On June 26, 2013, the US Supreme Court in a 5-4 decision in United States v. Windsor declared unconstitutional Section III of the Federal Defense of Marriage Act (DOMA) which defined marriage solely as a legal union between a man and a woman. This landmark decision has far-reaching implications that significantly expand estate planning and tax-planning opportunities for same-sex married couples. Under the Supreme Court’s ruling, same-sex couples who are legally married now enjoy marital recognition at both the federal and state level. This ruling affords benefits, including Social Security survivorship benefits, joint tax return filing, and a wide range of estate planning benefits to married same-sex couples. Estate planning for same-sex couples after DOMA includes creating an estate plan that assures your property will go to your family, friends or the charities of your choice after you and your spouse both pass away.
Here are some of the important issues that all same-sex married couples should know:
ELIGIBILITY FOR THE ESTATE TAX MARITAL DEDUCTION
Now same-sex married couples can defer some estate taxes when the first same-sex spouse dies. Because the federal benefit now applies to same-sex couples, assets of $5.25 million (as of 2013) that may be subject to a 40% taxation rate can be protected with proper estate planning, including a marital disclaimer trust that allows for a bypass trust.
This is the ability of the surviving same-sex spouse to add the unused estate tax exclusion (currently at $5.25 million) of the deceased same-sex spouse to their own. To take advantage of portability, the trustee/executor handling the estate of the deceased same-sex spouse will transfer the unused exclusion to the same-sex surviving spouse, who can then use it to make lifetime gifts or pass assets through his or her own estate.
TRANSFERS BETWEEN SAME-SEX SPOUSES ARE NOT SUBJECT TO FEDERAL GIFT TAX
Same-sex spouses can now transfer an unlimited amount of property between each other without being subject to the federal gift tax. Considering that prior to DOMA being repealed, even the purchase of a car for a same-sex spouse or adding the name of a same-sex spouse to a real property deed previously triggered a gift tax, now same-sex married couples can transfer any amount of money or property between each other with no federal gift tax consequence.
GIFTING TO SOMEONE OTHER THAN YOUR SAME-SEX SPOUSE
Currently, you can gift up to $14,000 each year to as many individuals without incurring a gift tax. Now same-sex spouses can combine this annual exclusion to jointly give $28,000 to any one person tax-free. Any gift that is more than the annual exclusion counts against the lifetime gift tax exclusion – the amount that each individual can give away during his or her lifetime without triggering a gift tax. Once you have passed the limit, which is $5.25 million, a gift tax of up to 40% applies. Same-sex couples can gift-split with their applicable exclusion amount and together transfer up to $10.5 million through lifetime gifts.
ROLLOVER RIGHTS ON SPOUSES IRA
For IRAs and qualified retirement plans, the law gives special privileges to spouses who inherit these funds. Unlike other beneficiaries, who must begin making withdrawals by December 31st of the year following the account owner’s death, a same-sex spouse who inherits an IRA or company retirement plan has another option. The same-sex spouse can now elect to roll the assets into his or her own IRA and postpone required minimum distributions until the year after she or he turns 70½ allowing the money to remain in their account accruing tax-deferred growth.
EASE OF TRUST ADMINISTRATION WITH MARITAL TRUSTS
When same-sex married couples have one marital trust, the surviving spouse does not have to go through a formal trust administration of the same-sex spouse’s estate because everything is held in the marital trust. Prior to DOMA being repealed, same-sex couples could not benefit from a marital trust with a disclaimer trust or bypass provision, and usually elected to have separate trusts that named each other as the primary beneficiary. This required the surviving partner (or the person named as successor trustee, which is usually the surviving partner) to handle a full-blown administration of the deceased partner’s estate. Now that same-sex couples who marry are considered spouses, they can have one marital trust and the assets of the couple that are community property (or the deceased spouse’s separate property that passes to the surviving spouse) can just remain in the marital trust for the benefit of the surviving same-sex spouse, with the surviving same-sex spouse as sole trustee. There is no need for the surviving same-sex spouse to administer the deceased same-sex spouse’s estate (there is some paper work involved, but nothing to the extent of a full trust administration), which eases the burden on the surviving same-sex spouse at what is already a difficult enough time.
Estate plans of same-sex couples who decide to marry or who are already married in a state or country that recognized same-sex marriage prior to DOMA being struck down should be reviewed and analyzed based on the changes in the law. Issues that need to be examined include estate tax marital deduction planning, portability, transfers between same-sex spouses, gifting, IRA rollovers and establishing marital trusts. Going forward, when planning the estate for married same-sex couples in California, a marital trust is likely the best choice.
The Law Offices of Eric A. Rudolph P.C. can help you and your same-sex spouse. An experienced California LGBT estate planning attorney will provide you with more information on estate planning for same-sex couples after DOMA.