On June 26, 2013, the U.S. Supreme Court decided United States v. Windsor, and held that the provision of the Defense of Marriage Act (DOMA) that defined marriage as including only a legal union between one man and one woman is unconstitutional. The lawsuit involved Edith Windsor and her spouse, Thea Spyer. The two resided in New York State, which recognized their Canadian marriage as a valid marriage. Thea died in 2009 and left her entire estate to Edith. However, Thea’s estate was not allowed to take advantage of the federal marital estate tax deduction, since the couple’s marriage was not recognized under federal law.
As acknowledged in the Court’s opinion, DOMA’s definition of marriage “control[s] over 1,000 federal laws” and a “whole realm of federal regulations,” making the impact of the decision for same-sex married couples quite significant. From an estate planning and income tax perspective, the opportunities available to same-sex married couples because of Windsor include the following:
- Lifetime Gifts. Federal law permits a spouse to transfer an unlimited amount during lifetime to his or her spouse, free of gift tax. Thus, transfers of property between same-sex married couples will now qualify for the marital deduction and not require use of the donor’s lifetime gift tax exemption. In addition, same-sex married couples may now elect to “split gifts” on a federal gift tax return, meaning that the gift will be treated as though it were made equally by each spouse.
- Estate Planning – Provisions On Death. Federal law permits a spouse to transfer an unlimited amount to his or her spouse at death, free of estate tax. Thus, devises on death that qualify for the marital deduction will not be subject to estate tax, and will not use the decedent’s estate tax exemption. Same-sex married couples may now take advantage of this federal estate tax marital deduction, as well as get the benefit of “portability,” which permits the first spouse to die to leave his or her unused federal exemption amount to the surviving spouse.
- Estate Planning - Beneficiary Designations. A surviving spouse in a same-sex marriage who is named as a beneficiary of an Individual Retirement Account (IRA) can now take advantage of a so-called “spousal rollover” (after the first spouse dies), which generally provides greater income tax advantages to the surviving spouse.
- Income Tax – Joint-Filing: Federal law authorizes spouses to file joint income tax returns. Prior to Windsor, same-sex married couples were not allowed to file a joint income tax return federally. Now they can. For spouses with moderate incomes, this can result in a lower tax because the standard deduction, and other deductions, may be higher. Also, they may qualify for deductions not otherwise available. If both spouses are high-wage earners, however, the “marriage penalty” could come into effect, subjecting the couple to a higher tax rate than each individual would face if filing separately.
- Income Tax – Employer-Provided Health Benefits: Under federal law, the value of employer-provided health care benefits for employees, their spouses, and dependents is excluded from taxable income and deductible by the employer. These benefits for a same-sex spouse will now qualify for the favorable tax treatment, which could reduce the amount of taxable income for some couples, placing the couple in a lower tax bracket. In addition, employees will be able to use their pre-tax wages to pay qualified medical expenses for their same-sex spouses via flexible spending accounts. The decision will also afford same-sex married couples coverage protection under COBRA.
- Income Tax – Retirement Plans: Prior to Windsor, qualified retirement plans were required to offer surviving spouse benefits only to opposite-sex spouses. As a result of Windsor, such plans may now be required to offer the same surviving spouse benefits to same-sex spouses, including the right to be the default beneficiary.
- Other Considerations. The Windsor decision has many implications, many of which will only become apparent as we all work to incorporate the new federal definition of marriage into the myriad laws and regulations it controls. For example, it is still too early to determine how the Court’s decision will impact same-sex married couples who live in a state that does not recognize their marriage as “lawful.” Note that the above analysis assumes both spouses are U.S. citizens.
The ruling will not be effective until 25 days from the decision. The Court left open the issue of whether the decision is to be applied retroactively. Commentators have opined that, because the basis of the Court’s decision is rooted in the Constitution, the federal government will be hard pressed to avoid retroactive application entirely. Accordingly, same-sex married couples who have filed income tax returns, gift tax returns or estate tax returns should consult with their advisors to determine whether amended returns should be filed.