On Wednesday, June 26, 2013, a divided U.S. Supreme Court rendered its highly anticipated decision in United States v. Windsor, 133 S. Ct. 2675 (2013), and declared that Section 3 of the Defense of Marriage Act is unconstitutional. The Court’s decision, while it leaves open questions, will create estate planning opportunities and have other important implications for same-sex married couples. Clients in same-sex relationships should talk with their lawyers, accountants and Bessemer advisors about how to take advantage of the planning opportunities following the Windsor decision. (This summary is based on a discussion prepared by Jaclyn Feffer and Dana Fitzsimons, with Bessemer Trust.)
a. Background.
(1) The Defense of Marriage Act. The Defense of Marriage Act (“DOMA”) was passed in 1996. For the purpose of over 1,000 federal laws and numerous federal regulations, Section 3 of DOMA defines “marriage” as the legal union between one man and one woman as husband and wife, and the word “spouse” as a person of the opposite sex who is a husband or a wife. Section 3 of DOMA prevented same-sex married couples from being recognized for purposes of government employee benefits, Social Security benefits, tax benefits and filing status, and other aspects of federal law.
(2) State Laws. Thirteen states and the District of Columbia have passed laws
recognizing same-sex marriages. (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington.) California has effectively allowed same-sex marriage as a result of the Perry decision, issued by the Supreme Court on the same day as Windsor. Delaware’s law took effect on July 1, 2013 and Rhode Island’s and Minnesota’s laws took effect on August 1, 2013.) Thirty-five states specifically ban same-sex marriage, although some of those states allow civil unions and domestic partnerships which may provide state-level spousal rights. (Colorado, Delaware, District of Columbia, Hawaii, Illinois, Maine, Nevada, New Jersey, Oregon, Rhode Island, Washington, and Wisconsin. Civil unions are no longer available in Delaware beginning July 1, 2013 and in Rhode Island on August 1, 2013, when the states’ same-sex marriage laws are in effect.) New Mexico is the only state without legislation on same-sex marriage.
b. Windsor Case. In 1993, Edie Windsor and Thea Spyer registered as domestic partners under New York law. They were married in Canada in 2007 and New York deemed their marriage to be valid. Thea died in 2009, naming Edie as her executor and leaving her estate to Edie. Edie filed the estate tax return for Thea’s estate and claimed the
www.bessemer.com/advisor 121 marital deduction. The IRS denied the deduction on the basis of Section 3 of DOMA. Edie paid the estate tax and sued for a refund in New York federal court.
The federal district court found in Edie’s favor and held that Section 3 of DOMA was unconstitutional, and ordered a refund of $363,000 in federal estate taxes plus interest. On appeal, a divided Second Circuit also held that Section 3 of DOMA was unconstitutional.
A five member majority of the Supreme Court, under an opinion by Justice Kennedy, affirmed the Second Circuit decision and declared Section 3 of DOMA to be
unconstitutional. The majority opinion reasoned that DOMA deviates from the federal government’s historic deference to state law with respect to domestic relations and regulation of marriage, and that by singling out a class of persons deemed by a state entitled to recognition, and imposing a disability on that class, Section 3 of DOMA violates basic due process and equal protection principles under the Fifth Amendment. The court also points to the Fourteenth Amendment (but without any analysis how the Fourteenth Amendment specifically applies and whether a “strict scrutiny,”
“intermediate scrutiny,” or “rational basis” analysis under the Fourteenth Amendment applies in this context), by observing that the equal protection of the Fourteenth Amendment makes the Fifth Amendment right “all the more specific and all the better understood and preserved.” The court’s reasoning that Section 3 is unconstitutional results in a conclusion that it was always unconstitutional and the Court’s holding is applied retroactively. (But see the “Open Questions” addressed immediately below regarding potential uncertainties regarding retroactive administrative relief.)
