Revisiting life insurance after the defeat of DOMA
August 8, 2013 by Julius Giarmarco
The U.S. Supreme Court’s ruling in Windsor last month striking down certain provisions of the Defense of Marriage Act will give life insurance professionals both opportunities and challenges. The Supreme Court invalidated Section 3 of DOMA, which defined marriage for all federal law purposes as a legal union between a man and a woman. The decision means federal tax laws now apply to lawful marriages of same sex couples.
The Supreme Court’s decision, however, did not deal with Section 2 of DOMA, which allows states to refuse to recognize same-sex marriage performed in other states. To date, 13 states have legalized same-sex marriages, 35 have prohibited it, and two states are silent on the issue.
A same-sex couple with a combined estate of between $5 million and $10 million that purchased a single life policy on the wealthier partner to provide liquidity to pay estate taxes may find that they can reduce their coverage or take a paid up policy if they get married. As a married couple, they will benefit from both the unlimited marital deduction and portability of the first deceased spouse’s unused estate tax exemption. On the other hand, a same-sex couple with an estate of over $10 million may find a survivorship policy a better fit if they marry.
For same-sex married couples with larger estates, life insurance will continue to be a cost effective method to provide estate liquidity. Typically, an irrevocable life insurance trust (ILIT) will be used to own the policy. As a married couple, the gifts to the ILIT can now be “split,” thereby allowing up to $28,000 per year (per beneficiary) to be gifted to the ILIT.
Most states have a law that prohibits purchasing life insurance when the purchaser does not have an insurable interest in the insured. In states that do not recognize same-sex marriages, this is deterrent to purchasing life insurance (although there may be ways around the problem). But as more states legalize same-sex marriages in the aftermath of Windsor, the insurable interest rule will become less of an issue.
The repeal of DOMA may result in married same-sex couples adopting or having more children (since both spouses’ names can now appear on the birth certificate). As such, life insurance to provide minor children with funds for health, education, maintenance and support if one or both parents die prematurely will be advisable. Many same-sex couples purchased life insurance to cover the loss of qualified joint and survival annuity benefits, qualified pre-retirement survivor annuity benefits, Social Security survivor benefits, and retiree health insurance, upon the death of the first partner. Same-sex spouses who live in a state that recognizes their marriage will now enjoy those benefits. Thus, a life insurance professional should consult with those clients to determine whether they should reduce their life insurance coverage or take paid up policies.
As mentioned above, Section 2 of DOMA remains in effect. Other states may not only continue to prohibit same-sex marriages, but also refuse to recognize those marriages that were legally entered into in another state. Therefore, before making any changes to their life insurance, a married same-sex couple must remember that the law is unclear if they move to a state that does not recognize same-sex marriages. Uncertainty in this area will continue until federal guidance is provided. For all the reasons mentioned above, now is an excellent time for married same-sex couples to review their estate planning.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.
