SCotUS Decides an Important Estate Planning Case (and Overrules DOMA)

     Last week, the United States Supreme Court issued its decision in the case of US v. Windsor. This case, more commonly known as the Defense of Marriage Act (DOMA) case, has received much press coverage. This past week by 5-4 decision the Supreme Court found Section 3 of DOMA violated the Equal Protection Clause of the Fifth Amendment. Somewhat less well known, but equally important, is the estate planning relevance of Windsor.

     At its heart, Windsor was a suit brought by a taxpayer to collect a refund on Federal Estate Taxes. Edie Windsor and Thea Spyer were legally married in Canada in 2007, following an over forty year committed relationship while living in New York City. When Spyer died in 2009 she left her entire estate to Windsor. Since DOMA prevented same-sex married couples from receiving a wide range of Federal government benefits, the estate did not qualify for the unlimited marital deduction available to married couples. As a result, Windsor, as personal representative of the estate paid over $363,000 in Federal Estate Taxes. Windsor then sued for a refund and a declaration that Section 3 of DOMA violates the Constitution.

     While the Windsor decision has far-reaching consequences regarding many different types of federal benefits available to married spouses, with respect to estate planning legally married same-sex couples are now entitled to the following tax benefits:

• the right to file a joint Federal Income Tax return;
• the opportunity to obtain tax-free employer health coverage for the same-sex spouse;
• the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of Federal Gift Tax;
• the opportunity for the estate of the first spouse to die to receive a marital deduction for amounts transferred to the surviving spouse;
• the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;
• the opportunity to consent to make “split” gifts; and
• the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA using the more favorable spousal rules.

     All of these benefits are subject to Federal law and therefore are applicable to legally married couples in all 50 states, whether or not that state recognizes same-sex marriage. This means that clients legally married in any of the 13 states that currently recognize same-sex marriage may take advantage of these benefits no matter their state of residence. For financial planners and other estate planning professionals this change in the law will have a substantial effect on planning for any client that falls into this category.

     Any action regarding estate planning should only be undertaken following consultation with an experienced professional. If you have questions or concerns involving a specific situation, please contact us directly and will be happy to assist you.

Matt Ferrara