Federal Estate Tax Equality for Same-Sex Couples

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On June 6, 2012, in Windsor v. United States, U.S. District Judge Barbara Jones in the Southern District of New York granted summary judgment to Edith Windsor and created a precedent that is likely to positively affect same-sex married couples for years to come. Edith was awarded $353,053, plus interests and costs for the federal estate tax that she was wrongfully required to pay upon the death of her beloved wife.

Edith met her late spouse, Thea, nearly 50 years ago in New York City. Even though no state in the United States afforded legal recognition to same-sex couples, in 1967, Thea proposed to Edith. In 1977, Thea was diagnosed with multiple sclerosis, which gradually debilitated her over the years and made her a quadriplegic. After being engaged for 40 years, in 2007, Thea and Edith decided to legally marry in Canada since same-sex couples were still not permitted to marry under New York law. Their marriage in Canada was recognized in New York because New York affords legal recognition to civil marriages that are lawful in the jurisdiction where they are performed. See Matter of the Estate of Ranftle, No. 4585-2008 (N.Y. Sur. Ct. Jan. 26, 2009). On February 5, 2009, Thea lost the fight against her health battles and passed away, leaving her entire estate to Edith. In June 2011, New York became the sixth state to allow same-sex couples to marry.

While Thea's estate slightly exceeded the applicable federal exclusion amount set forth in 26 U.S.C. 2010(c), under 26 U.S.C. § 2056(a), a decedent's estate is generally entitled to an unlimited marital deduction for the value of any property that passes from the decedent to his or her surviving spouse. Whether a couple is married for purposes of the estate-tax marital deduction hinges on whether the couple is considered validly married under the law of the state. See Eccles v. Comm'r, 19 T.C. 1049, 1051, 1053-54 (1953).

While on its face, the estate-tax marital deduction applies to all legally married couples, same-sex couples have been denied these benefits due to the plain language of the Defense of Marriage Act (DOMA). Section 7 of DOMA provides:

"[i]n determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or wife." 1 U.S.C. § 7."

Due to DOMA, the Internal Revenue Service excluded same-sex spouses from the benefits of the estate-tax marital deduction. This consequently caused Thea's estate to owe $363,053 in federal estate tax, which is an amount that the estate would not have had to pay if she married a male.

In 2010, Edith challenged the federal government's refusal to recognize her marriage—that was deemed valid under New York law—for federal estate-tax purposes, and she won. In February 2011, President Obama's administration came to the conclusion that Section 3 of DOMA, which bars the federal government from recognizing the legal marriages of same-sex couples, is unconstitutional and decided that the U.S. Department of Justice would no longer defend such discrimination in court. The Bipartisan Legal Advisory Group of the U.S. House of Representatives (BLAG) intervened to defend the constitutionality of DOMA and argued that DOMA provides a federal definition of marriage and it is what is "universally accepted in American law." Windsor v. United States, 1:10-cv-08435 BSJ-JCF, p. 18. Judge Jones of the Southern District of New York disagreed with BLAG and held that DOMA's definition of marriage does not pass constitutional muster and is unconstitutional as applied to Edith. As a result of this groundbreaking case, couples living in states that license or respect same-sex marriages are now entitled to equal treatment for federal estate-tax purposes. This case also suggests that executors of estates involving a same-sex surviving spouse may be entitled to a refund of federal estate taxes that they may have been wrongfully required to paid.

For Further Information

If you would like more information about this Alert, please contact Michael Grohman, any of the attorneys in the Wealth Planning Practice Group or the attorney in the firm with whom you are regularly in contact.

As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Published In: Civil Rights Updates, Constitutional Law Updates, Family Law Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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