Single-Sex Married Couples Could Soon Realize Estate Tax BenefitsJuly 2012
A Federal District Court in New York recently ruled that a same-sex, legally-married couple is entitled to the federal estate tax marital deduction, and the government was ordered to refund federal estate taxes paid to the couple’s surviving spouse.
While this is a precedent-setting ruling, in most cases it’s premature to conclude the marital deduction is now available to all same-sex married couples. However, it’s not too early for single-sex married couples to update their estate plans to ensure they take full advantage of the marital deduction should it ultimately become available.
Understanding Recent Court Rulings Related to Same-Sex Marriages
While on its face the federal estate tax marital deduction applies to all legally-married couples, federal tax law does not recognize same-sex marriage: the federal government, including the IRS, has been prohibited from recognizing same-sex marriages due to a 1996 law called the Defense of Marriage Act (DOMA). In the case noted above, Windsor v. United States, a Federal District Court in New York concluded DOMA violates the equal protection clause of the U.S. Constitution, and other federal courts have recently reached the same conclusion in the context of other benefits.
The Powerful Tax-Savings Benefits of the Marital Deduction
The marital deduction allows a person to give or bequeath assets to his or her spouse free of gift or estate tax, during lifetime or at death. There is no limit on the amount that may be transferred. Since the maximum federal estate tax rate is currently 35%, this ruling could save surviving spouses of same-sex married couples substantial amounts of estate tax. The implications could be even more significant next year, since the maximum federal estate tax rate is scheduled to climb to 55% in 2013.
How to Benefit from This Ruling
This issue will likely be resolved by the U.S. Supreme Court, so drawing conclusions regarding the availability of the marital deduction to same-sex couples is premature. Nonetheless, same-sex married couples should review their estate plans to ensure they take advantage of the marital deduction should it ultimately become available.
- Consider adding language to your estate planning documents that covers both the contingencies that a marital deduction will or will not be available.
- In either event, make sure that any estate taxes are directed to be paid by the appropriate beneficiaries.
- Similarly, remember to review your insurance and pension plan beneficiary designations to address the possibility that the marital deduction could be upheld.
We are always here to help. Call your Fiduciary Trust representative, or take this opportunity to contact your estate planner.
This communication is intended to provide general information. The information and opinions stated herein are as of June 2012, unless otherwise indicated, and do not represent a complete analysis of every material fact. We undertake no obligation to update this information. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual tax or investment advice or as a recommendation of any particular security, strategy or investment project. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.
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