On June 26, 2015, the Supreme Court ruled in favor of state recognition for same-sex marriage in Obergefell v. Hodges. Two years before that, in United States v. Windsor, it struck down Section 3 of the Defense of Marriage Act, which defined marriage for federal purposes as existing only between one woman and one man.
“In its most basic terms, recognition of same-sex marriage equates to the simple fact that a spouse is now a spouse, irrespective of gender, in the eyes of the law,” John McManus, founding partners of the estate planning law firm of McManus & Associates, said in a statement.
“Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history.”
Following are 10 tax and estate planning considerations for same-sex couples, part of the law firm’s Educational Focus Series:
Because same-sex and opposite-sex married couples are afforded the same tax benefits on both the federal and state level, there is no longer a need to draft estate planning documents differently for same-sex couples. Whether a will was executed before Obergefell makes no difference. The applicable law is the law at the testator’s death, and pursuant to the Supreme Court’s decision, states are obliged to recognize same-sex marriage.
2. Unlimited Marital Deduction
Same-sex couples who wed are eligible to take advantage of the unlimited marital deduction for federal estate and gift tax. Before Obergefell, same-sex couples had to rely on their applicable exclusion amount with regard to providing for the surviving spouse. Same-sex couples should review any existing estate planning with their wealth planning and tax advisors in order to best use the tax-saving vehicles available to them.
Besides the unlimited marital deduction, a surviving spouse in a same-sex marriage is entitled to the portability provision under federal estate and gift tax law. This means a surviving spouse may preserve, and thereafter use, any portion of the deceased spouse’s unused applicable exclusion amount. Portability allows the surviving spouse to make tax-free gifts in order to reduce the estate tax owed upon his or her death.
In an in-depth discussion, McManus offers more tips on the possibilities of portability.
4. Gift Splitting
Each individual has the right to make gifts on a tax-free basis for federal gift and generation skipping transfer tax. At present, the annual exclusion amount is $14,000. Now same-sex couples can enjoy the benefits of gift splitting, whereby one spouse can gift from his or her own assets, with the consent of the other spouse, in order to use both of their annual exclusion amounts (currently $28,000 maximum to any individual), resulting in the gifting spouse’s applicable lifetime gift tax exemption amount remaining intact.
Gift splitting generally requires the filing of a Form 709 Gift Tax Return. If the split gifts total $28,000 or less to each donee, however, only the donor spouse is required to file a gift tax return.
5. Beneficiary Designation of Retirement Benefits
A deceased same-sex spouse’s retirement account assets can now be rolled over into the surviving spouse’s account without the requirement of a mandatory minimum distribution or lump sum distribution. Such a roll-over was not possible before Obergefell.
With regard to an ERISA covered plan, Windsor made it possible for the same-sex spouse of a participant in the plan to automatically be the beneficiary. Now, the participant has to obtain consent from his or her spouse if that spouse is not the desired beneficiary of the plan.
All state-level employment benefits should be reviewed and updated with the same-sex spouse information in order to take advantage of the rights and benefits available to the same-sex spouse. Review employers’ benefits policies for spousal benefits granted to same sex couples.
As well, review prenuptials and other marital agreements.
Insurance planning may have been part of same-sex planning prior to the Obergefell decision. Now, all policies, as well as beneficiary designations, should be reviewed in conjunction with the new planning concepts for a streamlined flow of assets upon both the first spouse’s death and that of the surviving spouse.
7. Previously Filed Federal Tax Returns
Same-sex spouses may amend previously filed federal estate, gift and income tax returns from single to married status, subject to the statutory limitations period of three years from when the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later.
Married couples living in states that did not recognize same-sex marriages before Obergefell may be able to amend filed state income tax returns for the years 2012, 2013 or 2014, depending on the law of the state.
8. Natural Born and Adopted Children
A child, either born or adopted into a same-sex union, needs to be specifically identified throughout the estate planning documents. If not planned for ahead of time, the relationship of the child to the adoptive parent or parents or birth parent in a same-sex married couple can be cause for contest at the death of the legal parent.
If a child is born to one spouse, the other spouse should strongly consider adoption of the child to legalize the relationship. Absent a legal relationship between the child and the spouse of the natural parent, a relative of the former could seek custody in the event of the natural parent’s death or failure to care for the child.
The same is true for a child who is adopted by only one spouse. Same-sex couples may consider co-parent adoption to ensure that both have rights regarding child custody and guardianship.
If a partner in a same-sex relationship has a child and the other partner plans to adopt that child, he or she is eligible to receive an adoption tax credit. However, this credit is not available for a spouse adopting his or her spouse’s child. If a couple is planning to marry and an adoption is part of the scenario, it may be more advantageous for the adoption to take place before the couple marries.
9. Non-Citizen Spouse May Consider Becoming a Citizen
Non-citizen same-sex spouses have the opportunity to become U.S. citizens on the basis of their marriage to a spouse of the same sex who is a U.S. citizen. But this eligibility demands careful consideration, taking all ramifications into account. For example, as a U.S. citizen, the individual would be taxed by the U.S. on his or her worldwide income.
As well, expatriating from the U.S., renouncing one’s U.S. citizenship, and returning to one’s native country can be costly. To expatriate, the individual generally must prove five years of U.S. tax compliance. If he or she has a net worth of more than $2 million or average annual net income tax for the five previous years of $160,000 or more, that person will have to pay an exit tax. In addition, the U.S. State Department has raised the fee for renouncing U.S. citizenship from $450 to $2,350.
10. Current Estate Plan Review
- Given the tax-saving venues opened to same-sex couples, it is beneficial for them to review all existing plans in order to maximize federal and state estate, gift and income tax planning
- Beneficiary designations for insurance and retirement benefits should be aligned
- Re-title any property with joint ownership to ownership by the couple as tenancy by the entirety. In community property states, the couple may want to convert separately owned property to community property in order to receive a step up in basis upon the death of the survivor of the spouses
- Confirm that definitions in the estate planning documents correctly reflect relationships, such as “spouse,” “husband,” “wife” and/or “children,” whether naturally born or adopted
- Determine whether a necessity exists for a “no contest” clause to be incorporated in the event family members disapprove of the same-sex couple’s lifestyle or decisions regarding the estate plan.
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