San Diego Estate Planning Lawyer Blog
The U.S. Supreme Court’s June 26 decisions in United States v. Windsor and Hollingsworth v. Perry significantly altered the legal and estate planning landscape with respect to same-sex couples. In Windsor, the justices invalidated the key provision of the Defense of Marriage Act, which previously barred federal agencies from recognizing any same-sex marriages, even those that were legal under state law. Perry ended litigation over Proposition 8, a California voter initiative that attempted to ban same-sex marriages in the state. California officials resumed issuing marriage licenses to same-sex couples shortly after the court’s decision.
The IRS Responds
In August, the Internal Revenue Service announced same-sex couples could henceforth be treated as “married” for purposes of federal tax law, provided the couple was legally married in a state or foreign country that recognized such unions. The key is that the marriage need only be legal in the state where it took place, not where the couple presently lives. So, for example, if a same-sex couple legally married in California later moved to Virginia-where such marriages remain illegal under the state constitution-the IRS would still treat the couple as married for purposes of determining any federal taxes.
The IRS announcement critically affects federal estate taxes, which was the subject of the Windsor litigation. That case began when the surviving spouse of a same-sex couple (legally married in Canada) sought a refund of federal estate taxes. Property passing from one spouse to another is exempt from the calculation of the gross estate subject to estate tax. Under the newly announced policy, same-sex spouses now enjoy the same “marital deduction” as other married couples.
It’s important to note that a same-sex couple must be married. Some states continue to recognize non-marriage “civil unions” or “domestic partnerships.” The IRS does not recognize these as the equivalents of marriage. A domestic partner, for example, cannot claim a marital deduction from the federal estate tax.
Gift Tax Benefits
The IRS decision also impacts gifts made by same-sex couples. Under current federal law, an individual may make gifts up to $14,000 annually to any other person without tax consequences. Married couples have long been permitted to double this. For example, if you want to give someone $25,000 without tax consequence, your spouse can “join” the gift, thereby doubling the maximum exemption from $14,000 to $28,000 annually. And as with the marital deduction for estate tax purposes, spouses can give unlimited tax-free gifts to one another. Same-sex married couples now enjoy these same privileges.
State Law Consequences
California no longer assesses its own estate or inheritance tax. Other states do, however, and if you or your same-sex spouse own real property subject to probate in such a state, the IRS decision may not be applicable. And as with all estate planning, it’s important to work with an experienced attorney who can advise you as to the ongoing changes in federal and state laws in this area. Contact the Law Office of Scott C. Soady today in San Diego if you have any questions.