By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
On June 26, 2013 the United States Supreme Court struck down part of the Defense of Marriage Act, commonly known as DOMA, as unconstitutional. In particular, the Supreme Court decided that if same-sex marriages are recognized under state law, the federal government must recognize those marriages as valid too. This has obvious implications for a virtually infinite list of financial items including federal tax issues, Social Security benefits, healthcare benefits and various rights with regard to retirement assets afforded under ERISA.
While there are, no doubt, a host of new planning strategies, rules and issues to discuss as a result of DOMA, in one important aspect there is nothing new at all. Much has been made about the various complications that are going to result due to some states recognizing same-sex marriages, while others will not, but this issue is hardly unique to same-sex marriages. In fact, there are many ways in which state and federal laws interact.
When our Constitution was first created, it required a delicate balance of states’ rights versus the rights of the federal government in order to garner enough support to become law. Some, like Alexander Hamilton, believed the federal government should have the bulk of the power and were called Federalists. Others, like Thomas Jefferson, believed that the majority of governmental power should rest with the states and were called anti-federalists or Jeffersonians. The compromise that resulted in our Constitution, including the Bill of Rights, gave some powers to the federal government, while keeping other powers in the hands of the states.
One result of this split of power between states and the federal government is that when states choose to exercise their rights differently from one another, there can be some pretty dramatic differences in how very similar people in very similar situations are treated for federal purposes, despite the fact that the same federal laws apply to everyone no matter what state you live in. Same-sex marriages are now an excellent example of this, but it’s far from the only one.
Just as states have the authority to decide upon their own definition of marriage, they also have most of the control when it comes to property law. Most states (roughly 40) follow what is known as “separate property” law, but a handful of states, mostly in the South and West, use what is known as “community property” law. There are very unique federal tax complications created by community property that, for the most part, only affect the people living in those states. Now, in a similar fashion, most states do not allow same-sex marriages, but a handful of states do. This will, no doubt, create a whole host of interesting complications, some of which are yet unknown.
Other state’s rights issues that impact IRAs are the creditor protection afforded to IRAs, how income from an IRA is defined when it is left to a trust and whether a state imposes its own income tax on IRA distributions. Now, thanks to the Supreme Court’s decision on DOMA, we can add same-sex marriages to the list. This is now one more example of why it’s important to make sure that when you choose your tax and financial professionals, you chose those who are knowledgeable at both the federal and (applicable) state(s) level.