By STEVEN A. SIGSBURY
The U.S. Supreme Court issued a pair of landmark decisions on June 26, striking down Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional and dismissing the case against California’s Proposition 8. Currently, the District of Columbia and 13 states have legislation enacted that allows same-sex marriage, and, in light of these decisions, many more will likely consider this issue in the next several years. As a result of these rulings, the financial and estate planning of same-sex couples will be affected, as more than 1,000 federal statutes and 100 tax laws will now be applicable to them, relating to aspects of marriage, divorce, inheritance, child-rearing, taxes, retirement planning, health care, employee benefits and immigration.
In the area of estate and wealth planning, the recent Supreme Court decisions have given same-sex couples a unique opportunity to revisit their plans, to ensure that they are structured to meet their lifetime and testamentary objectives.
Among the many rights and responsibilities afforded under federal laws, same-sex couples will now be able to: Transfer assets during life or at death without triggering any gift or estate tax by using the (unlimited) marital deduction for gift and estate taxes; split gifts, allowing spouses to treat taxable gifts as made half by each of them; make a “portability” election to pass one spouse’s estate tax exemption to the survivor at death; and elect to treat inherited property from a spouse as qualified terminable interest property and allocate Generation Skipping Transfer tax exemption to it at the first spouse’s death; qualify for survivor and death benefits under annuities, pension plans, 401(k) plans, or similar retirement plans, and allow a surviving spouse to rollover inherited retirement funds into their own retirement accounts and thereby avoid having to take required minimum distributions until age 70 1/2.
The DOMA decision thus affords a number of benefits to same-sex couples and, in general, most will be able to simplify their estate plans. Same-sex couples should review their estate plans and may want to revisit the ownership structure of their assets.
Considering the foregoing, many same-sex 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 premarital agreements, if necessary.
As a final word of caution it should be noted that the Supreme Court decisions left a number of questions largely unanswered. The IRS has already said it will “move swiftly to provide revised guidance in the near future,” but it did not provide any details on how it would approach resolving these issues.
One big unknown will be the effect of the laws across state borders. Specifically, what will happen to same-sex couples who are married in one jurisdiction and who move to a jurisdiction that does not recognize same-sex marriage? The Supreme Court’s decision did not address Section 2 of DOMA, which allows states to deny recognition to same-sex marriages of other states. Presumably, couples that move to such a jurisdiction may see their entire estate planning strategy less effective since they could potentially remain subject to large state tax bills upon the death of a spouse under state law. Similarly, the decisions do not address civil unions or domestic partnerships. Same-sex couples that are registered as partners but who are not “married” under state law will not be able to avail themselves of any of the estate planning benefits of having a legal spouse under federal law.
Planners are hopeful that many of these questions will be answered in the short term as the IRS and the Obama administration continues to address and update the federal laws affected by these decisions. If you have questions regarding your own planning or how these laws will affect you or your spouse, please contact one of our estate planning attorneys.
If you have any questions regarding this article, contact Steven A. Sigsbury at 202-457-1627 or SSigsbury@jackscamp.com. If you have any questions regarding our firm, please contact Don Uttrich, who chairs our Diversity Committee, at 202-457-4266 or firstname.lastname@example.org.