United States: The Legal Implications Of "United States v. Windsor"

On June 26, 2013, the United States Supreme Court issued two landmark decisions on same-sex marriage. In United States v. Windsor 507 U.S. ___ (2013) (the "Windsor Decision") the Defense of Marriage Act ("DOMA"), which barred the federal government from recognizing same-sex marriages, was found to be unconstitutional by the Supreme Court by a 5-4 vote. Additionally, in Hollingsworth v. Perry 507 U.S. ___ (2013) (the "Proposition 8 Decision"), the Supreme Court opened the door for same-sex marriages to resume in California.

It is important to note that the Windsor Decision and the Proposition 8 Decision do not require that same-sex marriages be recognized in states that do not already allow it. The Windsor Decision merely requires that the federal government treat same-sex couples as married if they reside in states or foreign jurisdictions that allow same-sex marriages. At the present, 13 states and the District of Columbia recognize same-sex marriages, highlighting the division of the states on this issue.1 The Court's decisions leave many issues unresolved and questions unanswered, but at the same time provide opportunities for planning for same-sex couples.

I. CASE SUMMARY

United States v. Windsor is essentially a tax case. Edith Windsor alleged that the federal government's refusal to acknowledge her marriage to Thea Spyer, her partner of forty-four years, violated equal protection principles of the United States Constitution. As the surviving spouse and executor of Thea's estate, Edith claimed she incurred over $360,000 in federal estate tax because the federal government pursuant to DOMA did not recognize her valid marriage under Canadian law. As a result, she was not permitted to take advantage of the unlimited federal estate tax marital deduction for property passing to her from Thea's estate. The United States maintained (eventually without support from the Department of Justice) that DOMA was entitled to a presumption of constitutionality and that DOMA's definition of marriage did not offend the equal protection clause. The two women lived in New York, where same-sex marriage is legal. Windsor won at the District Court level and before the Second Circuit Court of Appeals, paving the way for our country's highest court to hear the argument on the constitutionality of DOMA.

At issue in the Windsor Decision was Section 3 of DOMA, which provides a definition of "spouse" as "a person of the opposite sex who is a husband or wife." In its 5-4 majority decision written by Justice Kennedy, the Supreme Court declared Section 3 unconstitutional. While the effects are broad, the Supreme Court did not hold that all prohibitions on same-sex marriage violate the constitution, nor did the Supreme Court redefine marriage nationally. Instead, the Supreme Court respected the rights of the states to decide what marriage will be. For federal purposes, however, same-sex couples will now maintain the same status as opposite-sex couples; same-sex couples who are legally married and live in states which recognize same-sex marriages will be treated by the United States government as married, and will be afforded the same rights and protections as opposite sex married couples. These rights include well over 1000 possible benefits under federal law.

Notably, other parts of DOMA remain in effect including Section 2, which allows states which do not allow same-sex marriage to ignore the legal marriages or unions from other states around the country. This presents a conundrum for those same-sex couples who marry in a state which recognizes same-sex marriages and later move to a state where their union is not acknowledged.

At issue in the Proposition 8 Decision was a California law defining marriage as solely between a man and woman. In 2008, the California Supreme Court found that limiting marriage to opposite-sex couples violated the rights of same-sex couples under California's constitution and could not be used to prevent same-sex couples from marrying. Voters overturned this decision via Proposition 8 in the November 2008 election. In 2009, two same-sex couples challenged Proposition 8 in the United States District Court for the Northern District of California. In August 2010, the District Court struck down Proposition 8 and in February of 2012, the Ninth Circuit Court of Appeals upheld the District Court's decision.

In a separate 5-4 decision, the Proposition 8 Decision was dismissed for lack of jurisdiction by the Supreme Court. The Court declined to decide the merits and constitutionality of the voter-approved ban on same-sex marriage, and instead held that the appellants who supported Proposition 8 lacked the necessary standing to bring the matter before the Supreme Court. Effectively, the Supreme Court's decision left in place the lower court's determination that the state's voter initiative to ban same-sex marriage was unconstitutional and therefore reinstates California as the thirteenth state to allow same-sex marriages.

II. TAX PLANNING OPPORTUNITIES AND FILINGS TO CONSIDER NOW

Following the Windsor Decision, there are numerous opportunities and filings that should be considered both for same-sex couples and the family members of same-sex couples. While a number of issues require clarification, same-sex couples should consider the following.

