Unconstitutionality of Defense Of Marriage Act Has Broad Reaching Implications For Tax and Wealth Planning And Tax Compliance Of Same-Sex Married Couples

by Greenberg Glusker Fields Claman & Machtinger LLP
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Yesterday, the Supreme Court issued two historic rulings on the constitutionality of same-sex marriage.  The first ruling, in a 5-4 decision, struck down as unconstitutional a key provision of the federal Defense of Marriage Act (DOMA), which denied federal marital benefits to same-sex couples who were legally married under state law.  The second ruling, also a 5-4 split and decided on procedural grounds, in effect upheld a lower court ruling in California that held Proposition 8, which banned same-sex marriage in California, unconstitutional.  While these decisions were immediately reported from the steps of the Supreme Court and instantly tweeted worldwide, it will take months to understand the full impact of the two decisions.

President Obama has already issued a directive for the federal government to review its policies and procedures in light of the unconstitutionality of DOMA and officials in California have suggested that same-sex marriage ceremonies will resume within the next 30 days.  While the focus of news coverage is currently centered around the Court’s equal protection of heterosexual and same-sex couples, here are some of the broad reaching tax and wealth planning implications of these rulings to consider:

  • Same-sex married couples will now be required to file and report their income taxes as “married.” This will simplify the coordination of their federal and state income tax reporting, but may significantly increase their annual tax liability.  
  • The federal gift and estate tax marital deduction, which allows spouses to transfer assets between each other during lifetime or at death without a transfer tax, will now be available for same-sex married couples.  The denial of the estate tax marital deduction to a same-sex couple was the issue that brought the constitutionality of DOMA in front of the Court.  
  • Significant federal benefits, such as social security, military and veteran benefits, pension and health benefits for federal employees and favorable treatment of retirement assets passing to a spouse, should now be made available to same-sex married couples. 

Because these federal marital benefits have not previously been available to same-sex couples, same-sex couples should revisit their existing planning structures not only with respect to their estate plans, but also with respect to retirement planning, income tax planning and medical and life insurance planning.  In addition, couples who have existing domestic partnerships or civil unions in place may need to revisit these arrangements in light of the privileges (and burdens) now afforded same-sex married couples that do not extend to domestic partnerships and civil unions.

We will follow developments closely and provide updates as it becomes clearer whether income, gift and estate tax returns should be amended and claims for refund filed for benefits that were unavailable while DOMA remained in full effect.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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