By Lisa S. Presser, Charles H. Wampold and Kristen A. Curatolo

On June 26, 2013, the United States Supreme Court struck down § 3 of the Defense of Marriage Act (DOMA). United States v. Windsor (Sup. Ct. Doc. No. 12-307, Decided June 26, 2013). Section 3 defined marriage for all federal law purposes as only a legal union between a man and a woman. Now, the federal definition of marriage must recognize “lawful marriages” of same-sex couples. The DOMA decision impacts hundreds of federal laws that apply to married individuals and will provide same-sex married couples with the same federal rights and obligations as heterosexual married couples.

The DOMA decision will have sweeping effects in numerous planning areas for married same-sex couples, including federal estate and gift taxes, federal income taxes, employee benefits and federal spouse benefits. However, some of these new opportunities may come with an expiration date. Married same-sex couples may be able to file amended estate, gift and income tax returns to amend returns filed in the past three years to reflect changes in their marital status.[1] Additionally, same-sex couples who are in civil unions and are living in “battleground” states, such as New Jersey, Illinois and Hawaii, should especially consider filing protective claims on previously filed tax returns in order to avoid being barred by the statute of limitations.

Impact on Individuals in Civil Unions

To date, thirteen states and the District of Columbia have legalized same-sex marriage,[2] four states have legalized civil unions,[3] and thirty-five states have banned same-sex marriage by constitutional amendment or state law.[4] In states that have legalized same-sex marriage (like New York), same-sex married couples will now be subject to more than 1,000 federal laws and programs and will start to receive the federal benefits of marriage.

However, in states allowing civil unions (like New Jersey), the impact of DOMA remains uncertain. For example, New Jersey has no laws banning or allowing same-sex marriage. In 2006, the New Jersey Supreme Court ruled that the State Legislature had to extend same-sex couples the same benefits as heterosexual couples, but did not say that lawmakers had to call it “marriage.” The Legislature responded by passing a bill recognizing civil unions. However, a state commission in 2008 found that civil unions did not provide equal benefits, and gay rights advocates went back to court in 2010. The groups are asking the court to speed up its ruling following the DOMA decision. Oral arguments in Garden State Equality v. Paula Dow[5] will take place on August 15th in Superior Court in Mercer County. Finally, the federal benefits afforded to same-sex married couples living in states that have a ban on same-sex marriages (like Pennsylvania and Illinois) will vary by agency.

The (Federal) Benefits of the DOMA Decision

A sampling of the federal benefits the DOMA decision affords same-sex married couples are listed below.

  1. The Unlimited Marital Deduction and DSUE: Under federal estate tax law, spouses can make unlimited transfers of assets to each other (during life and at the death of the first to die) without incurring any federal gift tax or estate tax (also known as the unlimited marital deduction). The surviving spouse can also inherit the deceased spouse’s unused estate (DSUE) and gift tax exemption. In other words, the deceased spouse’s DSUE is “portable” to the surviving spouse, which enables the surviving spouse to shield up to an additional $5.25 million in assets during their life or death, for a total exemption amount of $10.5 million, which is currently indexed for inflation.
  2. Retirement Plans: A surviving spouse in a same-sex marriage can “roll over” their deceased spouse’s IRA or other qualified retirement plan into their own retirement account, which may result in deferring the required dates of distribution.
  3. Gift Splitting: Same-sex married couples may treat “split” gifts. In 2013, each person has a $14,000 gift tax exemption amount. If a spouse would like to make a $15,000 gift and avoid having to pay gift tax, the spouses may “split” the gift – meaning, the gift will be treated as a $7,500 gift from each spouse and will keep the yearly gift tax exemption intact.
  4. Simpler Federal Income Tax Returns: Same-sex married couples may file joint federal income tax returns.
  5. Citizenship: A U.S. citizen spouse may sponsor a non-citizen spouse for legal permanent resident status – or a “green card”.
  6. Military Benefits and Burial Rights: Same-sex spouses in the military will be eligible for benefits (such as health coverage and housing allowances). They will also have the right to be buried together in military cemeteries.
  7. Employee Benefits: Same-sex spouses will now be able to enjoy their spouse’s health care benefits and share in their spouse’s COBRA coverage when an employer plan terminates.
  8. Beneficiary Designations: Same-sex couples should review their beneficiary designation forms because the beneficiary on certain qualified plans must be the spouse (unless the spouse waives the right) under federal law.

The Bare Minimum

The DOMA decision should motivate same-sex married couples to have a basic estate plan in place (Will, Power of Attorney and Health Care Directive). Right now, it remains unclear who would inherit a same-sex spouse’s assets if they die in a state that does not recognize same-sex unions. If a same-sex spouse or partner dies without a Will, that deceased spouse’s or partner’s belongings could be inherited entirely by their blood-related family members.

New Estate Planning Techniques

Before the DOMA decision, same-sex couples had limited estate planning techniques. Many couples gravitated toward grantor retained income trusts (GRITs), charitable lead trusts (CLTs) and family investment entities (such as family limited partnerships) for flexibility and to avoid gift tax exposure. Now that the unlimited marital deduction and federal exemption amount is available to same-sex married couples, an entire universe of wealth transferring techniques are available, including QTIPs and Dynasty Trusts, which utilize both the unlimited marital deduction amount and the federal exemption amount.

Conclusion

Same-sex married couples (and perhaps same-sex civil union partners) should re-examine their past income, gift and estate tax returns and consider filing amended returns. For example, couples who made gifts to each other above the annual gift tax exclusion amount should file protective claims now that they can take advantage of the marital deduction and avoid having those gifts counted against their lifetime gift tax exemption.

As the IRS and U.S. Treasury are working on post-DOMA guidance, the complete impact of the DOMA decision remains to be realized. We will continue to monitor these developments and will provide you relevant updated information when available. In the meantime, if you have any questions, please contact a member of the Private Client Group team or other Drinker Biddle lawyer.

 


[1]  Filing an amended return may qualify couples for exclusions, deductions, different tax rates or a refund. For example, Edith Windsor (the DOMA decision’s plaintiff) is due to receive a New York state estate tax refund of $275,000 (plus $25,000 in interest) on top of a federal estate tax refund of $363,000 (plus $45,000 in interest).

[2]  CA, CT, DE, IA, ME, MD, MA, NH, NY, VT, WA, MN and RI (both MN and RI effective 8/1/2013)

[3]  CO, HI, IL, and NJ

[4]  AL, AK, AZ, AR, CO, FL, GA, HI, ID, IL, IN, KS, KY, LA, MI, MS, MO, MT, NE, NV, NC, ND, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, WV, WI, and WY

[5]  Case No. MER-L-1729-11, Superior Court of New Jersey, Law Division, Mercer County.

Source: Client Alert