A. Income Tax Issues:

  1. Income Taxes for 2010-2013: For couples who were married in a U.S. state or a foreign country2 that permits same-sex marriage, and who continue to live in a state that permits same-sex marriage ("Qualified same-sex couples") at the end of each applicable year, they may file or amend their tax returns for state and federal purposes as "married." Married couples may file either jointly or separately. In general, joint filing tends to favor spouses when one makes significantly more than the other spouse. This is because the IRS treats each spouse as having earned one-half of the income so a couple may be able to take advantage of a lower tax bracket. However, if both same-sex spouses are high income earners, they will be subject to the same "marriage tax"3 that traditional couples face.

    Qualified same-sex couples on extension for 2012 should file their taxes as either "married filing jointly" or "married filing separately."4 Qualified same-sex couples may want to amend their 2010, 2011 and if already filed, 2012 tax returns to reflect married status. As of yet, there has been no guidance from the IRS as to whether amending returns is voluntary or if it will be mandatory. At a minimum prior returns should be reviewed and draft returns prepared using married status to see if it is beneficial to file amended returns. Absent a protective filing for prior years, it is likely that the only years currently open for refund are 2010, 2011 and 2012.
  2. Withholding: If you earn wages as an employee (i.e. receive a W-2 at the end of the year), you may want to consider changing your filing status and claimed allowances on Form W-4, which may affect the amount of tax that is withheld from your paycheck. If you pay quarterly estimated income taxes, you may want to consult a tax advisor about whether to change the amount of these payments.
  3. Other Miscellaneous Tax Issues: Married couples filing jointly may combine both spouses' income and expenses when computing credits and deductions. Therefore, both spouses may combine their qualifying medical and dental expenses to determine if they meet the adjusted gross income ("AGI") limits.5 Qualified same-sex couples will also no longer be penalized by having to pay income taxes on the value of employer-provided insurance to an employee's spouse. Additionally, Qualified same-sex couples may be able to use pre-tax dollars to pay premiums on employer-provided health insurance for a spouse and may also now exclude gain from the sale or exchange of a principal residence up to the maximum of $500,000 if they file jointly.
  4. Divorce Transfers: Property transferred between Qualified same-sex spouses because of a divorce is no longer subject to income or gift tax. Previously under DOMA, when a married same-sex couple divorced, transfers of real estate and other assets were taxable events.

    • Alimony: If alimony (sometimes called "spousal support") or separate maintenance payments are paid to a Qualified same-sex spouse under a divorce, separation agreement or court order, the payments are deductible to the person making the payments on his or her tax returns.6 The spouse or former spouse receiving the payments must report the payments as income.
    • QDRO: Certain retirement assets in the name of one spouse may not be divided without a court-issued Qualified Domestic Relations Order (QDRO). For Qualified same-sex couples who divorce, certain workplace retirement plans belonging to one spouse can be assigned to the non-employee/former spouse on a tax-free basis. A former spouse who receives benefits paid under a QDRO generally must report the benefits as income. If the employee contributed to the retirement plan, then a prorated share of the employee's cost is used to figure the taxable amount of the benefit.
    • IRAs: The transfer of all or part of an interest in a traditional IRA to a spouse or former spouse, pursuant to a divorce decree is not considered a taxable transfer.
  5. Grantor Trust Rules: Generally, trusts are taxed as either "grantor" trusts where the taxes are paid by the trust grantor, or "non-grantor" trusts, where the trust pays its own income taxes. One way to cause grantor trust status is to have a spouse as a beneficiary of the trust. With the Windsor Decision, trusts that were previously considered non-grantor trusts may now be treated as a "grantor" trust if a same-sex spouse is a beneficiary. Same-sex couples should consult with their legal advisors to see if the income tax status of any trusts may have inadvertently changed.

