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June 29, 2015
It's A Whole New World: Estate Planning for Same-Sex Couples After the Demise of DOMA
On June 26, 2013, the Supreme Court of the United States issued two groundbreaking opinions regarding same-sex marriage. The rulings will substantially impact financial and estate planning for same-sex couples living in jurisdictions that recognize same-sex marriage. Now is a critical time for same-sex couples, regardless of their legal status, to review their estate plans to ensure that they are optimally structured.
As a result of the Court's holding in United States v. Windsor, couples currently residing in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia will now be eligible for and subject to over 1,000 spousal rights and responsibilities afforded under federal law, including:
The ability to transfer unlimited assets to a spouse during life and at death, which means the payment of any estate tax due can be deferred until the second death;
The option to file joint federal tax returns, which gives couples with significantly disparate incomes the ability to lower their overall effective tax rate;
For a surviving spouse, the right to receive Social Security survivor benefits;
The opportunity to sponsor a foreign-born spouse for citizenship; and
Access to veterans' spousal benefits.
While it is clear that same-sex married couples living in jurisdictions that recognize same-sex marriage will be eligible for these federal benefits, there are still unresolved questions for those residing elsewhere. Additionally, the Court did not describe how the holding in the Windsor case might apply to couples who are in registered domestic partnerships and civil unions. In the meantime, it is critically important that same-sex couples, regardless of their legal status, review their estate plans to ensure that they are structured optimally in light of these new rules.
For high net worth couples, adding provisions to wills and trusts that allow them to take full advantage of the unlimited marital deduction from estate tax will be important.
Couples of more moderate means may be able to simplify their plans by relying on the relatively new concept of portability, which allows a surviving spouse to utilize any unused estate tax exemption of the first spouse to die.
Couples in community property states may obtain tax advantages by transmuting property from separate to community, which is possible now that lifetime transfers between same-sex married couples in recognition states do not constitute taxable gifts.
In addition, many couples may now wish to marry. It is important that these couples are aware of the financial implications of marriage and enter into the appropriate pre-marital agreements if necessary. Couples who are currently registered domestic partners or in a civil union, and who have previously entered into an agreement governing their responsibilities, may need to update the agreement.
June 26, 2013 Rulings
In United States v. Windsor, the Court held Section 3 of the Defense of Marriage Act (DOMA), a federal statute that defines “marriage” as the union between one man and one woman, to be unconstitutional under the equal protection clause of the Fifth Amendment. The Court’s holding has the effect of extending all of the federal rights and responsibilities of marriage to same-sex couples who are lawfully married under state law.
While this is an enormous development, many questions remain. The opinion does not address whether states can continue to ban same-sex marriage or whether states that prohibit same-sex marriage are required to recognize marriages performed in other states. In addition, federal agencies have different approaches when it comes to deciding which state’s laws apply for determining whether a couple is married for the purposes of federal law, and it is possible that a couple that is legally married but living in a state that does not allow same-sex marriage will have certain federal rights but not others. The only guaranteed safe harbor is for married couples who reside in states that recognize same-sex marriage—these couples will have all the rights and obligations of married couples under federal law when the decision goes into effect (25 days after it was issued).
In Hollingsworth v. Perry, the Supreme Court was asked to consider the constitutionality of Proposition 8, the 2008 measure that amended the California constitution to ban same-sex marriage. Instead of addressing the merits of the case, the Court held that the official sponsors of Proposition 8 lacked standing to appeal the trial court’s decision holding that the amendment is unconstitutional--and so it stands. As a result, same-sex marriage should be available again in California very soon. The impact of the Perry case is limited to California. Because the Supreme Court did not reach the issue of whether Proposition 8 is unconstitutional, the Court’s holding leaves undisturbed the laws of other states that ban same-sex marriage.