Insight on Estate Planning - October/November 2013: Estate planning for same-sex spouses: What the Supreme Court’s DOMA ruling means

In June, the U.S. Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (DOMA). Under that section, for purposes of federal law, “marriage” means a legal union between a man and a woman as husband and wife, and “spouse” is limited to a husband or wife of the opposite sex.

The ruling has wide-ranging implications for same-sex couples who are legally married in one of the jurisdictions that permit such unions (as of this writing, 12 states plus the District of Columbia). These married couples are now eligible for approximately 1,100 federal benefits previously enjoyed only by heterosexual spouses, including a variety of federal tax advantages, Social Security benefits and preferred immigration status. One area where the decision will have a big impact is estate planning.

Advantages for married couples

Federal gift and estate tax laws provide married couples several important advantages, including:

Marital deduction. The unlimited marital deduction allows one spouse to transfer any amount of property to the other, either through lifetime gifts or bequests at death, free of federal gift or estate tax (so long as the recipient is a U.S. citizen). Before the Supreme Court’s decision, same-sex married couples were subject to tax to the extent that total gifts or inheritances exceeded the $5.25 million federal gift and estate tax exemption amount.

Now, same-sex spouses can transfer unlimited assets to each other without triggering federal taxes. They can also take advantage of sophisticated estate planning techniques, such as qualified terminable interest trusts (QTIPs) that rely on the marital deduction.

Portability. The tax law concept of “portability” was introduced in 2010 and made permanent this year. When one spouse dies, portability allows the surviving spouse to “inherit” the deceased spouse’s unused exemption. To take advantage of this benefit, the deceased spouse’s executor must elect portability on a timely filed estate tax return (even if there’s no estate tax liability).

Gift splitting. The annual gift tax exclusion allows you to give up to $14,000 per year (adjusted annually for inflation) to any number of recipients, without triggering gift tax or using up any of your lifetime exemption. Spouses that “split” their gifts (by making an election on their gift tax returns) can combine their annual exclusions. This allows them to give up to $28,000 per recipient, regardless of whose assets they use to make the gift. Married couples can also use gift splitting to combine their lifetime exemptions and give up to $10.5 million tax-free, even if most or all of the gift comes from one spouse’s separate assets.

Retirement benefits. Married couples have a big advantage when it comes to inherited retirement accounts. If you name someone other than your spouse as beneficiary of an employer-sponsored plan or IRA, he or she will generally have to take required minimum distributions (RMDs), which are taxable, beginning the year after you die. If you name your spouse as beneficiary, however, he or she can roll the funds into his or her own IRA and defer RMDs to age 70½. Now, same-sex married couples can also take advantage of spousal rollovers.

Next steps

Legally married same-sex couples should consult their advisors to discuss the impact of the Supreme Court’s decision on their estate plans. Also, be sure to consider state taxes in your planning. The DOMA ruling left several questions unanswered, including the treatment of same-sex couples who legally marry in one state but reside in a state that doesn’t permit same-sex marriages. (See the sidebar “Unanswered questions.”)

For those who’ve already paid federal gift or estate taxes, there may be an opportunity to amend their returns and claim a refund. Generally, the limitations period for amending a return is three years from the filing date or due date, whichever is later. But keep an eye out for guidance in this area.

Sidebar: Unanswered questions

The Supreme Court’s ruling on the Defense of Marriage Act (DOMA) is good news for same-sex married couples, but there are some important issues the Court didn’t address. For example, what happens if a same-sex couple is married in one state but resides in or moves to a state that doesn’t permit same-sex marriages? Arguably, it follows from the court’s decision that a legally married couple should be treated as such for federal tax purposes regardless of which state they live in. But a definitive answer may require further guidance from the IRS.

Also, the court didn’t decide the constitutionality of DOMA Section 2, which provides that states aren’t required to recognize same-sex marriages performed in other states. Until this issue is resolved, married same-sex couples living in states that don’t recognize their marriages may not be eligible for state-law benefits available to heterosexual couples.

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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