By Attorney Angie Martell
Marriage may not be a benefit to a same-sex couple in all circumstances. It can impact couples differently depending on their situation. Often, same-sex couples seek out a lawyer to discuss the benefits and detriments of marriage. Unmarried couples may ask, "Should we marry now that we can?" Married couples may inquire, "What difference does it make that Michigan now must recognize our marriage?"
The short answer to these questions is, "It depends." For some couples, a relationship of mutual caring may be good and sufficient reason to marry or to remain married without regard to legal consequences. For other couples, it may be essential to marry as a way of affirming their relationship before their families and/or faith communities. For still others, the legal benefits and protections associated with marital status may be paramount. Ultimately, after being fully informed, the clients must decide their course of action.
Depending upon the age, financial circumstances and health of a couple, however, marriage may bring unwanted or unbearable burdens that are addressed below.
Overview of Federal Legal Implications of Marital Status
Marital status is referred to in more than 1,000 federal laws and regulations. The federal rights and responsibilities affect income and transfer taxes, Social Security, Medicare and Medicaid, veterans' benefits, and immigration, among other matters.
Federal tax implications of marital status for same-sex couples.
Prop Treas Reg 301.7701-18, published October 21, 2015, states, in relevant part:
(a) In general. For federal tax purposes, the terms spouse, husband and wife mean an individual lawfully married to another individual. The term husband and wife means two individuals lawfully married to each other.
(b) Persons who are married for federal tax purposes. A marriage of two individuals is recognized for federal tax purposes if the marriage would be recognized by any state, possession or territory of the United States.
(c) Persons who are not married for federal tax purposes. The terms spouse, husband and wife do not include individuals who have entered into a registered domestic partnership, civil union or other similar relationship not denominated as a marriage under the law of a state, possession or territory of the U.S. The term husband and wife does not include couples who have entered into such a relationship, and the term marriage does not include such relationships.
Thus, same-sex married couples may make gift and estate tax-free transfers between themselves during life, at death and in the event of divorce. They must file income taxes jointly (or as married filing jointly). They may exclude $500,000 of gain upon the sale of their principal residence.
On July 9, 2015, Attorney General Lynch announced that the Social Security Administration and Department of Veterans' Affairs also will recognize same-sex marriages nationwide.
Note that unmarried couples, including those who enter into civil unions or domestic partnerships, are not treated as married under federal law.
Marriage affects receipt of Social Security. If the marriage has been in place for one year, a spouse at age 62 may claim a retirement benefit based upon his or her spouse's record. The benefit is 50 percent of the spouse's benefit. If the couple has been married for nine months, a surviving spouse who is age 60 or older may claim a survivor benefit. Given these 12 month or nine month eligibility requirements for retirement and survivor benefits, unmarried same-sex couples may resolve to marry as soon as possible.
Practitioners may need to keep an eye on how Social Security will treat married couples who might not have been eligible for Social Security retirement or survivor benefits before Obergefell but who meet the criteria after Obergefell. An issue arises because the federal statute governing Social Security refers to marital status as determined by a couple's state of domicile. In a state like Michigan that did not recognize marital status for same-sex couples before Obergefell but that now is constitutionally obliged to recognize that status, is there retroactive recognition of a marriage? Consider the case of a Michigan couple who married in Massachusetts in 2004. If one spouse died before Obergefell was decided on June 26, 2015, is the surviving spouse eligible now for survivor's benefits? The Social Security Administration generally is encouraging parties to apply for benefits for which they are or may be eligible, and the practitioner should advise clients of their options.
A divorced spouse may qualify for Social Security based on the ex-spouse's record. Eligibility for this benefit, however, may be difficult for a same-sex ex-spouse to secure because the couple must have been married for 10 years and been divorced for at least two years. Further, the applicant must be at least 62, unmarried and ineligible for an equal or greater benefit. Conceivably an individual might have married in Massachusetts in 2004, divorced in 2014 and applied for a divorced spouse's benefit in 2016. Query whether the Social Security Administration will honor the dissolved marriage entered into before federal recognition.
