Under the Defense of Marriage Act (DOMA), the Federal tax law only affords treatment to married couples when the marriage is between a man and a woman, and denies marital treatment for same-sex couples, regardless of whether the couple is recognized as married under state law. However, in the recent Windsor v. United States court case, a New York District Court declared the applicable Section 3 of DOMA to be unconstitutional, and ruled that a same-sex couple should be eligible for the marital deduction for Federal estate taxes, resulting in a $363,000 estate tax refund. The case will likely end up in the Supreme Court, and in fact appears to be on the fast track to get there soon. If DOMA is ultimately declared unconstitutional, it will result in a dramatic shift in planning for same-sex couples, opening the door for marital treatment for estate tax marital deduction, intra-couple gifts, and numerous income tax deductions, credits, and other benefits afforded to married couples. At this point, DOMA is still the law of the land, but same-sex couples may wish to begin filing protective refund claims in case DOMA is ultimately struck down in the coming year.

The inspiration for today's blog post is the recent New York court case Windsor v. United States, which on June 6th declared that a same sex couple can take advantage of the Federal estate tax marital deduction. Previously, the marital deduction has not been allowed to same sex couples, as Section 3 of the 1996 Defense of Marriage Act (DOMA) defines "marriage" under Federal law as being between a man and a woman, and consequently does not view a same-sex couple as being "married" for the purposes of Federal tax law, including the availability of the marital deduction at death.

Details Of The Windsor Case 

In the Windsor case, Edith Windsor and Thea Spyer, both females, were married in Toronto in 2007, a marriage recognized by their New York state domicile. Spyer passed away in 2009, leaving her assets to Windsor, and incurring a Federal estate tax liability of $363,000 due to the lack of a marital deduction for her estate. With the support of the American Civil Liberties Union (ACLU), Windsor filed a case in the New York District Court as the executor of Spyer's estate, claiming that Section 3 of DOMA was unconstitutional under the Equal Protection Clause of the Constitution and that consequently the Federal government should recognize the marriage (given that New York state recognized it), and allow Spyer's estate the marital deduction.

Although DOMA has been upheld in the past in some other jurisdictions, in the Windsor case the New York Distrction Court did declare Section 3 of DOMA to be unconstitutional under the Equal Protection Clause of the Fourteenth Amendment, and in recognizing Windsor and Spyer's same-sex marriage, ordered that Windsor receive a refund of $363,000 of Federal estate taxes paid by Spyer's estate due to the original lack of a marital deduction.

Next Steps For The Windsor Case

At this point, various District courts have issued differing rulings on the constitutionality of DOMA, with some cases being upheld, and several others including the Windsor case ruled unconstitutional, which makes it likely that the issue will be ultimately decided by the Supreme Court. In point of fact, earlier this month Windsor's attorneys filed a petition of certiorari with the Supreme Court, asking the case to be considered.

Notably, in a somewhat controversial move (depending on your political views regarding same-sex marriage), Attorney General Eric Holder has indicated that the Obama administration agrees that sexual orientation may represent an Equal Protection issue, and that the Department of Justice will not defend the constitutionality of DOMA, although it will continue to enforce the law until it is repealed or declared unconstitutional.

As a result, it is considered likely that issue will end out in front of the Supreme Court, sooner rather than later, given disagreement in the lower courts. In fact, petitions have been filed to bypass the Appeals courts and take the issue directly to the Supreme Court to expedite the outcome.

Planning Implications

There are many notable implications of the Windsor case and the potential that Section 3 of DOMA could be declared unconstitutional by the Supreme Court - effectively reverting the determination of marriage to state laws, including those states that recognize same-sex marriages.

The first notable planning issue is the marital deduction itself, which has been the central issue of the Windsor case. Without DOMA, same-sex couples will have the opportunity to take advantage of the marital deduction by getting married and being domiciled in a state that recognizes same-sex marriages. Of course, the reality is that this is a moot point for individuals whose estates do not exceed the $5.12 million Federal estate tax exemption, although the scope of the estate tax - and thus its potential impact on same-sex couples -becomes far more widespread if the Federal exemption is allowed to revert to $1 million in 2013. And of course, for a subset of same-sex couples whose marriages are not recognized for Federal tax law purposes because of DOMA and who do have assets in excess of $5.12 million, this ruling can potentially represent significant tax savings.

