Regardless of your personal feelings for, or against, same sex marriage, the US Supreme Court’s Windsor decision on June 26, 2013, combined with the Minnesota’s recent legalization of such marriages, holds tax implications for Minnesota residents of the GLBT community, their families, and business partners. Supreme Court held that the federal government will recognize same-sex marriages for the purposes of federal laws/programs, for couples who are married, and reside, in a jurisdiction that permits such marriages. Here is merely a small sampling of some tax effects, with an estate tax emphasis.
Estate Tax Gains:
- Unlimited gifts between spouses during lifetime. Legal spouses may gift an unlimited amount of assets to each other during their lifetime without incurring federal gift tax. This tool is often used to fund tax exempt by-pass trusts upon the death of first spouse, which then pass tax free to the named heirs (remainder beneficiaries). Minnesota still honors the unlimited gift between legal spouses.
- Portability. An individual has a Federal Exemption to pass $5.25 million estate tax free. Portability allows a married couple to pass $10.5 million without creating by-pass trusts at the first death. This however, is only a federal benefit for couples living in non- Estate Taxed States. Minnesota has its own estate tax regime, allowing only $1 million to be passed estate tax free, AND does not offer portability. Effectively, Minnesota couples cannot pass $2 million, but only $1 million estate tax free. Minnesota couples can increase the exemption to $2 million by seeing a tax attorney and drafting by-pass trusts into their estate plan.
- Gift Tax Splitting for Annual Exclusion Gifts. Annually, individuals can gift $14,000 to as many recipients as s/he desires, without incurring gift tax. Couples can gift twice that, $28,000, per recipient through gift splitting.
- Marriage Income Tax Penalty. Some couples who are legally married and filing jointly may experience higher income taxes than two similarly situated single individuals who file separately.
- GRITs: A grantor retained income trust allows a taxpayer to put highly appreciating assets into a trust, and receive back only the income produced by the trust. At the end of a term of years, the assets and appreciation to a beneficiary. The beneficiary, however, may not be a family member. So if you are currently a remainder beneficiary of such trust, a legal marriage could run afoul of this tax tool.
- Importance of Ante Nuptial Planning for all singles contemplating marriage. Marriage is a legal arrangement with far reaching consequences for GLBT and hetero couples. There are a host of state probate laws that apply to married individuals on the very first day of marriage. For two individuals who are contemplating combining your lives, and your assets, you may be unaware that state probate and divorce laws can substantially redistribute your assets differently than how you had planned. Even if you draft a will, state laws can override that will when not drafted accordingly. As a result, single and successive married individuals, whether GLBT or not, absolutely must consult with an estate planning attorney to ensure that their estate (1) goes in the overall proportions which you envision rather than the MN state legislature’s version, and (2) avoid horribly emotional and expensive post-death litigation between your surviving family, friends, and business partners. Avoiding this task due to emotional tension, is not doing anyone, least of all your new fiancé, a favor, and can be done in a caring and constructive manner.