News

Estate Planning: New opportunities for same-sex marriages

When the Supreme Court struck down part of the Defense of Marriage Act, also known as DOMA, as unconstitutional last June, the world of federal rights, protections and benefits fundamentally changed for married same-sex couples. From Social Security and visiting rights to consumer and housing benefits, all areas of life have been affected. Estate planning is no exception. It was, in fact, at the heart of the case that initiated the high court’s decision.

In United States v. Windsor, two New York residents, Edie Windsor and Thea Spyer, had married in Canada in 2007. When Spyer died two years later, Windsor was forced to pay $363,053 in federal taxes on Spyer’s estate. The reason? Under DOMA Section 3, which defined marriage as between a man and a woman, the federal government did not see their marriage as valid. The IRS consequently denied Windsor the unlimited marital tax deduction. Windsor paid the tax but sued for a refund, arguing that DOMA Section 3 violated the Equal Protection Clause of the United States Constitution. The Supreme Court agreed in a 5-4 decision.

As a result of the ruling, the IRS decided to treat all marriages as equal, regardless of where the ceremony was performed as well as where the couple lives. At the federal level, married same-sex partners now enjoy the same estate planning benefits as their opposite-sex counterparts:

  • Spouses are exempt from federal estate and gift taxes for all property transferred to a U.S. citizen spouse during their life time or upon death.
  • If one spouse dies his federal estate tax exemption of (currently) $5.34 million can be added to the surviving spouse’s exemption. When the second partner dies, he can leave property worth up to $10.68 million free from federal estate tax.
  • They can create life estate trusts which provide tax advantages when one spouse dies.
  • They can split gifts to third parties. Whereas unmarried partners can donate $14,000 each tax free, married couples can agree to combine their individual exemptions and one partner can donate up to $28,000 tax free.

At the state level, things are still slightly more complicated. Whether same-sex married couples are treated equally to opposite-sex married couples when it comes to state taxes depends on where the partners live. California recognizes same-sex marriage as valid, meaning tax laws apply to all married couples in the same way.

If you are in a same-sex marriage and want to take advantage of the federal estate planning benefits available to you because of the DOMA decision, you should revisit your plan with a professional and structure it accordingly. In certain cases, you may even be entitled to a refund of estate or gift taxes paid during the last three years.

 by Kevin J. Moore