In the wake of the Supreme Court’s recent decision in United States v. Windsor, you may have been wondering, what are all those “federal benefits now afforded to same-sex couples” that I keep hearing about? Well, one huge benefit, and the impetus behind the case itself, is the unlimited federal estate tax exemption for surviving spouses.
I know what you’re thinking—I don’t recall seeing posters in front of the Supreme Court declaring “WE WANT OUR UNLIMITED FEDERAL ESTATE TAX EXEMPTION TOO!” But in fact, that is exactly why Edith Windsor filed the lawsuit that resulted in the momentous decision. In 1981, Congress passed what is commonly known as the “unlimited marital deduction,” whereby a deceased spouse can leave an unlimited amount of property to his or her surviving spouse without incurring any estate tax. However, under the Defense of Marriage Act (DOMA) passed in 1996, the term “marriage” and “spouse” excluded same-sex couples for purposes of federal law. That led to United States v. Windsor.
Edith Windsor and Thea Spyer, a same-sex couple, were legally married in Canada, and lived in New York when Thea died in 2009. At that time, same-sex marriage was not legal in New York, but the state did recognize same-sex marriages from other states and countries. In her Will, Thea left her entire estate to her surviving spouse, Edith. Edith sought to claim the federal estate tax exemption for surviving spouses, but the IRS denied the claim because of the definition of spouse under DOMA. As a result, Edith had to pay $363,053 in estate taxes, which an opposite-sex couple would not have had to pay. In response to the tax, Edith brought a lawsuit contending that DOMA violated the principles of equal protection guaranteed by the United States Constitution. On June 26, 2013, the Supreme Court ruled that DOMA violated Edith’s equal protection rights and, therefore, required that federal law recognize a same-sex marriage in the same manner as an opposite sex-marriage. While the ruling has far broader effects for same-sex couples, for Edith it meant that she could claim the federal estate tax exemption for a surviving spouse, and receive a full refund from the IRS.
So, how do same-sex couples take advantage of this federal benefit? It’s simple: get married! Legally married same-sex couples can now bequeath to each other an unlimited amount of property free of estate tax (to be clear, legally married does NOT include domestic partners). However, during your lifetime, getting married could mean incurring the income tax “marriage penalty” if both spouses work. If you are in a same-sex relationship and you are already married, or plan to get married, you should revisit your estate plan to make sure you are taking advantage of the unlimited marital deduction not previously available to you. For Edith, the marital deduction meant a tax savings of $363,053…not a bad wedding present.