Estate Planning for Same-Sex Couples Post-DOMA

As ABC’s hit sitcom “Modern Family” becomes a reality for many American families, the estate planning industry must evolve as the number of same-sex marriages increases. A Gallup poll released on July 29, 2013, revealed that the majority of Americans, 52%, would vote in favor of legalizing gay marriage in all 50 states. A more recent poll by Civil Beat shows that 44% of voters in the state of Hawaii would vote to legalize gay marriage in the state, a rapid increase from the 37% favorability in an April 2012 poll on the same issue. Other recent reports reveal that New Jersey is poised to become the 14th state in the U.S. to recognize gay marriage, and Hawaii to become the 15th. Although support for gay marriage is growing, the current inconsistency in states’ recognition of gay marriage posits important estate considerations for legally married, same-sex couples.

Among the changing landscape, the U.S. Supreme Court’s decision in United States v. Windsor has spurred the most notable changes to the financial protections of same-sex couples. In Windsor, the court held in a 5-4 decision that the federal Defense of Marriage Act’s definition of marriage as being between a man and a woman was a violation of the Equal Protection Clause of the United States Constitution. One of the implications of the Windsor decision has been the Internal Revenue Service’s (IRS) extension of the unlimited marital deduction to same-sex couples. The extension of the deduction to same-sex couples allows one same-sex spouse to leave an unlimited amount of property to the other spouse at death without the imposition of a 40% estate tax. Another tax option previously withheld from, but now extended to, same-sex couples is the use of the Qualified Terminable Interest Property (“QTIP”). QTIP is a type of trust through which assets of a deceased spouse may provide an income stream to a surviving spouse and be subsequently transferred to other beneficiaries upon the surviving spouse’s death. In addition, same-sex couples may now jointly transfer up to $10.5 million in assets without incurring taxes. Furthermore, protections against income and negative gift taxes afforded heterosexual couples upon the termination of their union are also now afforded divorced homosexual couples, as is the tax deductibility of alimony.

Same-sex couples would be well advised to exercise caution when moving from a jurisdiction that recognizes their marriage to one that does not, as the transition to the new jurisdiction could potentially put the efficacy of their estate plan at risk. Although the U.S. Department of Treasury has stated that for federal tax purposes legally married, same-sex couples will continue to be treated as married in the event that they relocate from a jurisdiction that recognizes gay marriage to one that does not, other federal agencies have not expressed that intention. For example, the Social Security Administration still looks to a couple’s residence to determine whether couples qualify for marital benefits. Therefore, legally married, same-sex couples are not eligible to receive Social Security benefits based on the work record of their spouse in states that prohibit gay marriage. However, another federal agency, U.S. Citizenship and Immigration Services, has stated that it will look to the state in which a couple was married to determine eligibility for benefits. Employers and private companies in states whose recognition of same-sex marriages is inconclusive-as is the case in Wyoming, where courts may handle divorce proceedings in same-sex marriages, despite the state’s restricting marriage to a man and a woman only-may decide for themselves whether to offer health and retirement benefits to the same-sex spouses of their employees.

Moving forward, additional legislative and judicial decisions will continue to shape same-sex couples’ financial options and estate plans. For example, Bloomberg’s Daily Tax Report recently commented that it will take another judicial decision to determine whether the IRS will open up tax years prior to the three year statute of limitations to the income, gift, and estate tax refund claims allowed by the Windsor decision. In light of the aforementioned variations in states’ and agencies’ recognition of same-sex marriage, it is important that same-sex couples seek professional legal advice to understand the implications of these new protections on their estate plans. The attorneys at Chepenik Trushin LLP have the knowledge and experience to advise and guide you in the creation or modification of your estate plan, taking into account all recent changes in state and federal law that could potentially impact that plan.