The Supreme Court’s decision in United States v. Windsor, striking down a portion of the Defense of Marriage Act (“DOMA”), marks a significant change in the treatment of same-sex couples under federal law and, in some cases, creates an opportunity for income, gift and estate tax savings. Edith Windsor and Thea Spyer, a same-sex couple residing in New York, were wed in 2007 in a marriage recognized by the state of New York but not recognized by the federal government due to section 3 of DOMA which excludes a same-sex partner from the definition of “spouse” as that term is used in federal statutes. In a landmark decision, the Supreme Court held that section 3 of DOMA is unconstitutional.
Estate Planning and Other Tax Implications
In general, the Windsor decision means that same-sex couples who were married in and currently reside in a jurisdiction that recognizes such marriages are entitled to all of the federal benefits and responsibilities that are attached to that status. As discussed below, there remains some uncertainty about how the Windsor decision will affect federal treatment of couples who were married in a state that recognized their marriage but have since moved to another state that does not recognize same-sex marriages. Such couples may be eligible for certain federal benefits immediately and also may be eligible for additional benefits as other states and federal agencies continue to examine their policies in light of the Windsor decision. Therefore, same-sex couples may wish to consider the following recommendations:
Revisit estate planning documents to determine if they should be updated to take advantage of the federal marital deduction.
Review any trusts previously set up by the couple given that the federal gift tax marital deduction is now available; some trusts may be treated differently now that the couple’s marriage is recognized for federal tax purposes and there may be gift tax and/or income tax implications to consider.
Consult with an accountant regarding potential income tax refund claims based on the right to file joint federal income tax returns. It is important to do so promptly to ensure that claims are not barred by the statute of limitations. The IRS is currently reviewing the impact of the Windsor decision on its policies and plans to issue guidance for same-sex taxpayers shortly.
Consult with gift and estate tax return preparers to review prior years’ returns to determine whether it is possible to amend those returns if they involve transfers between same-sex spouses. Again, it is important to do so promptly to ensure that claims are not barred by the statute of limitations.
Review and, if necessary, update any beneficiary designations for retirement accounts and/or insurance policies. For example, a surviving spouse now may be able to roll over a deceased spouse’s retirement plan on an income tax-free basis, and couples may need to update their beneficiary designations to take advantage of this tax benefit.
Review eligibility for Social Security and Medicaid benefits and protections. Currently, the Social Security Administration is limiting payment of claims for same-sex married couples to those couples who were married in a state that allows same-sex marriage and also reside in a state that recognizes their marriage. Applications for claims from same-sex couples legally married in a state that recognized same-sex marriage but currently living in a state that does not recognize such marriages are currently being put on hold while the agency works with the Department of Justice to interpret the Windsor decision.
Remaining Uncertainty in the Wake of the Windsor Decision
The Windsor decision does not address all aspects of DOMA. Significantly, it did not strike down the portion of the law which permits a state to refuse to recognize same-sex marriages performed outside of its jurisdiction. Some federal agencies have historically looked to the laws of a couple’s place of residence to determine whether a marriage is valid for purposes of qualifying for benefits; others have looked to the laws in the place where the couple got married; and some agencies have no explicit rule at all.
Because a section of DOMA continues to permit each state to determine whether it will recognize a same-sex marriage entered into in another state, federal agencies which determine the validity of a marriage based upon place of residence may not presently provide benefits to same-sex spouses living in those states, even if the couple was legally married outside of that state. Given the Windsor decision, these agencies are in the process of reviewing their policies regarding how they define marriage. Hopefully, a uniform system for determining the validity of a couple’s marriage will be implemented through this review process.
Same-sex couples also are pursuing access to benefits through the courts. In a recent case in Ohio, a state that does not permit same-sex marriages, the court held that the state must recognize as valid marriages which were lawfully entered into in another jurisdiction. There is a similar case pending in Michigan, and it seems likely that other cases will be brought in other states on this issue in the near future. These cases may affect both federal and state benefits.
We encourage all married same-sex couples, and any individual whose estate plan benefits children or descendants in same-sex marriages, to consult with their estate planning attorney, accountant and tax advisors to discuss how the Windsor decision impacts their individual circumstances.