DOMA and Estate Planning

Recently the United States Supreme Court ruled on United States vs. Windsor—a case that argued the constitutionality of the Defense of Marriage Act (DOMA). DOMA’s Section 3 controversially defined a “marriage,” for federal tax law and benefits, as only between one man and one woman, and defined “spouse” as a person only of the opposite sex. Section 2 of DOMA also stated that states that did not allow same-sex marriages did not have to recognize those marriages from other jurisdictions.

The Windsor court struck down Section 3 as unconstitutional—removing it from the statute as though it had never existed. Section 2 was not ruled on, leaving some gray area when it comes to states’ recognition of out-of-state same sex marriages. The IRS, following the decision, was decidedly less equivocal—issuing Revenue Ruling 2013-17, stating that same-sex couples, legally married in a state or foreign jurisdiction that authorizes the marriage, will be treated as married for all federal tax purposes.

In California, Hollingsworth v. Perry held that Proposition 8, which banned same-sex marriages in the state, was also unconstitutional—allowing California same-sex couples to join into IRS-recognized valid marriages.

Notably, this does not apply to civil unions, registered domestic partnerships, or other non-marital relationships, regardless of what rights or privileges are bestowed upon those types of unions by states.

So what does this decision mean for same-sex couples in an Estate Planning context? Prior to the Windsor decision, same-sex couples historically faced challenges to planning their estates, including:

• Persistent need to define property rights by contract.
• High chance of Will contests.
• Difficulty enforcing inheritance rights of adopted children.

Simply, the IRS ruling coupled with these court decisions means that same-sex couples who have a valid marriage in California can take advantage of Estate Planning concepts such as the Marital Deduction, Gift Splitting, and Portability. Previously, same-sex couples were treated as being unrelated for tax purposes, excluding these couples from the aforementioned benefits, and other federal or employment benefits such as health insurance coverage, retirement benefits, Social Security, ERISA plans, and COBRA coverage.

This decision creates a full range of options for married, same-sex couples. We are recommending that all same-sex couples review their Estate Plans—because many same-sex Estate Plans did not take into account eligibility for many stress- and money-saving strategies.

Reference: http://www.aicpa.org/Publications/TaxAdviser/2013/September/Pages/PFP_sep2013.aspx