On June 27, 2013, in a landmark ruling, the United States Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. The case was United States v. Windsor and arose in connection with a New York statute that recognized same-sex marriages. On the same date, in Holingsworth v. Perry, the Supreme Court held that the proponents of California Proposition 8 did not have judicial standing to intervene in a case to argue in favor of the constitutionality of Proposition 8, which a United States District Court had previously declared unconstitutional. The Hollingsworth case effectively paved the way for California same-sex marriage.
The Windsor case arose from an attempt to claim an estate tax marital deduction in connection with the death of one member of a same-sex married couple. Edith Windsor and Thea Speyer were married in Canada, but their marriage was recognized under the laws of the state of New York, where they resided. Ms. Speyer died in 2009 and left her entire estate to Ms. Windsor. As Ms. Speyer’s executor, Ms. Windsor filed an estate tax return and paid the estate tax due. She then filed a lawsuit claiming a refund of the tax on the basis that Ms. Speyer’s estate was entitled to a marital deduction pursuant to IRC Section 2057.
The IRS denied the refund on the basis that under DOMA Ms. Windsor did not qualify as a surviving spouse. Section 3 of DOMA provides that for purposes of determining the meaning of any act of Congress, marriage means only a legal union between one man and one woman as husband and wife, and spouse refers only to a person of the opposite sex who is a husband or a wife. The import of this provision was that if a state permitted same-sex marriage, the federal government would not recognize it for purposes of any of its laws. The court held that the definition of marriage in Section 3 of DOMA violated the Due Process Clause of the Fifth Amendment to the United States Constitution as a deprivation of an essential part of the liberty protected under that amendment.
These two cases may significantly impact your estate plan and may have important income tax consequences for you. Below is a partial list of some of the income tax and estate planning consequences of these cases. Further, many of these benefits may be retroactive.
- The availability of the marital deduction for both gift and estate taxes, including the ability to transmute separate property of one spouse to community property (or vice versa) without negative gift tax consequences.
- Retirement benefits, Social Security benefits and the availability of the spousal rollover IRA. n The ability to file one joint income tax return and the attendant burden of the “marriage penalty.”
- The availability of using both spouses’ gift and estate tax exemptions, including the use of “split gifts” for gift tax purposes and the ability to make use at the second death of any estate tax exemption not applied to the deceased spouse’s estate.
- Increased health care access and rights.
- Increased opportunities for international estate planning and citizenship.
The IRS has indicated that it intends to publish guidance on the effect of the Windsor case soon.