Marriage: The Supreme Court Case on Same-Sex Couples & Estate Planning for All Married Couples

The recent U.S. Supreme Court Decision which determines Section 3 of the Defense of Marriage Act as unconstitutional has created a flurry of articles in the legal field and in the mainstream media. The following is to provide a summary of planning opportunities that are available to all married persons, including married same-sex couples, and to alert you to developing issues for same-sex couples in the Family law area as well.

Overview of DOMA Case. In the United States v. Windsor, the Supreme Court determined that Section 3 of the Federal Defense of Marriage Act (DOMA) was unconstitutional. Section 3 of DOMA defines marriage as a legal union between a man and a woman. The Supreme Court affirmed that this was a violation of the Equal Protection Clause of the 5th Amendment, rendering it unconstitutional.

In the Windsor case, Ms. Windsor was legally married to her partner pursuant to New York law. When Ms. Windsor’s partner passed away, Ms. Windsor was not permitted to take advantage of the federal tax exemption for surviving spouses; in fact, Ms. Windsor was compelled to pay over $363,000.00 in estate taxes. The United States Supreme Court ruled that DOMA was unconstitutional as “a deprivation of the liberty of the person protected by the Fifth Amendment.” The ‘Windsor Decision’ only applies to lawful same-sex marriages recognized in states that currently allow such marriages, such as New York.

The decision is not clear on the effect of federal benefits to those in same-sex relationships in states that only recognize domestic partnerships or civil unions. Moreover, the decision did not address Section 2 of DOMA which allows states to refuse to recognize same-sex marriages performed under the laws of other states.

Marriage Estate Planning Opportunities:

A. Marital Deduction. Property passing from one spouse to another, both during lifetime or after death, can pass estate and gift tax free.

In 2013, the Federal Estate Tax Exemption Amount (the amount that one can pass tax free) is $5,250,000 and, indexed for inflation, is likely to increase. In New York, an estate is subject to estate tax at $1,000,000. Therefore, for estates in excess of $5,250,000, the unlimited marital deduction is very important and for New York residents with estates over $1,000,000 this marital deduction is also crucial. Note there are specific and different rules with regard to marital deductions when the spouse is not a U.S. citizen. The marital deduction is an important estate planning tool, especially if an outright transfer to a surviving spouse is not desired. a qualified terminal interest property trust can still be utilized, which takes advantage of the unlimited spousal deduction but prevents an outright gifting to spouse.

B. Disclaimers: This is an estate tax planning device that allows a beneficiary to refuse a bequest for whatever reason from passing to that individual. This is a commonly used planning devise between spouses. In general, when an individual disclaims, that individual cannot benefit in any way from the disclaimed property, except for a spouse. A spouse, however, is allowed to disclaim to a trust for that spouse’s benefit. This allows the surviving spouse to benefit from that asset in a trust, but keeps the disclaimed asset, plus any growth, out of the estate of the surviving spouse upon the death of the second spouse to die.

C. Portability: Portability allows a surviving spouse to utilize the unused portion of a deceased spouse’s Federal Exemption amount (the $5,250,000). Thus, it allows a surviving spouse to increase the amount that he or she can leave to others free of Federal Estate Tax. This is a recent benefit made permanent under the American Taxpayer Relief Act of 2012, which became effective in January of 2013. Note that portability does not apply to the New York State estate tax exemption amount of $1,000,000.

D. Gift-Splitting: Gifting is an often-used planning device to decrease the size of one’s estate, which reduces or minimizes estate taxes at death. Splitting gifts allows the “monied” spouse to make a larger gift although only one-half of that gift counts toward the monied spouse’s annual exclusion amount or that spouse may use up the Federal Exemption Amount. Both spouses elect to treat the gift as if it came from each of them. This allows for the use of the annual gift tax exclusion for each spouse and allows the spouses to share in using up the non-annual exclusion gift portion of their Federal Exemption Amount. In 2013, the annual gift tax exclusion is $14,000. In gift splitting, one spouse can gift $28,000 without using up any of his or her Federal Exemption Amount.

E. Spousal Rollovers: Spousal Rollovers for Qualified Retirement Accounts permit a survivor to rollover the Qualified Retirement Account as his or her own and thereby extend the time required to payout of the account and defer the payment of income taxes even longer than if the account was treated as an inherited account. On the other hand, if one person desires to leave his or her Qualified Retirement Account to someone other than his or her spouse, then the spouse’s written consent to designate someone other than the spouse will be required.

F. Real Property Capital Gains Tax Exclusion: Married couples filing joint income tax returns can exclude up to $500,000 of capital gains on the sale of a personal residence, even if it was only owned by one spouse, as long as they file jointly and the other required elements exist for both individuals (you must use the property as your principal residence for a total of two years, not necessarily consecutive, out of the five years preceding the sale).

G. Tax Returns. Married couples have always been allowed to file joint income tax returns and there are specific deductions that are available to spouses. Same-sex couples should be aware of any possible future amendment that might allow them to recoup past taxes paid, given the recent legislation.

H. Other Benefits Available to Married Couples. Other important benefits available to all married couples include the ability to be covered under spouse’s health insurance plan. In addition, there are specific marital rights in a spouse’s retirement plan.

If you have questions on any of the above topics, please contact Anne Ruffer at aruffer@mackenziehughes.com or at 233-8269.

Family Law Issues Post-DOMA Although we all hope for a happy marriage or relationship, the sad reality is that some marriages do break down and some couples must turn to the legal system for help and guidance when navigating the tricky waters of custody and visitation. This is true for heterosexual couples as well as same-sex couples. New York’s divorce laws apply uniformly to all couples. While the new ruling striking down DOMA does not impact same-sex couples seeking a divorce in New York (provided all the residency requirements, etc., are met), it might affect assets with a federal component, such as pensions or other retirement assets.

Also, please keep in mind that the laws regarding custody and same-sex families are still evolving. Although the “best interest” standard always applies when determining appropriate custody or visitation schedules for children, if one party is neither a biological or adoptive parent, certain roadblocks might be difficult to overcome. One way to avoid unnecessary, and potentially heartbreaking, litigation is to come to an agreement between the parties. This can be done while the parties are still together, or while they are going through the separation process. All family law issues, and same-sex family law issues in particular, are often difficult and require sensitivity and expertise.

If you have any questions, please do not hesitate to contact our Family Law attorney, Jillian DiLaura McGuire, at jmcguire@mackenziehughes.com or at 233-8213.

Media Contacts:

Anne B. Ruffer

Mackenzie Hughes LLP

315.233.8269

aruffer@mackenziehughes.com

Jillian DiLaura McGuire

Mackenzie Hughes LLP

315.233.8213

jmcguire@mackenziehughes.com