The Estate Tax Consequences of the Defense of Marriage Act for Same-Sex Couples

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As of January 1, 2013, the Civil Marriage Protection Act legalized same-sex marriage in the State of Maryland. From the estate-planning perspective, the passage of this law clarified many points that had been problematic for same-sex couples including rights of inheritance where there is no will, spousal elective shares, and assessment of Maryland inheritance tax. Importantly, any portion of an individual’s estate passing to a surviving spouse passes free of Maryland estate tax. This exclusion was not previously available to same-sex partners who were not permitted to marry.

Unfortunately, the federal estate tax treatment of estates passing from one Maryland same-sex spouse to another remains in doubt. The Defense of Marriage Act defines marriage as a union between a man and a woman for purposes of federal benefits and application of federal law. Therefore, regardless of how Maryland or any other state defines marriage, the federal government only recognizes marriages between a man and a woman. This applies, of course, in connection with federal tax statutes such as those applicable to the federal estate tax.

The United States Supreme Court will hear the case of United States v. Windsor on March 27, 2013. The issue in Windsor focuses precisely on the constitutionality of the Defense of Marriage Act as it applies to the federal estate tax. The case concerns two New York women who were legally married in Canada. Upon the death of the first spouse, the estate was assessed an estate tax of approximately $360,000 because the surviving spouse was not considered a “spouse” pursuant to the Defense of Marriage Act. If the Supreme Court finds the Defense of Marriage Act unconstitutional, then estates passing to surviving same-sex spouses will pass free of estate tax.

The process of estate planning contemplates many issues, but one of the primary issues is addressing potential estate taxes. All married couples should engage in the estate-planning process to ensure proper distribution of assets in a tax-efficient manner. Having a discrepancy, then, between Maryland tax law and federal tax law makes efficient planning a significant challenge. The federal estate tax does not apply to everyone, but for Maryland same-sex spouses whose net worth exceeds a certain threshold, the forthcoming Supreme Court decision will have a tremendous impact on their estate planning.