Federal Tax Benefits Expanded to Certain Same-Sex Couples by U.S. Supreme Court

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With the U.S. Supreme Court’s landmark ruling in United States v. Windsor on June 26, 2013, same–sex couples legally married in a state that recognizes same-sex marriage, and who reside in such a state, are now governed by the same federal tax laws as opposite-sex married couples, and are thus eligible to utilize many federal tax benefits previously unavailable to them.

Among these potential benefits are:

  • Either spouse can transfer property to the other at death without federal estate tax liability in the estate of the first spouse to die;
  • Either spouse can make unlimited gifts to the other (U.S. citizen) spouse during life without gift tax and without the need to use the donor spouse’s annual exclusion or lifetime federal gift tax exemption;
  • The surviving spouse can utilize the first deceased spouse’s unused estate and gift tax exemption to transfer assets during life or at death without gift or estate tax liability;
  • Availability of the “spousal rollover” of retirement assets so the surviving spouse can defer, and potentially minimize, income taxes on her receipt of the first deceased spouse’s IRA or other qualified plan benefits;
  • The non-participant spouse must be the sole primary beneficiary of the participant spouse’s qualified retirement plan, unless the non-participant spouse consents, in writing, to naming anyone else to receive the retirement plan benefits;
  • Either spouse may “gift split” as to the other spouse’s separate property, which allows gifts to third parties to be treated as having been made equally by both spouses, thus effectively doubling a spouse’s annual exclusion;
  • A U.S. citizen spouse can sponsor a non-citizen spouse for U.S. citizenship (and with such citizenship, thus eliminate the need to utilize a marital “qualified domestic trust” in order to defer estate taxation at the first spouse’s death);
  • The spouses can file their income taxes jointly, thus eliminating the “marriage penalty”;
  • Potentially, to file amended income tax returns claiming a refund for open tax years (2010-2012, and 2009 if a protective filing was made by April 2013 for that tax year), although this point remains unclear, as it is not settled whether the court decision is solely prospective in nature;
  • Potentially, to file amended gift and estate tax returns for open tax years;
  • The entitlement of the surviving spouse to federal benefits as a result of the deceased spouse’s death, such as Social Security retirement and death benefits and certain military veteran benefits.

In addition to these changes, the court ruling has had an immediate impact on laws governing employment benefit plans. For further information on how the ruling has affected these plans, please see DWT’s employment benefits update.

Same-sex couples who were legally married in, but do not reside in, a state that recognizes same-sex marriage are currently not entitled to the same state-related benefits in their state of residence as are legally married opposite-sex couples. And, there is also some uncertainty whether such a couple is considered married for federal purposes.

The states that currently recognize same-sex marriage are California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington, as well as the District of Columbia.

Married same-sex couples who reside in these states should consider reaching out to an estate planning attorney to determine whether it is desirable to make revisions to any existing estate planning documents and beneficiary designations. For those married same-sex couples who do not have estate planning documents (e.g., Wills, Living Trusts, Powers of Attorney), now is an optimal time to implement an estate plan and to coordinate beneficiary designations.

Additionally, as noted above, income, gift, and estate tax returns that have been filed but are still open should be revisited to ascertain whether amended returns are appropriate.