In another significant step following the Supreme Court decision in U.S. v. Windsor, the U.S. Department of the Treasury and the Internal Revenue Service will now recognize legal same-sex marriages for federal tax purposes.1
As discussed in the July 2013 Newsletter, Estate Planning in Light of DOMA’s Unconstitutionality, the Windsor case arose out of the IRS’s denial of an estate tax deduction claimed by a woman following her partner’s death, resulting in a $363,053 estate tax bill. The U.S. Supreme Court found Section 3 of federal Defense of Marriage Act (“DOMA”)2, which provides that same-sex marriages are not recognized for all federal purposes, including insurance benefits for government employees, Social Security survivors’ benefits, immigration, and the filing of joint tax returns, to be unconstitutional.
In a release dated August 29, 2013, the federal agencies stated that same-sex couples that are legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes, including income, gift and estate taxes. Recognition of same-sex marriages will apply regardless of the couple’s state of residence—an unusual concession for tax policy, which is typically based on state of residence. However, the treatment will not apply to registered domestic partnerships, civil unions or any other formal relationships recognized under state law other than marriage.
The release also states that legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status. Additionally, individuals who were in same-sex marriages may file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations, which is typically three years from the date the return was filed or two years from the date the tax was paid, whichever is later.
Since the gift tax is a federal tax, this change in policy will allow individuals in same-sex marriages to transfer unlimited amounts during their lifetime to their respective spouses without incurring any gift tax. Additionally, same-sex couples residing in one of the 12 states that currently recognize same-sex marriages or Washington D.C. will now be able to file joint income tax returns and receive the same estate tax benefits as other married couples at both the federal and state levels. These benefits include the marital federal estate tax deduction, which allows a decedent to transfer unlimited assets to the surviving spouse at death without incurring any estate tax3, inheritance rights and the right to serve as the representative of an estate or guardian if the spouse is incapacitated.
The recognition of same-sex marriages on a federal level now places the pressure on states which have either not passed legislation allowing same-sex marriages or those which currently allow civil unions or other formal same-sex relationships. Until the states of ceremony and residence recognize same-sex marriage, same-sex couples will have to continue to carefully navigate the legal terrain in order to understand how the tax laws will apply to them.
Wal-Mart’s Employee Benefits
In a related development, Wal-Mart, which is the largest private employer in the U.S. and the largest retailer in the world, will offer health insurance benefits to same-sex partners of its domestic employees beginning in 2014. According to a Wal-Mart spokesperson, the coverage will include any spouse or domestic partner of the same sex or opposite sex, regardless of the particular state’s legal definition of marriage, domestic partnership or civil union. In order to qualify for Wal-Mart’s benefits, employees and their domestic partners must live together in an exclusive, non-committed relationship for 12 months with the intention to live together indefinitely.
Estate Planning Under the New Laws
In terms of planning, the federal government’s recognition of same-sex marriages will require estate planning attorneys and financial advisors to know the laws and ask the right questions of same-sex clients. A same-sex couple residing in Illinois but married in New York will require a completely different estate plan and will receive different tax treatment than a couple united under Illinois’s civil union law.
Beyond taxes, it is important to consider the consequences of not having an estate plan or having an estate plan that is not ideal for you and your family. As is often the case, an improper estate plan can have dire personal and financial repercussions for the loved ones of the decedent.
If you have an estate plan in place, consider changes in your financial or family situations as well as the law and consult an estate planning attorney to address your questions and concerns. If you do not have an estate plan in place, the costs and consequences of this gap in planning will typically far exceed the cost of having a proper estate plan prepared to serve your needs. It is important to work closely with an experienced estate planning attorney who will understand and explain the benefits and objectives of your estate plan.
1. IRS Notice 2013-17.
2. Defense of Marriage Act (“DOMA”), enacted September 21, 1996, by President Bill Clinton, whereby the Federal government defined marriage as a legal union between one man and one woman.
3. 26 USC § 2056. The unlimited marital deduction is only available when the surviving spouse is a U.S. citizen.