Estate Planning for Married Couples (Same Sex or Not)

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The U.S. Supreme Court issued a decision in United States v. Windsor that radically changed the estate planning landscape for affluent same-sex married couples. The Court’s decision will have a significant effect on many federal laws and regulations affecting estate planning for spouses.

In Windsor, the Court was reviewing the applicability of the estate tax marital deduction to same-sex couples.  Taking advantage of the federal estate tax marital deduction, an individual can transfer property to his or her spouse during life or at death without having to pay any federal estate or gift tax.  Before the Windsor case, same-sex couples did not get this benefit because the federal Defense of Marriage Act (DOMA) defined “marriage” as a legal union between one man and one woman, and defined “spouse” as a person of the opposite sex who is a husband or a wife.  Consequently, same-sex married couples were forced to pay federal estate tax on their inheritance if it exceeded the tax-free exclusion amount.

Since, the same-sex couple in Windsor was not considered legally married under DOMA, the estate of the deceased had to pay more than $360,000 in federal estate tax.  The executor of the estate then filed suit in District Court requesting a refund, claiming that the definitions of “marriage” and “spouse,” in DOMA was unconstitutional. The District Court agreed.  So did the Court of Appeals.  And in a 5-4 majority decision, the US Supreme Court affirmed the lower courts’ opinions.  By striking down DOMA’s definition of marriage, the Court’s decision made numerous federal laws and regulations (some good, some bad) applicable to same-sex married couples.

The Federal estate planning benefits now available to same-sex couples include:

Portability.  Portability is the right of a surviving spouse to add the unused estate tax exclusion amount (currently at $5.25 million) of the deceased spouse to his or her own unused exclusion amount.  To take advantage of portability, the executor of the deceased spouse transfers the unused exclusion to the surviving spouse, who can then use it to make lifetime gifts or pass assets at death tax-free.  One requirement of portability is that an estate tax return must be filed when the first spouse dies (even if no tax is owed). If the executor does not timely file the return, the surviving spouse loses the right to portability.

Gift-splitting. Currently, any individual can give up to $14,000 each year to as many different people (without limit) as you like without incurring gift tax. Spouses may make a joint gift and combine the annual gift exclusion and jointly give up to $28,000 each year to as many people as they like tax-free. Any gift that is more (individually or in aggregate with all other gifts to the same person) than the annual exclusion amount counts against the lifetime gift tax exclusion amount.  Once an individual has exceeded the lifetime gift exclusion limit (currently $5.25 million), gift tax can apply.  But couples can also gift-split with their applicable exclusion amount, and together can transfer up to $10.5 million through lifetime gifts before gift tax applies.

Retirement Plans. If an individual has a qualified retirement plan or IRA account, ERISA gives the individual’s spouse the right to be the sole primary beneficiary of the account. In order for the individual to name anyone else as a beneficiary, the individual needs his or her spouse’s written consent.

Rollover Rights. For IRAs and qualified plans, the law gives special privileges to spouses who inherit retirement plan or IRA assets. Unlike other inheritors, who must begin making withdrawals by the end of the year following the account owner’s death, a surviving spouse who inherits an IRA or retirement plan account can roll the assets into his or her own IRA and postpone required minimum distributions until the year after the surviving spouse turns 70½.

If you have any questions about estate planning, retirement plans or how the Court’s decision in Windsor affects you and your spouse, please contact one of our tax or estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING.    In addition to giving same-sex couples some of the advantages of married status, the Windsor Court’s decision makes available to same-sex couples some of the disadvantages that are inherent in married status including: (1) losing the ability to step up basis in property by selling it to the same-sex spouse; (2) being jointly and severally liable on a joint tax return, subject to possible innocent spouse relief; (3) losing the ability to recognize loss on sale of property to a same-sex spouse; and (4) applicability of the constructive ownership rules to stock owned by the same-sex spouse.   If you want help with any income tax issues involving spouse please contact Jeff Senney at 937-223-1130 or Jsenney@pselaw.com.