A five member majority of the Supreme Court, under an opinion by Justice Kennedy, affirmed the Second Circuit decision and declared Section 3 of DOMA to be
unconstitutional. The majority opinion reasoned that DOMA deviates from the federal government’s historic deference to state law with respect to domestic relations and regulation of marriage, and that by singling out a class of persons deemed by a state entitled to recognition, and imposing a disability on that class, Section 3 of DOMA violates basic due process and equal protection principles under the Fifth Amendment. The court also points to the Fourteenth Amendment (but without any analysis how the Fourteenth Amendment specifically applies and whether a “strict scrutiny,”
“intermediate scrutiny,” or “rational basis” analysis under the Fourteenth Amendment applies in this context), by observing that the equal protection of the Fourteenth Amendment makes the Fifth Amendment right “all the more specific and all the better understood and preserved.” The court’s reasoning that Section 3 is unconstitutional results in a conclusion that it was always unconstitutional and the Court’s holding is applied retroactively.
c. Revenue Ruling 2013-17. The day after Windsor was decided, the Internal Revenue Service announced that it is working with the Department of Treasury and Department of Justice and “will move swiftly to provide revised guidance in the near future” regarding how federal tax laws will be applied in light of the Windsor case. That guidance was published on August 29, 2013 in Rev. Rul. 2013-17.
www.bessemer.com/advisor 122 Rev. Rul. 2013-17 has three holdings and a clarification regarding its prospective application.
(1) Terms Relating to Marriage Include Same-Sex Couples. “For Federal tax purposes, the terms ‘spouse,’ ‘husband and wife,’ ‘husband,’ and ‘wife’ include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex.” There is nothing surprising about this holding, and it was fully expected following the Windsor decision.
(2) Place of Celebration Standard. “For Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a jurisdiction (whether a state, district, territory or foreign country) whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a place that does not recognize the validity of same-sex marriages.” This holding, adopting a “place of celebration” test rather than a “place of domicile” test, was anticipated but by no means certain. For further discussion of the place of celebration issue, see paragraph d below.
(3) Domestic Partnerships and Civil Unions Not Included. For federal tax purposes, the interpretation of terms to include same-sex couples does “not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state…” This holding is the most administratively feasible approach. Prior IRS private rulings have afforded favorable tax treatment to Illinois civil union partners and to California registered domestic partners. E.g., Pvt. Ltr. Rul. 201021048 (each California
domestic partner reports half of community property income). A practically difficulty is that some states that recognize domestic partnerships or civil unions provide that the couple has all of the rights and privileges afforded married couples but some states do not. Drawing a distinction based on the degree to which state laws afford such
relationships the benefits of marriage would have been cumbersome at best.
(4) Prospective Application. The holdings are applied prospectively as of September 16, 2013 (the date that the Ruling will be published in IRS 2013-38). Affected taxpayers may rely on the ruling “for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax..., provided the applicable limitations period for filing such claim under section 6511 has not expired.” All items on such return or claim that are affected by the marital status must be reported consistently. Similarly, taxpayers may rely retroactively on the ruling with respect to overpayment of employment tax and income tax with respect to tax- exempt employer-provided health coverage benefits or fringe benefits that are based on an individual’s marital status.
Notice IR-2013-72 expands on the discussion of the prospective application, and makes crystal clear that same-sex married couples must file 2013 federal income tax using either “married filing jointly” or “married filing separately” filing status. For prior
www.bessemer.com/advisor 123 tax years, however, the taxpayer can choose whichever is the better result regarding the individual’s marital status:
“Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open unset the statute of limitations.”
The Notice points out that refund claims can still be filed for tax years 2010, 2011, and 2012. The Notice does not point out that refunds also can be filed for 2009 income tax returns until October 15, 2013 if the due date for filing the return was extended to October 15, 2010.
