Earlier this year, the IRS issued Notice 2017-15 giving same-sex married couples some retroactive relief from the application of the gift, estate and generation-skipping taxes to transfers between the spouses.
This relief was necessary because the Defense of Marriage Act, as enacted in 1996, required that the IRS treat same-sex couples married under state law as unmarried for Federal tax purposes. In 2013, the Supreme Court overturned the statute in the celebrated Windsor decision. Now, almost four years after the Windsor decision, the IRS has agreed to grant limited retroactive gift, estate and generation-skipping tax relief to same-sex married couples.
The Notice provides that if a donor used gift tax exemption on a gift to his or her same-sex spouse, that donor can now file a Federal gift tax return and reclaim that exemption amount, regardless of the domicile of the parties. The donor is not required to file the gift tax return immediately. Rather, the Notice allows the donor to wait until he or she is otherwise required to file Federal gift tax return or to report other taxable gifts. At that time, the exemption can be reclaimed for the prior gift to the same-sex spouse, with a notation at the top that the return is “FILED PURSUANT TO NOTICE 2017-15.” A statement supporting the claim for the marital deduction and detailing a recalculation of the remaining exemption amount must be attached to this return. If not previously claimed, then this exemption restoration can be handled on the donor’s Federal estate tax return filed after death.
However, there are complications and limitations. If the gift was made to the same-sex spouse in trust, an IRS private letter ruling must be filed to make the election to treat the trust as qualifying for the marital deduction. This is an extremely expensive and time-consuming process.
Further, if gift or estate tax was paid on transfers to the same-sex spouse and the statute of limitations has closed on that return, the IRS will not reopen the statute of limitations and allow refunds to be paid. (The statute of limitations generally runs three years after the return is filed.)
Finally, it is important to note that the Notice does not apply to those couples that are in registered domestic partnerships, civil unions or other non-martial relationships. Additionally, the Notice does not provide relief to those couples that either could not or did not marry until after the bequest or gift occurred.
The IRS also will now generally allow donors to reclaim their generation-skipping tax (“GST”) exemption applied to transfers to their same-sex spouse, or to the descendants of their same-sex spouse. If GST exemption had to be applied to a gift to the same-sex spouse because the donee spouse was more than 37 ½ years younger than the donor spouse, then that exemption will be restored. If the same-sex spouses have such a large age gap, and the donor made gifts to the younger spouse’s children, then the GST exemption applied to those transfers likewise should be restored.
Automatic allocations of GST exemption to such gifts also will be subject to restoration. The process of obtaining the GST exemption restoration is the same as for claiming restoration of the gift tax exemption, as summarized above.
This IRS Notice was issued on January 18, just two days before the inauguration. It will be interesting to see if the Trump Administration decides to revoke or modify this Notice now.
If you qualify to claim a restoration of your gift, estate or generation-skipping tax exemption under this Notice, you would be well-advised to proceed to file for the exemption restoration in a 2016 gift tax return, rather than waiting and running the risk that the Notice is later revoked or amended.