DOMA and Estate Planning
By Barry Zimmer on July 9th, 2013 in Estate Planning, Inheritance Planning, Taxes, Wills & Trusts
The Supreme Court’s recent ruling on the Defense of Marriage Act (DOMA) is being hailed as a milestone for equal rights in America today. Among the ruling’s many effects are changes in the estate planning world.
DOMA defines “marriage” as a union between a man and a woman. Section 3 of DOMA explicitly precludes the federal government from recognizing same-sex marriages for the purposes of extending benefits.
Because of this DOMA provision, same-sex spouses who have been married in jurisdictions that allow such unions have not been able to utilize the unlimited marital federal estate tax deduction or gift tax deduction.
If you are legally married to a person of the opposite sex, you can transfer an unlimited amount of money to your spouse free of the federal estate or gift tax, if your spouse is an American citizen. However, Edith Windsor of New York was not allowed to use this deduction when her spouse Thea Spyer died in 2009. Consequently, Windsor had to pay over $300,000 in estate taxes, by virtue of the provision in DOMA.
Windsor challenged the constitutionality of this provision, and a lower court agreed with her contention. The case was accepted for review by the United States Supreme Court, the highest court in the country. By a vote of 5 to 4 the Justices agreed with the lower court’s ruling, striking down the provisions of DOMA that limited lawful marriages to those between men and women.
The full impact of the DOMA decision will play itself out over time. For now, we know the federal government must now provide both homo- and heterosexual spouses with the same benefits, including access to the unlimited marital estate tax deduction.
Portability of the federal estate tax exemption will also be extended to same-sex couples who are legally married. In an estate planning context, “portability” describes the ability of a surviving spouse to use his or her deceased spouse’s exclusion as well as his or her own.
A companion case decided with the Windsor appeal left some state law issues unresolved. It still appears that the state must allow same-sex marriages to afford the partners the same tax breaks available to traditional couples. But what we don’t know is if a state that does not legalize same sex marriages for its citizens must honor a marriage in a state that does.
We will follow developments in this area and comment from time to time.