The Ripple Effect of US v. Windsor on Planning

     Today marks a milestone for Plainly Legal. This is our 100th post, and we would like to thank everyone who has supported this venture and visited our Blog. That said, let's move on to today's topic, as recent weeks have produced significant news that affects our practice and those of our associated professionals.

     As we discussed in July, the Supreme Court's decision in the case of US v. Windsor, holding Section 3 of the Defense of Marriage Act (DOMA) unconstitutional, impacts planning for married same-sex clients. Since that decision, other departments of the Federal government have announced responses to this holding.

     On August 29th the US Department of Treasury and the Internal Revenue Service ruled that same-sex couples, legally married in states that recognize their marriages, would be treated as married for federal tax purposes. This ruling applies to all married same-sex couples regardless of whether their state of residence recognizes same-sex marriage. This ruling applies to all forms of federal taxation including income, gift, and estate tax. Because of this ruling, legally married same-sex couples may file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. These couples may, but are not required to, file amended returns for the tax years 2010, 2011, and 2012, choosing to be treated as married for those years. However, Michigan has yet to weigh in on whether legally married same-sex couples may file joint returns. 

     While the IRS has readily complied with the Supreme Court's decision, other departments of the Federal government are not as quick to change their policies. The Department of Veterans Affairs Secretary Eric Shinseki announced that the Supreme Court ruling did not specifically strike down a federal regulation defining a spouse as someone of the opposite sex, and therefore the Department of Veterans Affairs would continue to limit VA benefits to opposite sex spouses. This decision was almost immediately challenged, and on August 30th US District Judge Consuelo Marshall of Los Angeles ruled that based on the Supreme Court's decision in US v. Windsor, the regulation in question was unconstitutional and approved an injunction permanently barring the VA from applying that regulation.

     In contrast to the Department of Veterans Affairs, the Pentagon has announced that as of September 3rd same-sex spouses of military members will now be eligible for the same health care, housing, and other benefits enjoyed by opposite sex spouses. This decision has been met with some resistance, especially from the State of Texas, where the Texas National Guard currently refuses to process requests from same-sex couples.

As events unfold and the scope of the Supreme Court's decision becomes clearer, we at Plainly Legal will continue to provide you with commentary that may assist you in new planning for clients covered by the decision. 

     Again, thanks to all of our readers for their regular visits to the site, and we look forward to continuing to provide you with useful and insightful information regarding estate, tax, and business planning.

Matt Ferrara

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