B. Estate & Gift Issues:

  1. Unlimited Gifts: Historically, one of the planning difficulties for same-sex couples was transferring assets from one spouse to another. After the Windsor Decision, Qualified same-sex couples may, subject to certain limitations, freely transfer unlimited property from one spouse to another without gift tax. This is particularly beneficial where spouses want to re-title real estate jointly with survivorship rights to ensure the surviving spouse is not displaced upon the first death.
  2. Unlimited Marital Deduction: The Windsor case was ultimately about estate taxes. Where couples were married in a country or state that permits same-sex marriage, if an estate is probated in a state that permits same-sex marriage, then the surviving spouse can inherit the assets without paying estate tax using the unlimited marital deduction.
  3. Portability: Qualified same-sex couples can inherit any remaining unused "applicable exclusion amount" that shelters a set amount of a person's assets from federal estate taxation (currently, $5.25 million). It is not necessary to provide for this in a last will and testament; the election is made on the deceased spouse's estate tax return.
  4. Survivorship Life Insurance Policies and Annuities: Qualified same-sex couples can now easily obtain survivorship life insurance policies and annuities. These polices are especially beneficial if only one spouse is easily insurable.
  5. Section 672(c) Applies: In many trusts, certain trustees may not be persons who are "related or subordinate" pursuant to Internal Revenue Code ("IRC") Section 672(c) to either the grantor or the beneficiary of the trust. Where the trustee is a same-sex spouse, previously they were usually not considered related or subordinate. However, a review of current trust instruments should be undertaken to see if it is necessary to appoint a successor or co-trustee.
  6. Exercise POA to Spouse: A same-sex couple spouse may benefit from existing family trusts or estates. While a same-sex spouse could always benefit as a named beneficiary, often wills and trusts name a "beneficiary's spouse" rather than a specific person as a permitted beneficiary. A same-sex spouse may also be included as a permitted appointee as a "spouse" under a power of appointment included in a will or trust document. Instruments should be reviewed to determine if these rights exist.

C. Planning No Longer Available to Same-Sex Couples:

  1. Chapter 14 Applies: Many common estate planning issues could be avoided when planning for same-sex couples because Chapter 14 of the Internal Revenue Code did not apply to same-sex couples. In light of the Windsor Decision, same-sex couples now also need to be aware of the pitfalls of planning with the following: GRITs; QPRTs with the sale of residences and remainder interests; IRC Section 2701 compliant preferred partnerships; "vertical slice" investment fund, carried interest transfer planning, sales to Intentionally Defective Grantor Trusts; buy-sell agreements and family limited partnership agreements under IRC Section 2703; valuation problems under IRC Section 2704; and marital deduction mismatch problems.
  2. Grantor Retained Income Trust ("GRIT"): A GRIT permits a grantor to transfer assets to a beneficiary and retain the income stream from that asset. The goal is to freeze the value of the asset at the time of the transfer while permitting the growth and appreciation to occur outside of the grantor's estate. Congress recognized the potential for abusing this type of transaction and passed Chapter 14 of the Internal Revenue Code which limited the usefulness of this transaction among family members and related parties. However, since same-sex couples were not considered "related", this transaction was very effective for transferring property between same-sex spouses. Now that Qualified same-sex couples are considered married for federal purposes, they will no longer be able to use GRITs without application of Chapter 14.
  3. Qualified Personal Residence Trust ("QPRT") and Residence Sales: This type of trust is designed to transfer the ownership of a residence to a trust beneficiary (i.e., a same-sex spouse) following the completion of a term of years during which the grantor is entitled to remain in the residence. The benefit is that real estate could be transferred at a low gift value. One negative issue with this planning is that the beneficiary receives the residence subject to carry-over tax basis and may incur a substantial capital gains tax on the subsequent sale of the residence. For same-sex couples, a common technique involved creating a QPRT and, prior to the end of the trust, having the grantor purchase the real estate back from the trust, leaving cash in the trust. Upon death of the grantor, the real estate would receive a step-up in basis. However, since Treasury Regulations specifically prohibit the grantor from buying the residence back when the trust beneficiaries are members of the grantor's family, this technique will not work any longer where the Qualified same-sex spouse is the trust beneficiary.

III. IMMIGRATION OPPORTUNITIES

DOMA and the federal government's long-standing position that same-sex marriages are not recognized under federal law and therefore not eligible for federal benefits has been extremely detrimental to same-sex couples seeking immigration benefits. As an example, the United States allows U.S. citizens to sponsor their foreign national spouses. Prior to the Windsor Decision, foreign nationals married to same-sex U.S. citizens had to resort to other immigration options, such as employment-based sponsorship which is often lengthy and costly. In the post-DOMA world, U.S. citizens may now sponsor their same-sex foreign national spouse using follow to join provisions. Foreign nationals who are coming to the U.S. through employment-based or family-based sponsorship may seek derivative immigration status for their same-sex spouse. However, binational couples who resorted to creative ways to navigate the U.S. intolerant policies will now have to carefully consider their past decisions when making future immigration decisions.

