Defense of Marriage Act Overturned: Estate Planning Implications

This morning, June 26, 2013, the Supreme Court issued a decision in U.S. v. Windsor overturning the Defense of Marriage Act (“DOMA”).  DOMA defined marriage as being solely between a man and a woman for the purposes of federal programs and laws.  Justice Kennedy put into words the distinct issue facing many same-sex married couples: “By creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law.”

One such duality was the difference in estate planning for those couples that lived in the 12 states and Washington D.C. where marriage was legal.  These same-sex couples had to formulate an estate plan addressing both state and Federal laws and in most cases there was no ideal planning under the Federal laws.

U.S. v. Windsor addresses one of the major estate planning hurdles that high net worth same-sex married couples faced, the marital exclusion to the estate tax.  Edith Windsor and Thea Spayer were married in Toronto, Canada in 2007 and were residents of the State of New York.  They had been together for 40 years when Thea Spayer died in 2009.  As most married people do, Thea Spayer left her entire estate to her spouse.  If her spouse had been the opposite sex her estate would have claimed a marital exclusion and no tax would have been due.  However, under DOMA because Edith Windsor was the same sex the estate tax was $363,053.

Now, same-sex couples legally married no longer have to engage in this dual regime.  Edith Windsor will now be treated as having been married to Thea Spayer under the laws of New York and the Federal government.

The Supreme Court’s decision will reach farther than the marital exclusion and will impact all same-sex married couples.  As highlighted by Justice Kennedy in his opinion, spouses have various benefits under Federal laws and programs.  While these added benefits are useful for same-sex couples, certain same-sex couples may want benefits to pass to a trust or child directly.  In such a case a spouse may need to sign a waiver.  These are issues that will need to be addressed in their overall estate plan.

In addition to the marital exemption from estate tax, same-sex couples will now also be able to make unlimited lifetime gifts to their spouses without having to use a portion of their unified credit and/or paying gift tax.   In the past same-sex couples would run into issues in how they would title their property. Under DOMA, if one spouse had purchased property and wanted to put it in joint name he or she was making a taxable gift.  It remains to be seen whether same-sex couples that made taxable a gift to their spouses can amend prior year’s gift tax returns.

This ruling also opens up the possibility for same-sex couples to make split gifts.  The annual exclusion per person is $14,000.  Married couples are allowed to split gifts so that they can make gifts up to $28,000 per done.  This is an advantageous estate planning tool where one spouse has significantly more assets.

Same-sex married couples should revisit their estate plan to make sure their current plan reflects their ultimate intentions and to take advantage of the new estate and gift tax benefits available.

Please contact Meredith Mazzola or Gerald Dunworth for additional details regarding this alert, or to schedule a consultation to review your Estate Plan.