On June 24, 2011, Governor Cuomo signed into law the Marriage Equality Act, making New York the sixth and largest state to legalize same-sex marriage. The new law provided the most significant victory for those seeking full rights for same-sex couples and could lead to more states following suit.
But, with the new rights and obligations granted to same-sex couples wishing to marry, the law also complicated certain aspects of personal and tax planning for these couples. Additionally, newly wed same-sex couples face new problems due to the lack of full faith and credit typically provided by the federal government and other states.
Same-sex couples in New York can now marry and become entitled to the same rights and obligations that heterosexual married couples have. This includes access to spousal insurance benefits, authority to make decisions for an incapacitated spouse and the obligation of each spouse to support the other
One key right from an estate planning perspective is spousal inheritance rights. Prior to the enactment of the Act, same-sex couples could only pass property through the use of a will or a trust. Now, a surviving spouse, regardless of gender, is entitled automatic inheritance rights under New York law even if no will exists.
The state marital deduction for estate tax purposes is also now available to same-sex couples. Under New York law, a surviving spouse can inherit unlimited assets from their deceased spouse without incurring a state estate tax. This allows a same-sex couple to fully protect their assets from state estate tax until both spouses die. Unfortunately, this benefit is limited to New York state estate taxes only.
New York requires all married couples to file their income tax returns as a married couple, either individually or jointly. Because of the federal Defense of Marriage Act (“DOMA”), same-sex couples must file their federal income tax returns as individuals. In addition to preparing both state and federal tax returns, same-sex couples will also need to prepare a draft federal return for a married couple in order to complete their state income tax returns. This creates a more complicated tax situation and more work for the couple or their accountants.
This discrepancy is not limited to income tax. As I previously mentioned, in New York, a same-sex surviving spouse can inherit unlimited assets from their deceased spouse. This is not true for federal estate tax purposes and surviving spouses are limited to the federal estate tax exemption ($5.12 million in 2012). For couples with illiquid assets, this requires additional planning for when the first spouse dies.
Finally, same-sex couples are also limited regarding lifetime transfers between spouses. Transfers between same-sex spouses are considered taxable gifts, while transfers between heterosexual spouses are not. Spouses in a same-sex couple are limited to their annual gift tax exclusion amount ($13,000), using a portion of their lifetime exemption ($5.12 million) or having to pay gift tax on the transfers.
Once a same-sex couple marries, it limits their ability to move outside of New York and still have their marriage recognized. As mentioned previously, only five other states (Connecticut, Iowa, Massachusetts, New Hampshire, Vermont plus Washington, D.C.) recognize same-sex marriage. DOMA prevents the federal government from providing any federal benefits to same-sex couples. Additionally, 41 states have “mini-DOMAs” which either ban same-sex marriage or specifically define marriage as being between a man and a woman.
Adoption of a child can be a problem for same-sex couple as well. While most states allow homosexual individuals to adopt children, less than half of the states explicitly allow a same-sex couple to jointly adopt. This is also true of some foreign countries, most notably China.
The Marriage Equality Act was an important first step for same-sex couples in New York. The Justice Department’s recent decision to stop defending DOMA in court may eventually bring additional rights. Until then, it is important that same-sex couples work with their advisors to ensure that their rights, the rights of their spouses and the rights of their children are protected to the fullest extent possible.
Please contact firstname.lastname@example.org for more information about planning for same-sex couples.