One commentator has observed that the IRS may at some point wish it had not been so explicit in stating that there would be no assessment for underpayment in prior years (for example, if filing jointly would have produced a higher income tax due to the “marriage penalty”), because this may position may be precedent for a similar non- assessment if some future statute that protected an abusive transaction is later
determined to be unconstitutional. Karibjanian, George Karibjanian on Revenue Ruling
2013-17 and IR-2013-72: The Service Responds to Windsor, LEIMBERG ESTATE
PLANNING NEWSLETTER #2137 (September 3, 2013). That same commentator points
out that some taxpayer will likely challenge the inability to obtain a refund for closed tax years based on the theory that the finding that DOMA was unconstitutional means that it was void ab initio. However, the Mr. Karibjanian believes that the Service would likely win that argument because the ability to file a protective claim for refund
provided an adequate remedy, but that the remoteness of a statute’s unconstitutionality should be considered as a factor to reopen the statute of limitations. Id.
Rev. Rul. 2013-17 states that the IRS will give further guidance in the future regarding the retroactive application of Windsor to employee benefits and employee benefit plans and arrangements. (For example, what if the surviving party of a same-sex marriage did not previously receive the benefits of a spouse rollover of other benefits available to spouses under the minimum distribution rules?)
The retroactivity impact of the Windsor decision arises in various contexts. While the reasoning in Windsor that Section 3 is unconstitutional results in a conclusion that it was always unconstitutional, issues will arise in allowing retroactive administrative relief. For example, the Pentagon’s decision to make the full spousal benefits available to same-sex married couples allows benefit payments retroactive only to June 26, 2013, the date of the Windsor decision. The Office of Personnel Management has announced that for federal employees, benefits will be available for same-sex spouses regardless of their state of residency, but puts a limit on the retroactive effect of the availability of benefits:
“Because existing same-sex marriages were not recognized by the Federal government before this Supreme Court decision, all legal same-sex marriages that predate the decision are being treated as new marriages; enrollees will have 60 days from June 26, 2013 (i.e., until August 26, 2013) for enrollment actions.”
www.bessemer.com/advisor 124 d. “Place of Celebration” Standard. Rev. Rul. 2013-17 adopts a general rule for federal
tax purposes that recognizes a same-sex marriage “that was valid in the state where it was entered into, regardless of the married couple’s place of domicile.” Windsor does not expressly address whether federal benefits are available to same-sex spouses who reside in a jurisdiction that bans same-sex marriages (the place of “domicile”) but were legally married in another place that does recognize same-sex marriages (the place of “celebration”). Section 2 of DOMA provides that “No state … shall be required to give effect to any public act, record, or judicial proceeding of any other State … respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other States … arising from such relationship.” Windsor did not address whether Section 2 is unconstitutional.
In adopting the “place of celebration” standard, the IRS did not refer to Section 2 of DOMA, whether the Full Faith and Credit clause (which applies to “judgments”) of the U.S. Constitution would require that result, or other legal basis or other legal authority. The Ruling noted that the IRS has adopted the same approach for over 50 years
regarding common law marriages, stressing the long term application of a place of celebration standard regarding that analogous issue. Rev. Rul. 58-66, 1958-1 C.B. 60, which states the IRS position that taxpayers who enter into a common-law marriage in a state that recognizes such relationships and later move to a state that does not
recognize common-law marriage is nevertheless treated as married for purposes of the federal income tax laws (in particular to be able to take a personal exemption for the spouse and file a joint income tax return). In addition, the IRS reasoned that the place of celebration test (1) “achieves uniformity, stability, and efficiency in the application and administration of the Code,” (2) avoids serious administrative concerns, for
example in applying various attribution rules that are based on someone’s (perhaps not even the taxpayer’s) marital status, and (3) avoids “significant challenges for
employers” that operate in more than one state or have employees who live in more than one state or mover between states with different marriage recognition rules. Other federal agencies have differed on the place of celebration vs. place of domicile approach, but most seem to be applying the place of celebration method.
• Secretary of State John Kerry announced on August 1 that the United States will immediately begin issuing immigrant visas to same-sex couples, as long as the marriage is valid in the jurisdiction where it took place (i.e., a place of celebration standard).
