• Estate Tax, Income Tax and other Federal Benefits Now Available to Same-Sex Married Couples
  • October 30, 2013
  • Law Firm: Dentons Canada LLP - Toronto Office
  • In June 2012, the United States Supreme Court rendered two historic decisions.

    In Hollingsworth v. Perry, the Supreme Court made same-sex marriage in California legal when it held the appellants had no standing to appeal a federal court's decision finding that Proposition 8, banning same-sex marriage in that state, was unconstitutional.

    In Windsor v. United States, the Court held Section 3 of the Defense of Marriage Act (DOMA) unconstitutional and recognized same-sex marriage so long as the marriage is valid under "applicable state law." That decision, for the first time, makes available to same-sex married couples the estate tax, income tax and other benefits previously available only to opposite-sex married couples under more than 1,000 federal statutes. However, the Windsor case left open the question of what is the "applicable state law" for determining whether a same-sex couple is legally married and entitled to marriage benefits under federal statutes.

    Federal agencies have answered the question for estate tax, income tax and other federal benefits: applicable state law is the state of "celebration," meaning the state where the marriage takes place.

    After the Windsor case, federal agencies, including the Internal Revenue Service in August of this year, answered the question left open by Windsor. They ruled that, for most of the federal laws providing marriage benefits, the "applicable state law" is the law of the state where the couple was married. Thus, marriage benefits under federal law are available to all legally married same-sex couples regardless of the laws of the state in which they reside. However, if a legally married same-sex couple moves to and/or lives in a state that does not recognize same-sex marriage, that couple will not qualify for the state's marriage benefits.

    What are the marriage benefits available under federal statutes?

    Marriage benefits under federal law, now available to same-sex married couples, include the following:

    i. Traditional estate planning techniques, including the marital deduction, which allows same-sex married couples who are US citizens to make gifts to each other during lifetime or at death free of estate or gift tax; portability, which potentially gives the surviving spouse the right to use the deceased spouse's unused federal gift and estate tax exemption amount; and the right to split gifts for gift tax purposes.

    ii. Same-sex-married couples are entitled to the benefits enjoyed by other married couples under federal income tax law, but are also subject to the "marriage penalty" under federal income tax law. Same-sex married couples may now file joint tax returns and, if legally married in prior years, may amend and seek refunds for previously filed returns not barred by the statute of limitations.

    iii. Same-sex married couples may now obtain tax-free employer benefits, such as health care coverage and reimbursements from flexible spending accounts.

    iv. Same-sex married couples may obtain beneficial treatment of inherited retirement accounts.

    v. Same-sex married couples may obtain spousal Social Security benefits.

    vi. Same-sex married couples may obtain military spouse benefits.

    Steps to take

    Same-sex couples are advised to review their situation to determine whether they are legally married for federal purposes. If not, they may wish to determine whether they want to be legally married and thus subject to the federal laws affecting married couples. Be advised, if living in a state recognizing same-sex marriage, a same-sex couple will also be subject to the state's laws affecting married couples.

    Note that the recent Supreme Court cases and federal agencies' rulings do not give marriage benefits to other types of relationships, such as domestic partnerships or unions.

    To take advantage of the newly available marriage benefits, same-sex couples need to revise their estate plans.

    Same-sex married couples should review how being married affects their income taxes and may want to file amended tax returns to obtain tax refunds.

    Same-sex married couples in California need to be aware that California community property law and family law are applicable to them, and may want to consider a pre-marital or post-marital property agreement.