On June 26, 2013, in a landmark 5 to 4 decision the United States Supreme Court ruled in United States v. Windsor that Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional. Specifically, the Supreme Court held that a marriage performed in Canada and recognized in New York must be recognized for federal purposes.
This decision impacts over 1,000 statutes and federal regulations including laws pertaining to such diverse areas as federal income, gift and estate taxes, divorce, payroll taxes, immigration, political contributions and health care. Provisions bearing on tax and estate planning include:
Same-sex spouses must now file their annual federal income returns jointly, or as married filing separately. Previously, two single returns were required for federal purposes.
Gifts and bequests between spouses now qualify for the unlimited gift and estate tax marital deduction. Until the Windsor decision, gifts in excess of the annual exclusion (currently $14,000) between spouses, and any bequest to the surviving spouse, would have generated a gift or estate tax (or consumed a portion of the donor spouse’s unified gift and estate tax exemption).
The same federal estate planning strategies will now apply to all married couples regardless of gender. For example, qualified terminable interest trusts (QTIP trusts) are now available for same-sex spouses. Conversely, certain estate planning techniques, such grantor retained income trusts, that had been available to same-sex spouses based on federal non-recognition of their marriage can no longer be used.
Upon divorce, alimony payments from one former spouse to another will now be deductible by the payor spouse and includable in income by the payee spouse for federal income tax purposes. Other divorce-related provisions of the tax law will also apply equally to all couples upon dissolution of their marriage.
Use of a joint account by the non-contributing spouse will no longer generate a taxable gift.
Any unused portion of a deceased spouse’s federal estate tax exemption will now be available to his or her surviving spouse.
A surviving spouse will now be able to roll over an IRA from the deceased spouse and defer the distribution and income taxation of that account.
The Court did not address whether its ruling is retroactive. Thus, whether a taxpayer can now file a refund claim based on federal recognition of his or her marital status may depend upon whether the statute of limitations has run on the return. Further, it is not clear how the unconstitutionality of the law will affect irrevocable estate planning strategies already in existence.
The Windsor decision leaves several other important issues up in the air. The Court did not rule on Section 2 of DOMA, which provides that states are not bound by the Constitution to recognize same-sex marriages legally performed in other states. Therefore, if a same-sex couple resides in a state which does not recognize their marriage (even if performed lawfully in another state), those spouses will continue to have state level income, estate and gift tax issues which will need to be addressed, in addition to non-tax issues such as health care and death benefits. Further, the Windsor decision expressly applies only to “lawful marriages”. While the decision clearly applies to marriages performed in New York, it provides no guidance as to how, if at all, it will impact civil unions conducted in states such as New Jersey, where same-sex marriage remains unavailable.
One thing is clear: same-sex couples should review their situation to determine how the Windsor decision affects their estate planning goals.
