As discussed in a recent post, I anticipated that the Supreme Court’s ruling in the matter of United States v. Windsor would have a significant impact on estate planning matters for same-sex married couples. The Court issued its opinion on June 26, 2013, holding that the Defense of Marriage Act is unconstitutional. It would be well beyond the scope of this blog to discuss all of the ramifications of the Windsor decision, so I will limit my comments to the estate planning issues arising out of the decision.
Supreme Court rulings on estate tax matters are far between and few at best, so the Windsor decision is worthy of immediate discussion. A recap of the facts of Windsor is in order. Edith Windsor and Thea Spyer, residents of New York, were married in Ontario in 2007 before New York legalized same-sex marriages. When Ms. Spyer died in 2009, she left her entire estate to her spouse, Ms. Windsor. Typically, assets passing from the estate of one spouse to the surviving spouse pass free of estate tax – this is known as the marital deduction, which is one of the fundamental concepts of estate planning. However, the Defense of Marriage Act precluded application of the federal marital deduction to the passing of assets between same-sex spouses. As such, a substantial federal estate tax was assessed against Ms. Spyer’s estate.
Ms. Windsor successfully argued in both the U.S. District Court and the Circuit Court of Appeals that the Defense of Marriage Act was unconstitutional. The Supreme Court affirmed these decisions, entitling Ms. Windsor to a refund of the estate taxes paid previously. Thus, the Windsor decision indicates that two individuals who are legally married may rely on this decision in planning their estates. In Maryland, for example, a same-sex married couple may utilize standard marital-deduction planning – both for federal and Maryland estate-tax purposes – to defer and minimize those estate taxes. Federal concepts of portability of exemption amounts between spouses should also apply to same-sex couples. In other words, all of the estate-planning techniques that have been available only to opposite-sex married couples are now available to same-sex married couples as well.
In terms of foreseeable problems, the one that comes to mind immediately is what will result when a same-sex couple legally married in one state moves to a state that does not recognize same-sex marriage. Presumably, such a same-sex couple can rely on Windsor with respect to federal estate-tax planning. But what if the couple’s new state of residence has a separately constituted estate tax, much as Maryland does? It is unclear whether the new state will recognize the marriage for estate-tax purposes. Windsor does not (nor could it) resolve this issue. As with any of the issues discussed here, specific questions and issues should be discussed with your legal advisors.