Post-DOMA Estate Planning Opportunities

Estate Planning

By Gregory Allison

On June 26, the U.S. Supreme Court, in the Windsor decision, ruled that the Defense of Marriage Act (“DOMA”) violates the equal protection clause of the Fifth Amendment by denying equal protection to same-sex couples who are lawfully married in their resident states (Windsor, No. 12-307 (U.S. 2013)). The decision does not legalize same-sex marriages nationwide nor does it rule that same-sex couples have a constitutional right to marry. However, the Supreme Court’s decision has opened the door for same-sex married couples to enjoy many federal tax-related benefits previously only afforded to opposite-sex married couples, including income, estate, gift, employee benefits, and more. Some of the most noteworthy estate and gift tax implications are as follows:

Gift Tax Marital Deduction. Perhaps the greatest benefit in the estate and gift tax area is the availability of the marital deduction for same-sex couples. In the gift tax regime, transfers between spouses qualify for the unlimited marital deduction and are not subject to gift tax. Prior to Windsor, same-sex couples who would transfer money to each other, title accounts or property jointly, or pay obligations of each other could have gift tax implications. These transfers now qualify for the marital deduction, affording same-sex couples the opportunity to truly intermingle financial affairs as is customary in many marital relationships without potentially incurring gift tax.

Estate Tax Marital Deduction. The marital deduction extends beyond the gift tax regime and into the estate tax regime. Accordingly, same-sex couples may now utilize marital deduction formulas in their wills or other similar instruments to provide for each other upon death without incurring estate taxes on these bequests.

Gift Splitting. Also in the gift tax regime, same-sex couples will now be allowed to split gifts. Splitting gifts allows a taxpayer to effectively double his or her annual exclusion ($14,000 in 2013) and lifetime exemption by treating the gift as having been made one-half by his or her spouse.

Portability. Same-sex couples are also able to enjoy the benefits of portability. Portability is a relatively new concept that allows the unused gift and estate tax exemption amount of a deceased spouse to be absorbed and added to the exemption amount of the surviving spouse. Upon the first death, if no exemption amount has been used, this new opportunity doubles the surviving spouse’s exemption amount.

Inherited IRAs. Before Windsor, when a same-sex spouse inherited an individual retirement account (“IRA”), the assets in the IRA were to be distributed over the surviving spouse’s life expectancy beginning immediately. Now, if a spouse inherits an IRA from his or her same-sex spouse, the surviving spouse may treat the inherited IRA as his or her own and may postpone required minimum distributions until the year he or she attains the age of 70 ½.

On a prospective basis, for individuals who reside in a state that recognizes same-sex marriages, now is the time for estate planning documents to be revisited. In addition, there may be retrospective opportunities as well. Some practitioners believe that same-sex married couples will not be considered married on June 26, 2013, the date of the decision, but rather the marriage will be recognized retroactively to the date of their marriage pursuant to state law. Accordingly, same-sex spouses who have made gifts to one another or have inherited from a same-sex spouse in the past few years should consult their tax professional to determine if filing amended gift tax or estate tax returns might be warranted.

© 2013 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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