone as “married” solely according to the law of the state where the taxpayer resides.

A married gay couple in a DOMA world would be prevented from filing a joint return. Each spouse would be “single.” Ironically, if both spouses work this would often result in lower income taxes because the infamous “marriage penalty” would not apply. DOMA may therefore cost the Treasury a windfall it would receive if many gays wed.

On the other hand, an individual whose spouse does not work would not be able to take advantage of the spouse’s personal exemption or deductible expenses. The general rule under DOMA, then, would be higher taxes for couples in which only one partner works or where incomes are very unequal, and lower taxes for couples with two relatively equal incomes.

Health, Pension Benefits Hurt

Once we look beyond the basics of income tax filing status, denying recognition of same-sex marriages is an unmitigated disaster for those couples. This is probably most evident in the health and pension area.

Over the past decade a growing number of employers have begun making health benefits available to the domestic partners of their employees. Unlike most employee health coverage, however, workers are often required to pay income tax when the coverage is extended to an unmarried living partner.

Being legally married would change this for gay couples, but only if the federal government recognizes the marriage. Under DOMA a couple could get married under their state’s own laws but would have to continue paying tax on benefits that other couples enjoy tax-free.

Pensions are an even bigger problem. In many households, especially for couples that have spend a long time together, one partner’s pension, profit-sharing and IRA accounts may be the biggest single asset. Generally both partners count on this money for retirement security, though the accounts are in only one individual’s name.

In the event of divorce these accounts often need to be divided if any kind of equitable settlement is to be achieved. The tax code provides that under a “Qualified Domestic Relations Order” one divorcing spouse can transfer retirement plan benefits into the name of the other spouse without any tax effect. The retirement money remains tax sheltered until it is withdrawn. If the original owner is under age 59½ no premature distribution is deemed to have occurred.

DOMA would cause enormous mischief in this situation. A couple could be legally married in their home state for decades, during which one partner might amass a huge retirement fund, but the “divorce” would not be recognized for federal tax purposes. No divorce, no Qualified Domestic Relations Order. Even if the spouse who amassed the benefit volunteered to give a share to the other partner, this would be treated as a taxable distribution from the plan. If the original owner were too young to receive regular distributions the 10% penalty tax would also kick in. The couple may face a choice of paying a hefty tax bill or leaving one partner without a source of retirement funds.

Estate Planning Woes

Denying recognition to gay marriages can cause even bigger problems in the estate planning area, though these problems will affect a smaller number of people near the high end of the wealth scale.

In the late 1970s a furor arose over the number of surviving spouses, mostly women, who were being forced to sell the family farm or business just to pay taxes on their late husband’s estate. This is why Congress enacted an unlimited marital deduction for estate and gift taxes in 1981. Under the new system, the tax code looks at a married couple as a single economic unit. Assets that are passed from one spouse to another are generally received free of tax (as long as the recipient is a U.S. citizen), and gift or estate tax is finally imposed when wealth moves from an older generation to a younger one, such as when the second spouse dies and leaves an estate for the children.

DOMA would dictate that this fair and sensible treatment never applies to same-sex couples who are legally married. Instead, estate tax would be due at the death of the first spouse, which could result in a forced sale of the couple’s business or real estate at fire-sale prices.

Gifts from one spouse to another also would be subject to tax, which raises all sorts of sticky issues. When a high-earning partner pays for the lavish lifestyle of a mate, are these payments taxable gifts? Or perhaps payment for ‘services rendered’ by the recipient, which would in turn be subject to income and self-employment tax? We have already seen some interesting Tax Court cases on this issue; DOMA may assure that we see more.

Outside the tax arena, DOMA would play havoc with the rights of people in same-sex relationship to obtain Social Security and other federal benefits. Presumably, it would also deny fringe benefits to the same-sex spouses of federal employees when those benefits are extended to other employees’ spouses.

The public policy justification for imposing all these hardships is — what, exactly? When people undertake all the responsibilities and obligations that the law imposes upon one spouse toward another, what is gained by having the government strip them of health, pension, tax and inheritance benefits that everyone else receives?

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.
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