I (Meghan) find myself, on what could be the eve of the United States Supreme Court’s decision in United States v. Windsor (the case which will likely determine the constitutionality of the Defense of Marriage Act (“DOMA”)), drafting a prenuptial agreement in advance of a same sex couple’s wedding. The timing of this agreement reminds me, yet again, not only of the obvious inequality and additional financial burden same sex couples face due to DOMA, but how ludicrous the “married in this state, not married in that state, not married federally” status is for same sex married folks.
And, on top of that, you see, this happens to be June. June — the month in which people get married, and the month in which the Supreme Court hands down a pile of rulings every Monday, including on Windsor. The trick is that we don’t know what rulings will be released on which Monday.
When you have an impending decision from the Supreme Court on an undetermined Monday in June that has a significant impact on how a couple will decide to structure their finances, and toss in their firm June wedding date, you get some pretty darn acrobatic prenuptial agreement drafting.
There are compelling reasons why same sex couples decide to enter into prenuptial agreements. (Which are also referred to as antenuptial agreements. I know. Fancy.) Many of them are financial and related to the federal government’s (and therefore the IRS’s) not conferring the benefits of marriage on same sex married couples thanks to DOMA, but others have nothing to do with money. Even gay and lesbian couples who have no interest in the “traditional” reasons for entering into a prenuptial agreement (for example pre-determining alimony in the event of a divorce), might choose to enter into one because of its particular potential advantages to same sex couples. But first, on to the financial.
DOMA creates a pile of issues for same sex couples that straight married people don’t face. One of these issues is the potential for additional federal tax burdens when one transfers money — which sometimes occurs just through opening and funding a joint bank account — to her spouse. What would not be a taxable event to a heterosexual married couple may create a federally taxable gift for a same sex married couple.
In the case of my client’s prenuptial agreement, the Supreme Court’s decision on Windsor could have a significant gift tax implication on the couple. Do they agree to merge their bank accounts immediately following their June wedding and risk gift tax exposure if DOMA either 1) hasn’t been decided or 2) isn’t overturned? Do they agree to wait until the Windsor ruling comes down to decide whether to combine their funds? What will the Court decide? Will their wedding date fall before or after the decision?
The gift tax issue doesn’t just impact the super weathy or even the wealthy — only transfers below the first $14,000 are exempt from gift tax, and the gift tax rate is high. Prenuptial agreements can’t undo the negative impact of DOMA — only the Supreme Court can do that — but it may help couples structure their financial lives in a manner that lessens the impact. A prenuptial agreement may also be helpful in the context of retirement and pension benefits under ERISA.
All same sex married couples, regardless of the size of their bank accounts, are affected by the issue of the “portability” of their marriage. This is a key issue that we attempt to address in premarital agreements for same sex couples. While same sex marriages are recognized by a growing number of states, if a marriage is challenged and not recognized, a whole host of issues can crop up. For example, here in Connecticut where we have marriage equality, a child born during the marriage is presumed to be the child of both parents, even when both parents happen to be men. The baby’s legitimacy is presumed, regardless of the fact that one parent may have no biological connection to the child. However, if a couple finds themselves in a state that does not recognize their marriage, Connecticut’s view of the parents’ rights cannot be relied upon. Prenuptial agreements are one tool we use to try to address the issue of future children of the marriage.
Finally, there is the topic no engaged couple enjoys discussing — divorce. Obtaining a divorce is difficult for same-sex couples who live in most states. A gay couple who married in Connecticut but relocated to Texas may not be able to obtain a divorce because the state that would have jurisdiction over their marriage, Texas, doesn’t recognize their marriage and therefore can’t divorce them. It may be wise for the couple to address this issue by entering into a prenuptial agreement which seeks to grant jurisdiction to a state that recognizes their marriage, and their prenuptial agreement. The hope is to make the marriage, or at least the prenuptial agreement apart and aside from the marriage, enforceable regardless of where the couple lives.
So as we always say, “Don’t mess with Texas, or, you know, taxes.”