Estate Planning for Same-Sex Partners Amidst Uncertainty

Congress enacted DOMA (Defense of Marriage Act) after the Supreme Court of Hawaii ruled in 1993 that the state constitution guaranteed the right of same‑sex couples to marry.  One provision of DOMA permits states to disregard the status of same‑sex marriages that were lawfully performed in another state.

Vermont was the first state to establish Civil Unions, Domestic Partnerships, and Reciprocal Beneficiary Relationships in the year 2000.  Following Vermont, 19 other states and the District of Columbia established similar titles.  Some of these jurisdictions gave these relationships all of the rights, privileges, and benefits of marriage, without being able to legally label them marriages.

Other jurisdictions gave the relationships limited protections.  Some jurisdictions only gave partners the right to visit the other partner in the hospital or gave the right to make funeral decisions for a deceased partner.  However, the actual status of the relationship usually did not go any further than the celebration of the marriage.

The IRS uses the place of celebration status.  The Federal Government will recognize a marriage based on the law of the state where the marriage occurred.  However, the Federal Government will not acknowledge any other relationship statuses; such as Domestic Partnerships, Reciprocal Beneficiary Relationships, and Civil Unions.

On income tax returns, same‑sex spouses may only select “married filing jointly” or “married filing separately” as their federal income tax filing status.  Same‑sex spouses who are married (according the IRS), and are also in a non‑recognition state, are subject to tax.  Generally, they must file their state income tax returns as though they were not married.

As a result, each spouse must prepare a dummy individual Federal income tax return with a single status in order to derive his or her adjusted gross income for state income tax purposes.

Same-sex spouses subject to income tax in only one state and married filing jointly, for Federal income tax purposes, will prepare five returns and file only three.  To compare, a similarly‑situated opposite‑sex couple will both prepare and file just two returns.

Similarly, upon the death of one spouse, a surviving same‑sex spouse can claim an unlimited marital deduction for qualified transfers of property for Federal Estate Tax purposes.  Upon the death of the surviving spouse, the spouse may include the unused portion of his or her deceased spouses estate tax exemption to his or her own exemption.

Some states also have an estate tax or an Inheritance tax.  An inheritance tax is based on the class of property transferred at death, and or the beneficiaries relationship to the decedent.  Surviving opposite‑sex spouses are exempt from the tax in each state, while surviving same‑sex spouses are considered unrelated to the decedent in some states.  Real estate is subject to estate or inheritance tax in the state where it is.  Financial assets are normally only subject to estate or inheritance tax in the state where the decedent resides.  Accordingly, it is important for a same sex couple to know and understand the estate and inheritance tax laws not only in their state of residence, but also in the state where they own real estate.  Consequently, certain transfers to surviving same-sex spouses, at death, may be subject to higher tax rates in the non-recognition states.

While more states are recognizing same-sex marriages, same-sex couples should be aware of the ever-changing status recognition or non-recognition of their relationship.  Until Federal and State governments are on the same page, the statuses will continue to make planning interesting by the constant change.