Same-Sex Marriage Cases—Planning Opportunities and Pitfalls

by McDermott Will & Emery
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The Supreme Court of the United States recently held that the federal government must recognize same-sex marriages that are valid under state law, and effectively reinstated same-sex marriage in the state of California.  However, many questions still remain.  Same-sex couples should contact their financial and legal advisers to determine what, if anything, they should be doing to take advantage of the federal benefits for which they may now be eligible and to mitigate any disadvantages.

In two landmark decisions, the Supreme Court of the United States held that the federal government must recognize same-sex marriages that are valid under state law, and effectively reinstated same-sex marriage in the state of California.  Although these cases provide some clarity for same-sex couples in some states, many questions still remain.  Same-sex couples should contact their financial and legal advisers to determine what, if anything, they should be doing to take advantage of the federal benefits for which they may now be eligible and to mitigate disadvantages that may result from federal recognition of their marriages.

Federal Recognition for Same-Sex Marriages

In United States v. Windsor, the Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA), which defined marriage as a legal union between one man and one woman for purposes of all federal laws.  As a result, the federal government must now recognize same-sex marriages that are valid under state law.  Same-sex couples living in a state that recognize their marriage can now take full advantage of the more than 1,000 federal benefits afforded to married couples.  These benefits include filing joint income tax returns, qualifying for social security survivor benefits and receiving preferential status in immigration matters.  Spouses in same-sex marriages can also make unlimited gifts or bequests to their spouses without triggering any federal gift or estate tax, and can take advantage of the “spousal rollover” IRA after one spouse dies.  

However, the Windsor decision does not require states that have not legalized same-sex marriage to recognize same-sex marriages validly performed in other states or countries.  This raises a host of issues.  For example, if a same-sex couple who lives in a state that does not recognize same-sex marriage is married in a state that does recognize such marriage, that couple’s status when they return home is uncertain.  Their marriage is unlikely to be recognized by their state of domicile, and it is unclear whether the marriage will be recognized by the federal government.  Complicating matters further, it is unclear whether that couple would be able to ever obtain a divorce unless one of them moves to a state that recognizes same-sex marriages because many states permit out-of-state couples to marry, but impose residency requirements for obtaining a divorce.

It is also unclear whether couples who have registered as domestic partners or formed civil unions will now be treated as spouses under federal law.  In 2011, the Internal Revenue Service (IRS) issued an informal letter to a tax preparer stating the IRS position that opposite-sex couples who entered into civil unions in Illinois could file joint federal returns if they were treated as spouses under the laws of their home state.  This same reasoning should apply to same-sex couples now that Section 3 of DOMA has been struck down.  However, the answer is unclear and the informal IRS letter cannot be relied upon by taxpayers in filing their returns.  In the coming weeks and months, the federal government is likely to publish guidance (in the form of new legislation, regulations or executive orders) that deals with the issue of whether same-sex couples in domestic partnerships or civil unions will be treated as spouses for purposes of federal law.     

Same-Sex Marriage Reinstated in California

In Hollingsworth v. Perry, the Supreme Court held that the proponents of Proposition 8 lacked standing to appeal a district court decision that struck down the voter-passed referendum banning same-sex marriage in California.  As a result, California has now joined 12 other states and the District of Columbia in allowing same-sex couples to marry. 

In light of the Windsor decision, same-sex marriages in California will be treated the same as their opposite-sex counterparts under federal law.  The question remains whether the federal government will treat California couples in a domestic partnership as married for purposes of federal law.  Couples who have formed registered domestic partnerships in the last five years may want to consider obtaining a formal marriage license if they determine that the federal benefits of marriage outweigh the federal detriments. 

Estate and Tax Planning Opportunities

In the aftermath of the Supreme Court’s decisions, the legal landscape has changed significantly for same-sex couples.  Below are just some of the highlights and issues.

Married Filing Status—Income Tax Returns.  All same-sex couples who are legally married in their home state must now file their income tax returns either jointly or married filing separately.  For same-sex married couples living in a community property state, such as Washington or California, this requirement will likely increase the amount of taxes that they pay each year.  The community property laws already had the effect of splitting all income equally between the spouses, and the fact that they now must file as a married couple will subject many of these couples to a significant marriage tax penalty. 

For same-sex married couples living in a common law state, the impact of the married filing status will depend on their particular circumstances.  Couples with two wage-earners are likely to pay more taxes filing jointly, while couples with one spouse earning most of the income are likely to see a reduced tax burden. 

Amending Prior Income Tax Returns.  All same-sex couples who are either married or who formed a registered domestic partnership or civil union should speak with their advisers to determine whether it would benefit them to amend prior returns.  If filing as a married couple would reduce their total income tax burden, couples should be able to obtain a refund for the years in which the statute of limitations is still open.  The statute of limitations period is generally three years after the date that the return was due, or three years after the date it was filed, if filed on time under an extension.  The IRS is likely to issue guidance in the coming weeks as to who may claim a refund, and the proper procedure for doing so.      

Revisiting Estate and Gift Tax Returns.  Same-sex married couples should also review their prior gift or estate tax returns.  If the statute of limitations is still open, it may be possible to retroactively claim the unlimited gift or estate tax marital deduction for all transfers made between same-sex spouses.  This could result in a refund of any gift taxes or estate taxes paid, or the reinstatement of some or all of the transferor’s applicable exclusion amount. 

Review Existing Estate Plans.  Finally, same-sex couples should review their existing estate plans.  Married couples will want to ensure that no tax will be paid on amounts passing for the benefit of the surviving spouse, and that their plan is set up to minimize the tax and to take advantage of all available exemptions.  Couples should also review their beneficiary designations for all retirement plans and life insurance policies.  For plans covered by the Employee Retirement Income Security Act, the consent of the spouse may be necessary in order to name a non-spouse beneficiary.  For other retirement accounts, same-sex couples may want to ensure that they can take advantage of the more favorable spousal rollover, rather than a traditional inherited IRA.

 

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