By: Hollis J. Fishman, Esq.
The recent Supreme Court decision in United States v. Windsor ensures significant changes for same-sex couples. Of course, the decision provides validation to the LGBT community. However, as it also implicates important estate planning issues, the decision necessitates an examination of the effects it will have on those issues. The decision is an impetus to many legal changes, both on the federal and the state level, which same-sex couples should understand. Prior to explaining the effect that United States v. Windsor will have on estate planning for same-sex couples, it is important to understand the case.
United States v. Windsor involved a tax break for married couples, called the federal marital deduction, which is an important estate planning tool. Until now, same-sex couples have not been allowed the federal marital deduction and have been paying federal estate tax on their inheritance if it exceeded the exclusion amount, $5,250,000 in 2013. The reason that same-sex couples were not allowed this marital deduction is because the federal Defense of Marriage Act (“DOMA”), defines marriage as a “legal union between one man and one woman.” Additionally, a “spouse” is defined as “a person of the opposite sex who is a husband or a wife.”
Edith Windsor and her partner, Thea Spyer, were both residents of New York. The couple married in Canada, before same-sex marriage was legalized in New York. Spyer died in 2009, during the couple’s marriage. Before her death, they had been partners for 44 years. Spyer left all assets in her estate to Windsor, yet despite being legally married to one another and living in a state where same-sex marriage is legal, Windsor was denied the marital deduction. Upon Spyer’s death, Windsor paid $363,053 in federal estate tax. Because she was not considered “married” or a “spouse” under DOMA’s definitions. Windsor then filed a lawsuit in the New York District court seeking a refund of the taxes paid, arguing that Section 3 of DOMA violated the Equal Protection Clause of the United States Constitution, which provides, “no state shall … deny to any person within its jurisdiction the equal protection of the laws.” Both the District Court and the Court of Appeals of the Second Circuit agreed with Windsor’s position, and it was ordered that the taxes paid be refunded to Windsor. The United States appealed to the Supreme Court and the Supreme Court agreed with Windsor.
This landmark decision is not only a pivotal case for the plight of LGBT citizens, but it also serves as a major reformation to estate planning. In declining to accept DOMA’s definition of marriage, the Supreme Court acknowledged that their decision impacts married same-sex couples’ access to more than 1,000 federal benefits. Immediately after Windsor, it was clear that married same-sex couples residing in states recognizing same-sex marriage could obtain federal tax benefits; however, it was unclear whether married same-sex couples living in states that did not recognize same-sex marriages could obtain federal benefits. The Internal Revenue Service, in Revenue Ruling 2013-17, clarified the status of same-sex marriages and announced that for all federal tax purposes, same-sex couples will be considered married if the marriage was “valid in the state where it was entered into, regardless of the married couple’s place of domicile.” Some of these federal tax benefits include the following:
Social Security Benefits
Married same-sex couples may now legally apply for Social Security benefits on their spouse’s earning records, as well as survivor benefits.
Federal Income Taxes
Married same-sex couples will now have the right to file joint federal tax returns. This means that high income couples will likely pay more taxes, while low income couples will likely save taxes. Same-sex spouses should review their tax returns to determine if an amended return should be filed before the statute of limitations expires.
Gift Giving and Splitting
In 2013, an individual may give up to $14,000 each year to any person without paying gift tax. This gift must be a present interest. For example, an outright gift of cash to a person would be a present interest. Now, same-sex spouses can combine this exclusion. In doing so, spouses may jointly give $28,000 to any person without incurring federal gift taxes. This is known as “gift-splitting,” which requires the filing of federal gift tax returns.
Now, same-sex spouses have a presumptive right to be the sole primary beneficiary of most qualified plans. A qualified plan includes defined-contribution plan, defined benefit plan, Keogh plan (for the self-employed), and 401(k). Individuals participating in most qualified retirement plans must obtain spousal consent before naming a beneficiary other than his/her spouse or taking a retirement distribution that does not provide for a survivor benefit. An IRA is not a qualified plan for this purpose.
Prior to Windsor, same-sex spouses paid federal taxes on the value of their partner’s health insurance plan. Same-sex couples will no longer be required to do so, regardless of the couples’ state of residence. A same-sex spouse will now be treated as any other spouse would be treated with regard to health insurance taxes.
Upon the death of a spouse, the surviving spouse is allowed to roll over his or her deceased spouse’s IRA into his or her own IRA. Same-sex spouses will now have that right.
The unused federal estate tax exclusion of a deceased spouse, $5,250,000 in 2013, may be transferred to the surviving spouse. The executor of the decedent’s estate will need to transfer the unused exclusion to the surviving spouse, who can then use it to make lifetime gifts or pass assets through his or her estate. To qualify, an estate tax return must be filed when the first spouse dies. This is required even if no tax is owed. If the executor of the estate does not file the return or misses the deadline (which is nine months post death with a possible six-month extension,) then that spouse loses that right to portability.
What does this mean for Same-Sex Relationships in Pennsylvania?
What does this mean for same-sex spouses in Pennsylvania? Same-sex marriage has not been legalized in Pennsylvania, so as of now, for state-law purposes, married same-sex couples living in the Commonwealth are still governed by Pennsylvania law. For example, when a spouse who is a Pennsylvania resident, dies in a heterosexual marriage, the surviving spouse inherits his or her spouse’s assets at a 0% tax rate, so the surviving spouse does not pay tax on the inheritance. However, married same-sex spouses in this state will be taxed at a 15% tax rate for “non-relatives.” This will not change, as Pennsylvania has not yet legalized same-sex marriage. However, due to the Windsor case, on the federal level, same-sex spouses will be entitled to all federal benefits the couple qualifies for. Another important economic issue for spouses is the Pennsylvania intestate law, which determines who is entitled to receive the assets of a person who died without a Will. If the decedent did not have any surviving children or surviving parent(s), a surviving spouse would be entitled to the estate. If the decedent had surviving children or surviving parent(s), those survivors and the surviving spouse would be entitled to the estate. A spouse in a same sex-marriage would not be recognized under Pennsylvania intestate law as a spouse entitled to a share of the estate of a spouse who died without a Will.
As Pennsylvania has yet to legalize same-sex marriage, the importance of state-law focused estate planning is crucial. Strategic planning becomes even more imperative when children are involved in a same-sex partnership or marriage. Proper estate planning can assist all couples and individuals in avoiding unnecessary taxes and allows surviving spouses or partners to enjoy significant tax savings. Estate planning also helps arrange for the care of surviving children. It is additionally essential for same-sex couples in Pennsylvania to identify the person they want to be responsible for their finances, estate, and medical treatment. Partners in same sex relationships must understand the importance of protecting themselves and their assets by executing an estate plan.