In United States v. Windsor (June 26, 2013), the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA), which defined marriage as between one man and one woman, violated the Fifth Amendment of the Constitution. This decision allows same-sex married couples in states recognizing same-sex marriage, such as Washington, to be treated the same as opposite-sex married couples under federal law, and has wide-ranging federal estate and gift tax implications.
Married same-sex couples can now use the unlimited marital deduction to transfer assets estate tax-free at the first spouse’s death. Additionally, same-sex surviving spouses now benefit from the portability of the unified credit, which allows any unused unified credit at the death of the first spouse to pass to the surviving spouse if an election is made on an estate tax return. When a surviving spouse inherits a deceased spouse’s IRA or other qualified retirement plan he or she can roll over the plan into his or her own retirement account, allowing him or her to defer the required distribution dates, which often results in a tax savings. A same-sex surviving spouse will be eligible for surviving spouse veteran’s benefits and social security benefits to the same extent a heterosexual surviving spouse is eligible.
The Windsor decision also impacts the ability of same-sex couples to engage in lifetime giving. The gift tax marital deduction allows a spouse to give an unlimited amount to the other spouse without paying federal gift tax or using the donor spouse’s unified credit. Same-sex spouses can now split gifts, allowing them to double the impact of their gift tax annual exclusion (currently $14,000 per year per donor). Section 3 of DOMA was held to be unconstitutional from its inception, which allows same-sex couples to amend any income, gift, or estate tax return where the statute of limitations has not expired.
Section 2 of DOMA (which was not affected by Windsor) allows states to refuse to recognize same-sex marriages performed in other states. Due to the varying standards, a couple married in a state that recognizes same-sex marriage but residing in a state that refuses to recognize same-sex marriages performed in other states may not receive the benefits outlined above. The IRS is expected to issue guidance on this issue within the next year.
The Windsor case provides a great opportunity for same-sex couples to revisit their estate plan. Married couples may find that their estate planning documents can be simplified, or that their federal estate tax burden will be reduced or eliminated. Unmarried couples may wish to take advantage of these benefits, and thus may consider taking the step of legal marriage in Washington state. Please contact our office if you have any questions about how the Windsor decision may affect you.