Qualified same-sex couples using these immigration opportunities should consult with their tax advisors prior to completion of the immigration planning as citizenship and green card changes can have a significant impact on their income and transfer tax planning.

IV. SOCIAL SECURITY & PENSION BENEFITS

  1. Social Security: Under the Windsor Decision, same-sex couples who live in states that permit same-sex marriage will be eligible for Social Security Spousal Retirement Benefits, Spousal Disability Benefits, Survivor's Benefits, and Lump-Sum Death Benefits and those who live in states that do not recognize same-sex marriage will not receive those benefits.
  2. Spousal ERISA Rights: The Employee Retirement Income Security Act of 1974 ("ERISA") provides special spousal rights with respect to payment of retirement benefits in the form of a joint and survivor annuity, and with respect to spousal consent to pay benefits to non-spouse beneficiaries for married participants in IRC 401(a) plans and other defined contribution plans.
  3. Beneficiary Designations: The IRC provides for special rules when a spouse inherits a continuing interest in an ERISA-qualified plan or individual retirement account. These rules may be used to stretch the payment period of pension benefits that are not available to a person other than the spouse. Special attention must be given to pension beneficiary designations and payment schedules.

V. HEALTH BENEFITS

  1. Health Care, COBRA: In states that permit or recognize same-sex marriages, group health care coverage and COBRA benefits will need to be offered to same-sex couples and families on the same basis as traditional families.
  2. Family Medical Leave Act: The Family Medical Leave Act looks to a person's place of residence for determining benefits. Qualified same-sex couples who live in a state that permits same-sex marriage are qualified for coverage.7

VI. OPEN QUESTIONS

As the country tries to digest the Supreme Court's decisions, further guidance from all three branches of government will be necessary and welcomed, as individuals and their advisors grapple with issues left open by the Supreme Court's rulings. For example, is a retroactive refund from the IRS available because an employee paid extra taxes on the value of health benefits provided to his same-sex spouse? Conflict of laws analyses will need to be thoroughly examined since the decisions fail to address that the recognition of same-sex marriages will vary state to state. Each state has been left with the prerogative to determine what status to accord to same sex couples who want to solidify their relationships and which rights should accompany those relationships. But what happens if a same-sex couple is married in a state which recognizes same-sex marriages and moves to a state that either renders their marriage unlawful or is silent on the issue? Which governs, the principle of "place of celebration," "place of residency," or other measure? Other forms of "marital arrangements" were left unconsidered by the Windsor Decision. For example, how does one address the impact on civil unions, domestic partnerships, or similar state law or other country concepts? The full impact of the Windsor Decision will take years to ascertain as these and thousands of other questions are resolved. Same-sex couples are encouraged to maintain regular contact with their advisors to keep current with latest developments.

Footnotes

1 Same sex couples can legally marry in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (on 8/1/2013), New Hampshire, New York, Rhode Island (on 8/1/2013), Vermont and Washington, the District of Columbia, and certain Native American tribal jurisdictions.

2 Same sex couples may legally marry in Argentina, Belgium, Brazil, Canada, Denmark (excluding the Faroe Islands and Greenland), France, Iceland, Netherlands (excluding Aruba, Curaçao and St Maarten), Norway, Portugal, Spain, South Africa, Sweden, Uruguay (on 8/1/2013), New Zealand (on 8/19/2013, excluding Tokelau, Niue and the Cook Islands), and several parts of Mexico.

3 "Marriage tax" happens because joint return income thresholds (i.e., the income level at which the next marginal tax bracket applies), while higher than unmarried individual return thresholds, are not twice as high. Thus, some high-earning married taxpayers, whether they file as "married filing jointly" or "married filing separately," will pay higher rates of tax than they would if they were unmarried individual filers.

4 Please consult with your personal tax advisor for individual advice regarding your tax filings.

5 7.5% of AGI in 2012 and 10% of AGI in 2013.

6 Under DOMA, the spouse paying alimony could not deduct payments. 7 Covered employees must have worked at least 1,250 hours during the prior 12 months and be employed by a private company with 50 or more employees or certain public employers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions