The United States Supreme Court issued its opinion in Obergefell v. Hodges, 576 U.S. ___ (2015) on June 26, 2015. In a 5-4 decision, the Supreme Court held that the Fourteenth Amendment requires a State to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of State. The result of this decision is that both the federal government and state governments must recognize the marriages of same-sex couples for all purposes including income taxes and estate taxes.
Obergefell is the latest in a series of Supreme Court decisions on same-sex marriages beginning with United States v. Windsor, 570 U.S. ___ (2013) , and Hollingsworth, et al. v. Perry, et al., 570 U.S. ___ (2013).
In the 5-4 Windsor decision, the Supreme Court held Section 3 of the federal Defense of Marriage Act unconstitutional as a deprivation of the equal liberty of persons protected by the Fifth Amendment to the United States Constitution. That section of the law, which applied to all corners of the federal code, defined marriage as the union of one man and one woman only. For all federal purposes, including the estate tax marital deduction, this applied regardless of status of a relationship at the state level. The Supreme Court held that the federal government’s attempts at classification and regulation of marriage — as only existing between one man and one woman — would not stand.
Before Windsor, a same-sex couple living in a jurisdiction that allowed or recognized same-sex marriage was forced to live as married for the purpose of state law but as unmarried for the purpose of federal law. Going forward, the federal government was required to respect all marriages from the states, including marriages of same-sex couples. And a couple living in a jurisdiction that allowed or recognized same-sex marriage would be married for both state and federal law purposes.
In Perry, in June 2008, the Supreme Court of California decided that marriages between same-sex couples would be recognized and equal to all other marriages performed in the state. Five months later in a ballot initiative known as Proposition 8, opponents of marriage equality successfully added a new provision to the California constitution whereby only a marriage between a man and a woman would be valid or recognized in the state.
A married same-sex couple and a non-married same-sex couple filed an action seeking to compel state officials and their respective county clerks to issue marriage licenses notwithstanding the language of Proposition 8. The plaintiffs claimed that the language added to the California constitution by Proposition 8 violated their rights guaranteed by the Fourteenth Amendment to the U.S. Constitution and that they should be allowed to marry. The state officials refused to defend Proposition 8, and the district court allowed a group of individual citizens — the group that supported Proposition 8 — to defend the language added as a result of the ballot initiative.
The lower federal courts in California held that Proposition 8 was unconstitutional, and the state officials were ordered not to enforce Proposition 8. The state officials elected not to appeal the matter, but the individual citizens did appeal the decision, to the Ninth Circuit Court of Appeals. The Ninth Circuit was unclear on whether the petitioners — the individual citizens who supported Proposition 8 — had standing to appeal. The federal appeals court certified the question to the California Supreme Court, which held that the proponents of the ballot initiative had standing under federal law to defend the constitutionality of the ballot initiative. The Ninth Circuit heard the appeal and upheld the lower court on the merits.
The United States Supreme Court, however, did not reach the merits of the Perrydecision. Rather, a five-judge majority determined that the opponents of marriage equality — the individual citizens — did not have standing to pursue the case. As a result, the decision of the lower courts stood. Proposition 8 was held to be unconstitutional, and the county clerks in California were authorized to issue marriage licenses to same-sex couples.
Windsor and Perry sparked a national discussion about the rights of same-sex couples to marry. In the wake of those decisions, same-sex couples celebrated their eligibility for the many federal benefits available to married couples. At the same time, plaintiffs in many states challenged the validity of state constitutions and statutes that recognized only marriages between a man and a woman.
In Obergefell, an Ohio federal district court issued a temporary restraining order and ordered the Ohio registrar of death certificates not to accept a death certificate for John Arthur, a resident of Ohio, that did not record his status as married and did not record James Obergefell as his surviving spouse. Obergefell v. Kasich, 2013 U.S. Dist. LEXIS 102077 (S.D. Ohio 2013). The district court issued a permanent restraining order on December 23, 2013 in Obergefell v. Wymyslo, 962 F.Supp.2d 968 (S.D. Ohio 2013) (the health department director was substituted for the governor as the named party).
