On Wednesday, 26 June 2013, the US Supreme Court ruled that Section 3 of the Defense of Marriage Act (“DOMA”), which limits the definition of “marriage” to “a legal union between one man and one woman as husband and wife” and the definition of “spouse” to “a person of the opposite sex who is a husband or a wife”, is unconstitutional (United States v. Windsor, U.S., No. 12-307, 6/26/2013). This landmark decision has far reaching implications as it affects every federal statute and regulation where “marriage” is relevant. Under the decision, the unlimited gift and estate tax marital deduction for gifts and bequests between spouses will now apply to same-sex spouses. Under Windsor, same-sex spouses should be able to defer, and potentially avoid, the tax on such transfers. At least that should be the case for same-sex spouses who reside in US states (and countries) that permit or recognize same-sex marriages. It is unclear whether the Windsor decision will apply to same-sex spouses who are legally married but reside in a US state (or country) that does not permit or recognize same-sex marriages. Similarly, whether the principles of Windsor will ultimately encompass legal institutions such as civil partnerships remains unclear. What is clear, however, is that the US Internal Revenue Service has its work cut out for it in the coming months since over 1,000 federal statutes and regulations are affected by the decision.
Some of the US federal tax benefits that are now available to same-sex spouses who reside in US states that permit or recognize same-sex marriages include:
- Unlimited lifetime gift tax marital deduction;
- Unlimited estate tax marital deduction;
- Portability of the unused estate tax exemption (currently $5.25 million) to the surviving spouse;
- Ability to file a joint income tax return; and
- Retirement plan benefits afforded to surviving spouses.
To take immediate advantage of these newly available benefits, same-sex spouses should amend their estate planning documents to incorporate all of the exemptions, credits and deductions available to married individuals under the Internal Revenue Code. As these tax benefits also may be extended to individuals in civil partnerships (in the UK for instance), civil partners should consider incorporating marital provisions in their estate planning documents that will apply in the event this treatment is confirmed. Lastly, same-sex spouses who filed separate US federal income tax returns should review their US federal income tax returns for previous years to determine whether they might be eligible to claim a US tax refund. Likewise, individuals in civil partnerships might consider filing protective refund claims to preserve their position in the event Windsor is interpreted in their favor as well.