It’s been a whirlwind the past two weeks following the Supreme Court issuing it’s decision overturning Section 3 of DOMA — by now most have heard the rallying cry of “DOMA IS DEAD!” but now that the dust has settled the question arises as to what the ruling actually means for same-sex couples. Specifically, the Supreme Court struck down Section 3 of DOMA only — the Section that defined “marriage” as between a man and woman.

The take away from this decision is that married same-sex couples who live in a state that recognizes their marriage are now treated as married under federal law.

While this ruling does not make marriage legal for same-sex couples across the nation, it does result in various tax or estate planning privileges now being accessible and/or applicable for all couples, whether same-sex or heterosexual. This has far-reaching impacts on how same-sex married couples ought to approach tax and estate planning. While we are not tax experts, we do pratice estate planning law and encourage our clients to consider whether this ruling serves as a good reminder that it is time to re-assess their estate planning.

Cayce & Grove Caveat: Those couples in long-term, committed relationships that for one reason or another do not want to actually marry, still need to consider their rights and what legal avenues other than marriage will protect themselves and their partner — especially in times of crisis or health emergency. A simple Power of Attorney can be a solution providing peace of mind that your loved one will have access to you should you be in the hospital, and be able to assist in your care should you be unable to. This is relatively straight-forward, and provides great protection when properly selected and used. 

JD Supra, a favorite website of ours around the office, posted the list below detailing how couples who fall within the Windsor class of married couples now enjoy the favorable federal transfer tax benefits afforded all married couples for wealth transfer planning, but also are subject to the restrictions applicable to planning for related parties:

Marital Deduction Planning. The federal gift and estate tax unlimited marital deductions are now available to these couples. Previously, gift and estate tax would have been imposed on the transfer of assets between the spouses as though they were unrelated persons. Assets can be transferred between them, outright or in trust, effectively deferring transfer tax to the death of the survivor.7 This allows the couple to rearrange ownership of assets to minimize transfer taxes, obtain creditor protection and plan appropriately for the survivor’s liquidity needs.

Portability. Portability permits a surviving spouse to use the predeceasing spouse’s unused federal estate tax exclusion to make additional gifts tax-free or reduce the survivor’s estate taxes upon death.

Community Property Interests. Couples in community property states that recognize same-sex marriage (such as Washington) will now receive a full step-up in basis for income tax purposes on community assets at the first spouse’s death.

Disclaimers. A surviving spouse may disclaim certain property interests while retaining other interests in the same property, unlike other beneficiaries, who cannot retain any interest in disclaimed assets. Particularly with trust planning, disclaimers are a useful post-mortem planning tool.

Spousal Election. Prior to Windsor, a surviving spouse could take advantage of a state level right of election (a right to receive a share of the deceasing spouse’s property) in some states, but could not take advantage of the associated federal estate tax benefit from the marital deduction. After Windsor, the spousal election may provide appropriate planning for the surviving spouse without a potentially disastrous estate tax impact.

Insurance Planning. The availability of the marital deduction and portability may impact life insurance planning, as the burden of the estate tax can now be deferred until the surviving spouse’s death. Consequently, “second-to-die” policies may now be more appropriate than single life policies.

Lifetime Gifting. Windsor impacts couples who contemplate lifetime gifting. Married couples now may “split gifts” to third parties. Previously, if one spouse had significantly greater wealth, he or she was limited to the annual exclusion and unified credit, without the ability to use the spouse’s exclusions and credit.

Grantor Trust Planning. Irrevocable trusts that include the spouse as a beneficiary are treated as grantor trusts for income tax purposes, with the result that the donor continues to be legally responsible for the income recognized by the trust. The donor’s payment of taxes is a tax-free gift, as trust assets are not diminished by income taxes, nor are the beneficiaries burdened by the tax. AfterWindsor, there are additional opportunities for planning with grantor trusts for same-sex married couples. Conversely, those who have already created irrevocable trusts naming a spouse as trustee or as a beneficiary should confirm that grantor trust status is not inadvertently created because ofWindsor.

Previous Planning with Techniques Not Available to Related Parties. Prior to Windsor, same-sex couples could take advantage of estate planning techniques not available to couples treated as married for federal tax purposes. Popular techniques to transfer wealth included residence trusts, common law GRITs, loans without adequate interest and shareholder agreements that did not comport with the requirements of §2703. These techniques should no longer be used for couples who fall within the Windsor decision. For domestic partners and married persons living in a state that does not recognize their union, these techniques should not be used until further guidance is received from IRS.


The original article in full as published on JD Supra, please click here.