Planning Trends Relating to the Demise of DOMA

As states began to legalize same-sex marriage in the early part of the twenty-first century, an inevitable conflict arose with the federal Defense of Marriage Act (DOMA), which broadly prohibited the federal government from recognizing the legality of same-sex marriage even when such marriages were permissible under state law. The legal requirements of marriage has always been governed by state law, and DOMA created circumstances in which same-sex couples saw their marriages recognized by some states and ignored by other states and the federal government. This led to tremendous practical difficulties with things like filing tax returns. Same–sex couples would often have to prepare multiple versions of their returns for the various jurisdictions in which they had tax reporting obligations, filing as a married couple in some states and filing as single in other states and on their federal returns. It also complicated life insurance planning, as insurable interest between two individuals is most easily demonstrated by a legally recognized marriage.

DOMA was overturned by the United States Supreme court in 2013. While this decision allowed federal recognition of same-sex marriages, the situation in the various states is still unclear. A number of states have allowed same-sex marriages through state court decisions or legislative enactments, and there is currently extensive litigation about the legality of same-sex marriage pending. These recent changes and continued uncertainty have given rise to several important insurance planning issues.

  1. Insurable interest – insurable interest between two individuals is most easily demonstrated by marriage. While there are other ways to achieve an insurable interest, they are complicated and may require circumstances that do not apply to all couples. Same-sex couples should review the current state of the law for their particular states to see if there have been changes in the legal recognition of their marriage which may give rise to additional planning opportunities that were not present just a few years ago.
  2. Second-to-die insurance – This is another area in which the legal recognition of a marriage is important and may give rise to significant estate planning opportunities. These can include buy-sell agreements and use of second-to-die insurance through an ILIT to provide estate liquidity. Again, clients who may not have previously qualified for this type of insurance because their marriages were not legally recognized may now have additional options if those marriages become recognized due to litigation or changes in state law.
  3. Qualified plan benefits – A same-sex couple who may not have been recognized as married couple may have been unable to take advantage of various survivorship benefits that are available through qualified retirement plans. These types of benefits are available in both defined contribution and defined benefit plans, so if the couple has recently had their marriage legally recognized, they may be able to utilize newly-available survivorship benefits from a qualified retirement plan. Utilization of these new benefits may in turn change their life insurance needs.

While the litigation currently pending regarding same-sex marriage is far from complete, same-sex couples have already seen significant changes that may affect their life insurance planning requirements. Planner would do well to stay apprised of the latest developments in the area of DOMA, particularly as they apply to jurisdictions in which their clients live, work, and own property.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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