Same-Sex Marriage Cases Now Hitting State Courts: Who Inherits Your 401(k)?

Imagine that a legally-elected body representing an entire country passes a law. Then the legally-elected leader of that country signs it, and for 20 years individuals, courts, businesses and other entities dutifully follow “the law of the land.”

Then it is suddenly struck down.

What happens to the people who were affected by this law for the past two decades? What about the companies and people who obeyed this law when it was in effect? Can they be sued today? Is there a statute of limitations? What is it?

We’re probably going to find out before the end of the year.

In June, the U.S. Supreme Court ruled in the case of U.S. v. Windsor that the federal definition of “marriage” was unconstitutional. The court said, in essence, that restricting “marriage” to the legal union of a man and a woman violated the Constitution. This set in motion a flood of lower-court case filings by same-sex couples,(1) and decisions are starting to come out.

The case of O’Connor v. Tobits examined the question of who was entitled to inherit the retirement account of a same-sex spouse. Sarah Farley and Jean Tobits were legally married in Canada, which recognizes same-sex marriage, and repeated the ceremony in Illinois, where they were living when Sarah died of cancer in 2010. Illinois is among the 13 jurisdictions (12 states plus the District of Columbia) that recognize same-sex marriage. Sarah had named Jean as her spouse beneficiary on her company profit-sharing plan.

According to attorney Michelle Ward, a partner in the tax advisory firm Keebler and Associates, under ERISA, the federal law that governs this type of retirement plan, when an employee with an account in the plan dies, “benefits must be paid to the surviving spouse unless she or he signs a waiver.”(2)

In an additional twist to this case, Sarah's parents alleged that their daughter had had a change of heart of who should get her benefits: The day before she died, she supposedly signed a Change of Beneficiary form directing that her parents receive her retirement assets instead of Jean.

Sarah’s employer filed a motion with the court to decide who should receive her account.

Although the authenticity of the Change of Beneficiary form was questioned, “That wasn’t the issue,” says Ward. Jean had never waived her spousal right to Sarah’s account; without this, ERISA prohibits retirement assets from going to anyone other than a spouse. The case came down to whether Jean was, in fact, Sarah’s legal spouse.

The U.S. District Court for Eastern Pennsylvania ruled yes, stating: "Windsor makes it clear that where a state has recognized a marriage as valid, the United States Constitution requires that the federal laws and regulations of this country acknowledge that marriage."

Although this case has been settled, it raises additional questions. For instance, what if Jean and Sarah were married in Illinois, but at the time of Sarah’s death, were living in a state that does not recognize same-sex marriages? Would this have changed the outcome?

Or, suppose an individual in a same-sex marriage died in 2009, before the recent Supreme Court decision. Based upon the federal definition of marriage in effect at the time, the retirement plan would not have been required to recognize his partner as his “spouse.” If there is no valid spouse, then ERISA specifies that assets in the decedent’s retirement plan must be paid to his/her parents.

In the wake of the Windsor decision, could the spouse of the decedent in such a case retroactively file suit against the parents demanding that they turn over the money? What if they spent it? What if they have also passed away? What is the statute of limitations?

Until we have answers to these questions, Ward recommends that same-sex couples review the beneficiary designations on all retirement plans, IRAs, annuities, etc.

Also note that for each partner to be considered a “spouse” under federal law, Windsor specifically states that, for purposes of federal law, the couple must have been legally married in a jurisdiction that recognizes same-sex unions.

Coming Up Next week: Strategies an individual in a same-sex couple should consider regarding filing their federal income tax return.

1. For purposes of federal law, the Defense of Marriage Act (DOMA) defined “marriage” as the legal union of a man and a woman. This was declared unconstitutional in the case of U.S. v. Windsor on the ground that it violated both the equal protection and due process principles embodied in the Fifth Amendment.

2. Under ERISA, in order to qualify as a “spouse,” you have to be married to the individual who owns the retirement account (a.k.a. the “Participant”) for at least one year.