Beyond the marital deduction, though, the availability of "spousal" treatment for a same-sex couples affords numerous other estate planning opportunities as well. For instance, portability of the estate tax credit would apply if same-sex marriages are recognized for Federal tax purposes. A surviving same-sex spouse would also be eligible for the more favorable stretch and spousal rollover options as the beneficiary of a retirement account. Notably, transfers between members of the couple while alive would also be sheltered under the marital exemption for gift taxes if same-sex marriage is recognized for Federal tax purposes, reducing what can be cumbersome and expensive gift tax requirements for same-sex couples with very uneven estates and/or where one member of the couple provides substantive financial support for the other.

Furthermore, it's notable that if Section 3 of DOMA is declared unconstitutional, same-sex couples can be recognized as married not only for Federal gift and estate tax purposes, but also for Federal income tax purposes. Thus, same-sex couples may gain access to filing joint income tax returns, and claiming various tax deductions afforded to married couples as the couple makes expenditures. For instance, the couple could deduct medical expenses from a joint income tax return, regardless of who was sick and who paid for the medical care, or one member of the couple could claim education tax credits for supporting a same-sex spouse or a child of the spouse through school (as the taxpayer's spouse and/or the taxpayer's dependent).

Near Term Steps

Of course, the reality is that until the Windsor case has not yet reached the Supreme Court, and DOMA has not been declared unconstitutional by the Supreme Court, so as it stands DOMA is still the law of the land (although those living within the jurisdiction where the Windsor case was decided may have further options). Consequently, the estate, gift, and income tax opportunities and implications discussed above cannot be fully applied to same-sex couples at this time.

Nonetheless, same-sex couples may wish to file protective refund claims with the IRS, especially if a significant gift or estate tax has been paid recently, to put the claim on record before the statute of limitations expires. That way, the refund can ultimately be processed in the future, even if the statute of limitations would have otherwise expired between now and whenever it is that the Supreme Court issues a ruling. In turn, if the Supreme Court ultimately upholds DOMA, taxes will have already been paid, so no interest or penalties will apply - the tax amounts simply will not be refunded.

And ultimately, stay tuned for a potential ruling from the Supreme Court in the coming year, as a declaration that DOMA is unconstitutional will create huge shockwaves in the planning for same-sex couples if it occurs, as the decision about where to live, whether to get married, and what state to live in, may suddenly take on significant income and estate tax consequences.

  • http://www.pathfinderfs.com David Jacobs

    We can only hope the Supreme’s will overturn DOMA. But the court has gotten pretty conservative these days, so I would give it less than even odds of being overturned.

  • Steve Smith

    The more interesting DOMA case, perhaps, is the one from the US Court of Appeals in Boston,http://www.ca1.uscourts.gov/pdf.opinions/10-2204P-01A.pdf in which the Commonwealth of Massachusets was a party, in addition to individual plaintiffs.

    This opinion will give conservative Chief Justice Roberts all he can handle; in that, while it may be a close case on the question of the rights of the individual plaintiffs, the state’s interest in having its marriage laws (which are generally given a great deal of respect as far as the incidents of marriage) respected, put the case over the top, as a matter of federalism.

  • http://jaydevincentis.com Financial Planner Massachusetts

    Great point. I totally agree with your position.

  • Steve

    But, of course, they didn’t take that case. They are hearing the NY case instead.

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

For ConsumersFor Advisors

Blog Updates by Email

Nerd’s Eye View Praise

@MichaelKitces Twitter

Out and About

Thursday, October 15th, 2015

*Future of Financial Planning in the Digital Age *Cutting Edge Tax Planning Developments & Opportunities @ FPA Mid-Tennessee

Monday, October 19th, 2015

*Cutting Edge Tax Planning Developments & Opportunities @ IMCA Advanced Wealth Management Conference

Wednesday, October 21st, 2015

*Future of Financial Planning in the Digital Age *Applying Behavioral Finance in your Financial Planning Practice @ FPA Pittsburgh