More on Transfer Tax Issues Post Windsor and the Legalization of Same-Sex Marriage

by Bryan Cave
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In a recent Notice, the Internal Revenue Service set forth some administrative procedures helping taxpayers recalculate gift and generation-skipping transfer tax exemption with respect to gifts and bequests made to or for the benefit of a same-sex spouse, or descendants of same-sex spouses before the Supreme Court Case United States v. Windsor was decided, even though the statute of limitation for claiming such exemption had expired.

Prior to the Windsor decision, the U.S. government (and by extension, the Internal Revenue Service) did not recognize marriages of same-sex couples. In the Windsor case, the estate of a decedent sought to claim the estate tax marital deduction for bequests to the decedent’s same-sex spouse (the couple was legally married in Canada and their marriage was recognized by their home state of New York prior to the decedent’s death).  The Court in Windsor allowed the estate to claim the estate tax marital deduction, and in so doing struck down Section 3 of the Defense of Marriage Act.  Following the decision, same-sex marriages recognized by a U.S. state became recognized by the U.S. government.  The question then arose – would retroactive relief be available in the case of a decedent who was part of a same-sex marriage but who died prior to the Windsor decision?

In Revenue Ruling 2013-17, the Internal Revenue Service ruled that as long as the relevant statute of limitation had not expired, a taxpayer who had made a gift or bequest to a same-sex spouse prior to the Windsor decision could file an amended gift or supplemental estate tax return to claim the marital deduction for the gift or bequest (See our 2013 blog post on this Ruling). However, additional questions still remained.  Could a taxpayer amend prior estate, gift or generation-skipping transfer tax returns if the statute of limitations had expired?  Furthermore, could a taxpayer amend any of such returns if doing so would not provide immediate tax relief, but would likely produce future tax savings (such as making the deceased spouse’s unused exemption amount “DSUE” available to the surviving same-sex spouse)?  Notice 2017-15 (the “Notice”) attempts to answer some of these questions.  The Notice provides progress, if not perfection, for the patchwork of tax benefits available to married same-sex couples over the years.

Marital Deduction and Applicable Exclusion Amount

The Notice provides that even if the limitations period for filing claims for credits or refunds had expired, a taxpayer’s remaining applicable exclusion amount (the amount he or she could give or bequeath free of Federal gift or estate tax) may be recalculated to restore it to the amount it would have been if the taxpayer’s marriage to his or her same-sex spouse had been recognized when the original return was filed. However, once the limitations period on assessment of tax has expired, any such amendment cannot amend the value of the transferred interest, nor can it change any position concerning a legal issue (other than the existence of the marriage) related to the transfer.  In addition, no credit or refund on tax paid on the marital gift can be given if the limitations period of claims for credit or refund has expired.

For example, if Jim made a gift each year for 5 years to his husband Bob before Windsor and filed a gift tax return for each of these years using some of his unified credit, he can now redetermine his taxable gifts for each of these years by claiming a marital deduction for those gifts to Bob.  The redetermined and reduced amount of Jim’s prior taxable gifts would be carried forward on his gift tax returns for each subsequent year.  Jim could then amend his gift tax return for all open years and seek refunds for any gift taxes that may have been paid during those later years.  On Jim’s death, his executor would file an estate tax return reporting the adjusted taxable gifts that reflected the marital deduction for all of Jim’s gifts to Bob, including those made during years for which the statute of limitations had already run, and would also be able to claim the gift taxes paid in respect of those gifts.  In this way, Jim’s applicable exclusion amount is restored for those prior gifts he made to Bob at a time during which he was unable to claim   a gift tax marital deduction.

If the gift made to the same-sex spouse was made to a trust that would have required a QTIP or QDOT election in order to qualify for the marital deduction, the Notice permits a taxpayer to apply for relief to make a late election, pursuant to Internal Revenue Code §  301.9100-3.  If gift tax was paid on account of Jim’s gift to Bob and the statute of limitations on the gift tax return had expired, Jim could not get a refund for the gift tax he paid, but such tax amount would be recognized as gift tax paid for purposes of the computation of estate tax.

Additionally, the Notice allows a taxpayer’s executor to recalculate the DSUE amount and to add the DSUE amount to the surviving spouse’s available exclusion.

Splitting Gifts

The Notice does not extend time limits on electing to split gifts made by a spouse under IRC § 2513.

Generation-Skipping Exemption and Generation Assignments

For purposes of determining whether the recipient of a gift is a “skip person” for purposes of the generation-skipping tax, family members are assigned to generations by comparing the number of generations between the transferee and the grandparent of the transferee with the number of generations between that grandparent and the transferor.  Spouses are treated as the same generation for such purposes, regardless of age difference.  For non-family members, however, generation assignments are based on the difference in age between the transferee and the transferor.  A person born less than 12 ½ years after the transferor is assigned to the transferor’s generation; an individual born more than 12 ½ years, but not more than 37 ½ years after the transferor is assigned to the next generation, and each new generation begins every 25 years thereafter.  Prior to Windsor, same sex married couples were assigned generations based on difference in age, rather than being treated as the same generation.  Using our couple above, Jim’s descendants would be assigned to generations below Bob based on their age compared to Bob, rather than their relationship to Jim, Bob’s husband.

The Notice, however, concludes that any allocation of GST exemption to a transfer that would not have required allocation of GST exemption had it been made post-Windsor (because of a change in generation assignment) is now void, and therefore the taxpayer’s remaining GST exemption should be recalculated.

Reporting

For both changes to the unified credit and GST exemptions, the Notice provides that, “In the interest of providing certainty and to ease the administrative burden on both the taxpayer and the IRS”, such recalculations should be reported on a form 709 (preferably the first Form 709 required to be filed after the issuance of the Notice), on an amended Form 709 if the limitations period has not expired, or on the Form 706 for the taxpayer’s estate if not reported on a Form 709.  Unless the taxpayer predeceased the Notice, the IRS does not require that an amended or supplemental return be filed solely to report a recalculation of unified credit or GST exemption. In any case, a statement should be included at the top of the Form 706 or 709 that the return is “FILED PURSUANT TO NOTICE 2017-15” and a statement explaining the recalculation should be attached.

Now would be a good time to review our 2014 blog post, “Same-Sex Married Couples: What to Do Now?”, and add that returns for which the statute of limitations has expired should also be reviewed by tax advisors.

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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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