Conventional wisdom suggests that New Yorkers should retire and move to Florida. They will enjoy a better climate (the polar vortex means 30 above, not 30 below). Florida also generally brings lower taxes as Florida has no personal income tax and no estate tax.
Following conventional wisdom as a same-sex married couple, however, could have disastrous tax consequences. How could that be? It is 2014. The Windsor case was decided more than a year ago now, meaning the federal government must recognize same-sex marriages. New York State has recognized same-sex marriages since 2011.
Florida does not recognize same-sex marriages. While Windsor requires the federal government to recognize same-sex marriages, the Windsor case does not require states to recognize same-sex marriages. More importantly, though, based on the Windsor case, if a marriage is not recognized by a couple’s state of residence, it will not be recognized by the federal government.
Some of the ramifications of Florida’s failure to recognize same-sex marriages are serious, particularly for wealthy couples. If a same-sex married couple moves from New York, where they were legally married, to Florida, where they are no longer legally married, the estate tax consequences will be severe if one of them dies. Federal estate tax will apply to the entire estate being gifted to a surviving spouse. Since Florida-resident same-sex married couples are not married for purposes of Florida law, there is no federal estate tax marital deduction for gifts from one spouse to another.
In a common example, consider a same-sex married couple: one spouse has about $15 million in assets. The other spouse has few assets and is a full-time parent to their one child. The couple’s estate is set up to pass entirely for the surviving spouse’s benefit at the first death. At the surviving spouse’s death, all of the assets will pass to the child.
As a Florida resident, federal estate tax would apply on the death of each of the spouses, resulting in a final gift to the child of less than $10 million. As a New York resident, no federal estate tax would be due on the first death, and the child would end up with closer to $14 million ($13 million after accounting for the New York State estate tax) on the second death. Moving to Florida in this example would have been a $3 million mistake.
Being married for federal estate tax purposes opens up a host of benefits that are not available to non-married couples. Two of the most important are the unlimited marital deduction and portability.
The unlimited marital deduction means that the estate of a married couple can be planned so that no estate tax is due until the surviving spouse dies. Portability means that spouses can share the $5,340,000 federal estate tax exemption that every individual may use (i.e., all individuals can pass a maximum of $5,340,000 in assets at death to anyone without incurring estate tax).
Breaking down our example, when our couple is not married (i.e., Florida resident), at the first death, exemption must be used to pass assets ($15 million) to the surviving spouse and then federal estate tax paid on the balance. The net to the surviving spouse is $11,882,720. On the death of the second spouse, the net to the child, after federal estate tax being applied a second time, is $9,812,846.
When the couple is married, at the first death, no estate tax is paid on the $15 million passing to the surviving spouse and the first to die spouse’s exemption will shelter $5,340,000 in assets eventually designated to pass to the child. On the second death, all of the assets will pass to the child. After application of federal estate tax, the net to the child in this example is $13,678,368.
The moral of the story: wealthy same-sex married couples should stay put in New York (and perhaps buy an extra pair of mittens).