James Obergefell and John Arthur were in a committed relationship for 20 years, and were both Cleveland, Ohio, residents. Ohio specifically prohibited in the state code and state constitution the recognition of marriage of gay or lesbian couples. Arthur suffered from ALS and was expected to die in the near future. Following the Windsordecision, Obergefell and Arthur flew in a medical transport plane to Maryland, whose laws already allowed same-sex couples to marry, and Arthur and Obergefell were wed in a ceremony inside the plane on the tarmac in Baltimore. They then returned to Ohio. The petitioners then sought a preliminary injunction, to prevent the Ohio registrar of death certificates from issuing a death certificate identifying Arthur as anything other than married to Obergefell at the time of his death. The district court found that the petitioners would suffer irreparable harm if Arthur’s death certificate did not recognize his marital status and, in light of the recent ruling in Windsor and the equal protection rulings from the U.S. Supreme Court, that the petitioners were likely to prevail on the merits of their case.
The State of Ohio appealed the decision in Obergefell to the Sixth Circuit. The Sixth Circuit heard Obergefell with other cases dealing with challenges to bans on same-sex marriage in Kentucky, Michigan, and Tennessee. On November 6, 2014, the Sixth Circuit in a 2-1 opinion held that Ohio’s ban on same-sex marriages did not violate the Constitution. DeBoer v. Snyder, 772 F.3d 388 (6th Cir. 2014).
The United States Supreme Court granted certiorari on January 16, 2015 and heard oral arguments on April 28, 2015. On June 26, 2015, the Supreme Court held that all states are required by the Fourteenth Amendment to grant licenses for same-sex marriages and to recognize same-sex marriages performed in other states. As a result of Obergefell, the federal and state governments are now obligated to respect a marriage that is validly recognized by a state. Thus, there will no longer be any disparity between the treatment of same-sex married couples for federal and state tax purposes as there was before Obergefell.
Marital status confers a number of tax advantages, including the following:
- gift-splitting (sections 2513(a) and 2652(a)(2));
- the marital deduction (sections 2056 and 2523);
- portability of the estate and gift tax unified credit (section 2010(c));
- per se same generation assignment (section 2651(c)) and reverse-QTIP elections (section 2652(a)(3)) for GST tax purposes;
- the availability of disclaimers even if the property passes for the disclaimant’s benefit (section 2518(b)(4)(A));
- a personal exemption (section 151(b));
- the nonrecognition of gain on transfers between spouses (section 1041(a));
- expanded eligibility to exclude gain from the sale of a principal residence (section 121(b)(2)(A)); and
- the treatment of spouses as one shareholder of an S corporation (section 1361(c)(1)).
Marriage also presents some potential tax disadvantages, such as the following:
- treatment of a spouse as a member of the family under chapter 14 (sections 2701(e)(1) and 2704(c)(2)) (which would prevent the use of a GRIT, for example);
- disallowance of losses (sections 267(c)(4) and 707(b));
- disallowance of a stepped-up basis in certain cases (section 1014(e)(1)(B)), attribution of stock ownership (section 318(a)(1)); and
- status as a disqualified person under the private foundation rules (section 4946(d)).
Other tax attributes that attach to marriage can be good or bad, depending on the circumstances. This includes the filing of a joint income tax return itself (section 6013), which can be a benefit when one spouse has all or most of the income, but can produce a “marriage penalty” when both have significant income, and married persons in such cases cannot elect the more advantageous filing as single taxpayers. Similarly, married status can make it easier to qualify a trust as a grantor trust (sections 672(e) and 677(a)(1)), whether that is desirable or undesirable.
In addition, same-sex married couples have the same status as opposite-sex married couples under state law, regardless of the state of residence. This status grants various rights and obligations to same-sex spouses under state property law, including the following:
- in the case of a decedent dying without a will, a surviving spouse has the right to receive a portion of the decedent’s estate under state intestacy laws;
- a surviving spouse has the right to take an elective share of a deceased spouse’s estate;
- based on the rights granted above, a surviving spouse may have standing to challenge a deceased spouse’s will;
- a surviving spouse has the right to take a share of a deceased spouse’s estate in the case of an accidental omission from an earlier will, under “omitted spouse” statutes;
- same-sex spouses may own property as tenants by the entirety, protecting such property from the creditors of one spouse;
- the right to a share of marital property in the case of divorce; and
- the right to a share of certain property in community property states.
In the case of same-sex couples who have been lawfully married or who now plan to be lawfully married, regardless of the jurisdiction of residence, estate planners and advisors should review estate planning documents, beneficiary designations, property agreements, and prenuptial and marital agreements to take advantage of any benefits granted by Obergefell, and to avoid any unanticipated consequences upon the death of either spouse, the incapacity of either spouse, or divorce.