The U.S. Supreme Court’s June decision to strike down Section 3 of the Defense of Marriage Act was a major milestone for same-sex couples seeking marriage equality. That decision has led to additional developments favoring gay and lesbian couples, all of which are good news for financial advisors.
The latest salvo comes from the Internal Revenue Service, which on August 29 adopted Revenue Rule 2013–17. Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes; filing status; claiming personal and dependency exemptions; taking the standard deduction; employee benefits; contributing to an IRA and claiming the earned income tax credit or child tax credit. Particularly noteworthy is a provision of the rule extending federal marriage rights to same-sex couples who tied the knot in a state that recognizes gay and lesbian marriages but are now domiciled in a state that offers no such recognition. From a planner’s perspective, that’s hugely beneficial.
In the workspace, spouses of participants in ERISA-compliant 401(k) plans can now be covered by provisions respecting spousal benefits. Additionally, a sole proprietor who employs a same-sex spouse can claim a refund of the Social Security, Medicare and Federal Unemployment Tax Act (FUTA) taxes incurred on the compensation paid to the spouse as an employee in the business.
Among the biggest gains for affluent couples are the tax benefits afforded in the areas of estate and gift planning. Because same-sex spouses are married for all federal tax purposes, they can now enjoy the various transfer exclusions. Among those allowed in 2013: The annual $14,000 gift tax exclusion; the $5 million lifetime exclusions for gift tax, estate tax and the generation-skipping transfer (GST) tax; plus the unlimited charitable and marital deductions provided under IRC Sections 2522 and 2523.
All well and good. But the IRS rule is not without issues from a policy perspective. Case in point: Provisions respecting the splitting of gifts among spouses, wherein half of a gift by one spouse is applied against the other spouse’s GST exemption.
The IRS allows same-sex couples to file an amended gift tax return for prior years when gift-splitting under DOMA was prohibited — albeit within certain time limitations. But as Robert Keebler of Robert Keebler Associates LLP noted, this restriction makes no sense: Couples should be able to make a refund claim for all previously filed gift tax returns since DOMA’s enactment in 1996. Also in need of rectifying is an IRS requirement permitting amended joint (or married filing separately) tax returns only if rule’s applicable statute of limitations has not expired. Again, the SCOTUS decision in U.S. vs. Windsor should make the statute of limitations null and void.
To be sure, relief from such ill-conceived tax provisions may be available. Keebler indicated that tax filers can request a private letter ruling about whether the IRS would permit an exception to the time limit on elections respecting gift-splitting in prior years. The securing of a PLR exception may also be possible, he noted, for late tax returns involving estate tax portability: Using a decedent’s estate tax exclusion amount ($5.2 million in 2013) or transferring the exclusion amount to a decedent’s surviving spouse. Same-sex couples can also seek redress through the courts. Already under attack in federal district courts is a provision of DOMA left untouched by the Supreme Court in the Windsor case — the constitutionality of Section 2, which permits states where same-sex marriages have not been legalized to not recognize out-of-state marriages.