Estate Planning For Same Sex Couples in a “Post DOMA” World

It has been two weeks since the United States Supreme Court issued its decision in United States v. Windsor in which the 5-4 majority found that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional.  This historic decision nullified the federal definition of marriage as a union between a man and a woman and qualified same sex married couples for federal benefits that were previously available only to heterosexual married couples.

Windsor specifically dealt with a same sex surviving spouse who had been required to pay over $300,000 in federal estate taxes due to her inability to claim the federal estate tax marital deduction.  This was despite the fact that the plaintiff, Edith Windsor, had been legally married to her spouse under the laws of the State of New York.  The majority’s decision, written by Justice Anthony M. Kennedy, held that DOMA created “two contradictory marriage regimes within the same state” and causes same sex marriages to be treated as “second tier marriages.”   The majority held DOMA unconstitutional for violating the Fifth Amendment due process rights of same sex married couples.

The practical result of this decision is that same sex married couples in the 13 states (and the District of Columbia) which allow same sex marriage are entitled to the same protections and rights under federal law as heterosexual married couples.  With 1/3 of the United States population and ¼ of the states now allowing full marriage equality, estate planning for same sex married couples in these states has changed significantly.  Amongst the new estate planning benefits are the following:

Federal Marital Deduction-The inability to qualify for this deduction was injury that allowed DOMA to be challenged.  Previously, same sex married couples could not protect their assets from federal estate tax using this deduction.  Now, assets passing to all surviving spouses pass free of both federal and state estate tax.

Gift Tax Implications-Prior to Windsor, lifetime transfers between same sex spouses were considered taxable gifts and had to be counted towards a spouse’s annual exclusion and lifetime exemption amounts.  Lifetime transfers between spouses are now considered non-taxable events for gift tax purposes.  Furthermore, same sex married couples can now utilize gift splitting to maximize their annual gift tax exclusion.  Prior to Windsor, this was available only to heterosexual married couples.

Portability-With the 2013 Tax Act, President Obama made the concept of portability, which allows a surviving spouse to claim the unused portion of a deceased spouse’s federal estate tax exemption, permanent.  This benefit will now be extended to same sex married couples as well.  However, it should be noted that portability only applied to federal estate tax and not New York or other state estate tax exemptions.

Qualified Retirement Plans-The Employee Retirement Income Service Act (“ERISA”) requires that the beneficiary of a qualified retirement plan must be the owner’s spouse unless the spouse consents to a substitute beneficiary.  Same sex spouses will now be entitled to the same default treatment.

While these changes are significant, many issues remain.  First, the decision in Windsor did not invalidate DOMA as a whole and did not find that states must allow same sex marriage.  This poses a significant burden on same sex couples in the states that do not allow same sex marriage.  Second, the available options for legally married same sex couples looking to move to other states remain limited.  Finally, because DOMA remains applicable to the states where marriage bans remain, there still remains a possibility that a state where same sex marriage is allowed could eventually reverse course and change its laws to ban same sex marriage.

Nevertheless, this change is welcomed by same sex couples and their advisors alike.  And while Windsor makes estate planning for same sex couples significantly easier, it still requires careful planning and consideration to ensure that their families are protected.

Please contact info@levyestatelaw.com for more information about estate planning for same sex couples.

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