Same-Sex Couples Should Review Their Estate Planning Documents to Take Advantage of Marriage-Friendly Tax Provisions

HIGHLIGHTS:

  • Married same-sex couples living in states that previously did not recognize their marital status now can (and indeed, must) file tax returns indicating their status as married filing jointly or married filing separately.
  • Couples residing in states that did not recognize their marriage previously are no longer subject to costly additional tax preparation for federal and state purposes. They are, however, subject to the same benefits and burdens at both the federal and state levels, including so-called “marriage penalties,” which may subject them to higher overall tax rates.
  • Same-sex couples in states that previously did not recognize same-sex marriage should review and update their estate planning documents to take advantage of marriage-friendly tax provisions and presumptions, as well as consider realigning assets for optimal tax planning.

The recent U.S. Supreme Court decision in Obergefell v. Hodges, 135 S.Ct. 1039 (June 26, 2015), answered definitively the lingering questions following the Court’s decision last year in Windsor1 about whether states could continue to prohibit same-sex marriage and/or the recognition of same-sex marriages validly entered into in another jurisdiction. While Windsor was limited in its application to federal recognition of same-sex marriage, Obergefell addressed state recognition of same-sex marriage, with the result being consistent treatment of couples for federal and state tax purposes.

Marital Status Will Be Uniform, Regardless of State of Residence

Married same-sex couples living in states that previously did not recognize their marital status now can (and indeed, must) file tax returns indicating their status as married filing jointly or married filing separately. Couples residing in states that did not recognize their marriage previously are no longer subject to costly additional tax preparation for federal and state purposes. They are, however, subject to the same benefits and burdens at both the federal and state levels, including so-called “marriage penalties,” which may subject them to higher overall tax rates. Because Obergefell was based on equal protection under the 14th amendment to the U.S. Constitution, state laws banning recognition of same-sex marriage were void ab initio. Accordingly, couples who were burdened by filing separate tax returns need to consider amending previously filed returns. However, just as Treasury issued guidance restricting how far back returns may be amended, so too may the states. For couples who are not married but are domestic partners or partnered in civil unions, Obergefell does not require state recognition.

State Domestic Relations and Family Laws

States that have not recognized same-sex marriages by state judicial decision or legislative action will need to update their domestic relations and family law provisions. For example, Massachusetts probate and family law courts, which recognized same-sex marriages more than 10 years ago, understand that in evaluating equitable distribution of assets and alimony upon divorce, the duration of the marriage may be artificial as a result of the inability to marry. For couples who evidenced an intent to live as a married couple, the duration of the marriage may be deemed to be longer than the actual marriage for determining the property settlement and alimony. For community property states, if there was a prior civil union or domestic partnership, community property rights would attach; if not, community property rights may only begin upon the actual marriage, absent legislation that would require an earlier date for the commencement of the community interests.

For family law matters, including presumption of parentage and adoption, states that previously recognized same-sex marriage worked to adapt family laws to apply to same-sex couples. States that must recognize same-sex marriage based on Obergefell will now need to review their family law statutes.

Employer Benefits

Employers in many states have provided healthcare and other benefits to domestic partners. For many, the benefits outweighed the adverse tax treatment for the cost of insuring a non-spouse partner. Now that marriage is available in all states, it remains unclear how companies will address providing benefits for unmarried couples.

Estate Plan Documents

Same-sex couples in states that previously did not recognize same-sex marriage should review and update their estate planning documents to take advantage of marriage-friendly tax provisions and presumptions, as well as consider realigning assets for optimal tax planning. Documents created by others, such as a parent or grandparent, may have provisions limited to certain categories of beneficiaries. For example, a parent’s trust may give the child the power to appoint the balance of her trust share to and among the child’s descendants and spouse. Effective exercise of the power of appointment can be a useful estate planning tool.