June 01, 2015

Gay Marriage and Estate Planning

Jay A. Soled

Not too long ago, the United States did not honor gay marriages. As a result, when it came to estate planning, gay couples encountered a hostile tax environment. However, in the aftermath of United States v. Windsor, 570 U.S. 12 (2013), which ruled the Defense of Marriage Act—which defined marriage as a union between two people of the opposite sex—unconstitutional, estate planning will prove less financially onerous for gay couples.

The Internal Revenue Code provides a number of special benefits for married couples. In the estate planning area, three are salient: (1) assets passing to a spouse qualify for the unlimited marital estate tax deduction, (2) the unused applicable exemption amount of a decedent spouse automatically passes to a surviving spouse, and (3) if an election is made, lifetime gifts made by one spouse can be considered made one-half by each spouse. Insofar as gay couples were concerned, in yesteryear, they could not avail themselves of these advantages, and they accordingly often bore a larger transfer tax burden relative to straight couples.

The Windsor decision changed all of this. In this decision, for transfer tax purposes, the court ruled that married gay couples should be treated the same as married straight couples. The IRS thereafter issued a ruling that declared that, for purposes of applying the Tax Code, it would extend the Windsor holding to all facets of taxation, including in the income taxation sphere, allowing gay couples to file joint tax returns. Rev. Rul. 2013-38.

Insofar as estate planning is concerned, what are the practical implications of Windsor and the IRS’s subsequent acquiescence? It means that the same techniques that estate planners have used for straight couples for several decades can now be utilized on behalf of gay couples. Such techniques include, but are not limited to, the use of QTIP trusts (a.k.a. marital trusts) and gift splitting.

To illustrate, suppose a gay couple, A and B, each worth $7.5 million, seek estate planning advice. Most estate planners would now recommend the tried and tested A/B trust arrangement. More specifically, on the death of either spouse, $2,070,000 would pass into a marital trust (i.e., $7,500,000 less $5,430,000 (the applicable exclusion amount in 2015)), and the balance, or $5,430,000, would pass into a bypass trust. Upon the death of the surviving spouse, the value of the property held in the marital trust would be subject to estate tax in the surviving spouse’s estate and the value of the bypass trust would be excluded.

That the same tax benefits now extend to gay couples does not mean that the estate planning concerns of gay and straight couples are necessarily the same. For example, gay couples have historically been less likely to have children. It is important, therefore, for estate planners to secure conflict of interest letters from their gay couple clients who are less likely to harbor shared objectives upon the death of the surviving spouse.

In the realm of estate planning, Windsor ushered in the dawn of a new era. This is good news for the gay community. It levels the playing field and opens up traditional estate planning opportunities for all taxpayers.

Jay A. Soled

Jay A. Soled is a professor at Rutgers University in Newark and the editor of the SLD book, Estate Planning Strategies: A Lawyer’s Guide to Retirement and Lifetime Planning. The information in this article is intended as general information only and should not be acted upon without professional advice.