Qualified retirement planning and same-sex couples.
Spouses have federally guaranteed rights in one another's qualified retirement plans, like 401(k) and 403(b) plans covered by the Retirement Equity Act (REA). REA is codified as IRC 401(a)(11), IRC 417, and section 205 of ERISA (29 USC 1055). A surviving spouse is entitled to a qualified preretirement survivor annuity or qualified joint and survivor annuity from a spouse's qualified retirement plan pursuant to IRC 417(a). In the event of divorce, a former spouse may be entitled to secure a share of the other spouse's qualified retirement plan through entry of qualified domestic relations order (QDRO) under IRC 414(p). A QDRO represents a statutory exception to the general rule that qualified retirement plans under ERISA cannot be assigned or alienated.
The REA requires a specific, timely postnuptial waiver in favor of an alternate beneficiary. See 29 USC 1055(c)(2)(A)(ii). Employee benefit plans, by their contractual terms, also may require that if a spouse is to waive a contractual right to a survivor's benefit, the spouse must consent in general or specific terms to the designation of someone other than the spouse as the beneficiary.
A client who wishes to avoid issues related to REA requirements should consider, if possible, "rolling over" his or her profit-sharing assets into an individual retirement account under IRC 408 because traditional IRAs and Roth IRAs are not subject to REA.
The REA spousal protections do not apply to unmarried couples, and a same-sex couple who are contemplating marriage need to be aware of the impact marriage will have on their estate planning. Married same-sex couples need to be aware of the need for a specific waiver of rights if they intend to leave their qualified retirement accumulations to anyone other than the spouse.
Michigan Legal Implications of Marriage
Pursuant to Obergefell, Michigan must recognize the marital status of married same-sex couples. Although many Michigan laws, like the Estates and Protected Individuals Code (EPIC), use the gender-neutral term "spouse," it has been reported that the gay marriage ruling by the U.S. Supreme Court affects hundreds of Michigan laws using the terms "husband" or "wife," and they will need to be reviewed and revised by the Michigan Law Revision Commission. Jonathan Oosting, Gay Marriage Ruling by U.S. Supreme Court Affects Hundreds of Michigan Laws, MLive (July 1, 2015). Until all Michigan laws become gender-neutral, there may be hiccups in applying Michigan's laws to same-sex married couples.
Contractual benefits may be affected by marriage. Marriage may affect contractual employee benefits, and the practitioner should review the impact of marriage on a client's particular benefits package. For example, the Michigan Public School Employee Retirement System authorizes a spouse who is employed by a public school to direct a pension to a legal spouse or a blood relative but not to a domestic partner. For couples who are not married, the survivor's pension is forfeited upon the employee's death.
Private contractual benefits may be a sensitive issue for a client whose employer may be unaware that the employee is in a same-sex relationship. In such case, the client will need to weigh the benefit associated with marital status versus the burden of disclosing information about his or her personal life.
Benefits or Burdens of Marital Status Depend on a Couple's Personal and Financial Circumstances
Marital status may create benefits or burdens depending on a couple's personal and financial circumstances. Below are a few of the personal and financial issues to consider.
Couples who reject the default marital status rules. An unmarried couple may not want the default federal or state rules associated with marital status to apply to their household. For example, if one unmarried partner has children from a prior relationship, that partner may not want automatic spousal rights to arise with respect to qualified retirement plans. Such a couple may prefer to provide, through intentional, enforceable estate planning, how they will provide for their loved ones. As an unmarried couple, they still may designate one another as patient advocate and attorney in fact, and they may trust their respective next of kin to honor expressed wishes about the disposition of their last remains.
Even if a couple expects to remain together for life, they may prefer to remain unmarried, perceiving that dissolution of a marriage will enmesh them in laws that would not apply to a mutual and friendly decision to separate.