• The Pentagon announced on August 14 that the same-sex spouses of military personnel will be entitled to the full benefits that are available to spouses
(including health care and housing benefits, extra compensation when the spouse is deployed and unable to live at home, and access to base facilities). Not only did the Pentagon adopt a place of celebration standard, it will grant leave to same-sex unmarried couples who are stationed in one of the 37 states where same-sex marriage is illegal to travel to a jurisdiction where the couple may be married. The benefit payments for spouses are retroactive to June 26, 2013, the date of the Windsor decision.
www.bessemer.com/advisor 125 • The Department of Health and Human Services (HHS) ruled on August 29, 2013,
that legally married same-sex couples, regardless of where they live, are eligible for Medicare benefits that are available to married couples.
• The Social Security Administration, however, seems to be applying a domicile standard. The Social Security Administration is putting a hold on applications for spousal benefits if the married couple resides in a state that does not recognize same-sex marriages (applying a “domicile standard”).Some of these differences in approaches of different federal agencies may be based on statutory provisions. The Social Security statute appears to use a domicile test:
Determination of family status
(1)(A)(i) An applicant is the wife, husband, widow, or widower of a fully or currently insured individual for purposes of this subchapter if the courts of the State in which such insured individual is domiciled at the time such applicant files an application, or, if such insured individual is dead, the courts of the State in which he was domiciled at the time of death, or, if such insured individual is or was not so domiciled in any State, the courts of the District of Columbia, would find that such applicant and such insured individual were validly married at the time such applicant files such application or, if such insured individual is dead, at the time he died.
(ii) If such courts would not find that such applicant and such insured individual were validly married at such time, such applicant shall, nevertheless be deemed to be the wife, husband, widow, or widower, as the case may be, of such insured individual if such applicant would, under the laws applied by such courts in determining the devolution of intestate personal property, have the same status with respect to the taking of such property as a wife, husband, widow, or widower of such insured individual. 42 U.S.C. §416(h).
• Attorney General Holder announced on September 5, 2013 that the Department of Veterans Affairs will no longer enforce a law regarding veterans benefits that excludes same-sex couples. If at least one spouse is a veteran, the couple will qualify for benefits that heterosexual veterans and their spouses receive, as long as the couple lives in a state that recognizes gay marriage (thus adopting a domicile standard). The veterans benefit statutory provision regarding the determination of family status is similar to that of the Social Security statute. Statutory provisions requiring a domicile standard may ultimately come under constitutional attack.
d. Tax Planning Opportunities for Same-Sex Spouses after Windsor. The Windsor decision presents planning opportunities and will have significant consequences concerning federal benefits for same-sex spouses (some of which may ultimately be available only for spouses living in states that allow same-sex marriage), such as Social Security benefits, retirement benefits, health insurance, disability benefits, taxes, and more. A few of the tax planning opportunities are mentioned briefly below.
Marital Deduction. One of the most significant benefits to same-sex spouses after Windsor is the availability of the unlimited federal estate and gift tax marital deduction.
§§2056 & 2523. Property passing from one spouse to another (either during life or after death) is free from estate and gift tax. The deduction applies to both outright gifts and certain trusts, such as “qualified terminable interest property” (or “QTIP”) trusts. Same-sex spouses will be able to pass assets to one another with no federal transfer tax
www.bessemer.com/advisor 126 cost. Same-sex spouses who previously paid estate or gift taxes on transfers may want to talk with their advisors about whether they can file amended returns and seek refunds for taxes paid. Pursuing such claims may involve seeking judicial approval to re-open statutes of limitations that have expired.
Portability. Same-sex spouses will be able to take advantage of the new “portability”
rules made permanent earlier this year under the American Taxpayer Relief Act. §2010(c). The current estate tax exemption amount for each individual is $5.25 million (indexed for inflation). This exemption is “portable” between spouses. That is, if the first spouse dies without utilizing his or her full exemption, the surviving spouse