Couples with taxable estates and/or significant income and assets. For married couples with estates in excess of the federal estate tax exclusion amount ($5.45 million in 2016), the advantages of marital status are compelling:
The couple may now take advantage of the marital deduction, which allows for tax-free transfers from a deceased spouse's estate to the surviving spouse at death subject to the requirements under IRC 2056 and a corresponding unlimited gift tax deduction for transfers during life under IRC 2523. Transfers may be made into a properly structured trust, including a "qualified terminable interest property" or "QTIP" trust. A QTIP trust allows the donor spouse to leave a life income interest to a spouse with the donor controlling disposition of the remainder. This feature may have great appeal when the couple wants to provide for one another for life but have different beneficiaries after they both are gone.
The couple can take advantage of "portability" so that the surviving spouse may use, during life or at death, the unused estate tax exclusion amount of a predeceased spouse.
Two generation-skipping transfer tax exemptions are available.
A surviving spouse may "rollover" a deceased spouse's retirement benefits into the survivor's spousal IRA and may defer withdrawal until age 70 and a half or, if past that age, stretch the withdrawals.
With the marital deduction available to the same-sex couple, the contortions that were required to defer and minimize estate taxes before Obergefell may be avoided. In many cases, the estate planning can be simplified.
At the same time, there may be downsides to marriage for an affluent couple.
Same-sex married couples must file their income taxes jointly or as "married filing separately." There is apt to be a "marriage bonus" if one spouse has much more income than the other, but there likely will be a "marriage penalty" if the couple both are substantial wage earners.
Unmarried couples who have separate principal residences may claim a principal residence exemption for both homes, but, as a married couple, they may be unable to do so, with the result that property taxes will increase on one of the homes.
Provisions of Chapter 14 of the Internal Revenue Code create the opportunity for leveraged transfers between unrelated individuals that are not available to spouses.
Couples with health concerns and potential long-term care needs. If one or both of the partners is or are disabled or experiencing negative effects from aging, marriage may have a positive or negative impact on a couple depending upon their circumstances.
If the wealthier partner enters into long-term care as an unmarried person, that partner's assets may be depleted, leaving the healthier partner without access to the ill partner's resources. If the couple marries, the Medicaid "spousal impoverishment rules" would allow some of the couple's resources to be preserved for the healthier spouse's use.
If the unmarried partner with fewer assets is the one needing long-term care, however, marriage would expose the wealthier partner's assets to the ill spouse's long-term care expenses. If both partners are disabled and receiving Supplemental Security Income (SSI), marriage actually may reduce their combined monthly benefits, making it harder to sustain the couple's household.
The right to retain a residence, car, and prepaid funeral contract and burial items for both partners may also be affected by marital status. The timing of recovery of long-term care benefits paid by Medicaid from a deceased's estate is affected by whether or not a legal spouse is living in the home from which the state seeks recovery.
Social Security also is affected after the death of a spouse. If the couple were married for nine months or more prior to death, the deceased spouse's Social Security benefit is available as an alternative to the Social Security earned by the surviving spouse. Depending on the relative employment records of the couple, there may be a meaningful difference between the amounts. Unmarried couples are not eligible for one another's Social Security.
Couples with children. If a young, healthy couple plans to raise a family together, marriage provides clear methods for securing parental rights to both adults for the benefit of the children. Stepparent adoption, marital presumption rights, surrogacy, direct or agency placement adoptions are ways in which parental rights can be secured to both members of the married couple. These same options are not as readily available to an unmarried couple. The marriage of the parents may be important psychologically to a couple's children and will secure the rights of both parents to participation in school, medical, and general decisions involved in raising the children. Marital status also assures that established custody, support, and inheritance rights will apply to a family headed by same-sex parents.
Identify Pre- and Postnuptial Agreement Issues
Michigan law provides that "A contract relating to property made between persons in contemplation of marriage shall remain in full force after marriage takes place."
Further statutory foundation for prenuptial and postnuptial agreements is provided by MCL 700.2205:
The rights of the surviving spouse to a share under intestate succession, homestead allowance, election, dower, exempt property, or family allowance may be waived, wholly or partially, before or after marriage, by a written contract, agreement, or waiver signed by the party waiving after fair disclosure. Unless it provides to the contrary, a waiver of "all rights" in the property or estate of a present or prospective spouse or a complete property settlement entered into after or in anticipation of separate maintenance is a waiver of all rights to homestead allowance election, dower, exempt property, and family allowance by the spouse in the property of the other and is an irrevocable renunciation by the spouse of all benefits that would otherwise pass to the spouse from the other spouse by intestate succession or by virtue of a will executed before the waiver or property settlement.
Marriage itself is consideration for a prenuptial agreement, but a postnuptial agreement requires additional consideration. Such consideration might be furnished if the couple already has separated and their postnuptial agreement amounts to a property settlement. A property settlement that appears to encourage divorce may be disregarded by Michigan courts on public policy grounds, however. A postnuptial agreement intended to salvage a marriage also will be enforced if it otherwise meets the legal requirements.
Pre- and Postnuptial Agreements and Same-Sex Couples
Prenuptial and postnuptial planning for same-sex couples may be different from planning for traditional husbands and wives due to the age, financial circumstances, and the history of the parties. A prenuptial agreement for a same-sex couple marrying for the first time and without any previous relationships may resemble a similar agreement for an opposite-sex couple with a similar history. If, however, one or both of the parties has been in a previous marriage or other "less than marriage" legal relationship, like a civil union or domestic partnership, it is essential to learn about that prior relationship and to confirm that it has been dissolved legally before a marriage can take place. Loose ends are likely for a same-sex couple because, prior to Obergefell, divorce was not available to a same-sex married couple who lived in a nonrecognition state like Michigan.
For a same-sex couple in a long-term relationship who decide to marry now that they can, any marital agreement may feel to them like a postnuptial agreement. They already may have a history of commingling assets and operating their financial lives together. The couple will need to evaluate how much of their premarital accumulations should be "tacked on" to their postnuptial planning. Rather than enter into a postnuptial agreement, they may prefer simply to undertake intentional estate planning.
Marital Agreements and REA Protections for Spouses
Spousal protection under the REA cannot be waived by a prenuptial agreement. Benefits governed by the REA may be waived only by a spouse, and, before marriage, the fiance is not a spouse.
This federal prohibition differs from Michigan law that allows the fiance to waive state law rights, like dower, that arise only after marriage. The differences between federal law and state law can give rise to controversy. A prenuptial agreement may refer to an REA-covered plan and should include the fiance's informed agreement to sign, after marriage, any and all forms required by the plan administrator to confirm the spousal waiver. If a spouse later fails to honor the terms of a prenuptial agreement and insists on REA rights, the designated beneficiaries may argue that the surviving spouse breached the contractual prenuptial or postnuptial agreement, leading to protracted litigation.
Cohabitation Agreements (Preferably, "Partnership Agreements") and Unmarried Same-Sex Couples
Before Obergefell, unmarried same-sex couples entered into business agreements in order to formalize their commitment and their intentions for managing their financial affairs. These agreements are sometimes called "cohabitation agreements," or, preferably, "partnership agreements." Cohabitation by a man and a woman remains a misdemeanor in Michigan. By its terms, the statute does not apply to same-sex couples, and, in any case, it is doubtful that the statute currently is enforced. It nevertheless may be prudent avoid use of the term "cohabitation" in a legal document even though the term may have popular use.
An agreement between an unmarried couple living in a relationship of mutual caring requires consideration other than the relationship itself, and, in this regard, differs from a prenuptial agreement where marriage itself furnishes the consideration. The unmarried couple's agreement amounts to a joint venture that spells out how the couple may pool assets, divide legal and financial responsibilities, and even dissolve the joint venture, whether the dissolution occurs during the lifetimes of the partners or after the death of one of them. Michigan courts have addressed the dissolution of unmarried relationships with differing results.
Partnership agreements between unmarried individuals remain viable in at least two ways. First, they may be used for couples who share their lives together but cannot marry or do not wish to marry. Second, agreements entered into in the past may provide evidence of the parties' intentions if the relationship ends and disputes arise regarding division of assets, support or parentage matters.
