Estate Planning After DOMA

Date: Jul 15 2013

Susan Von Herrmann, Schiff Hardin LLP - A FOX Thought Leaders Council Member

On June 26, 2013, the Supreme Court of the United States issued two groundbreaking opinions regarding same-sex marriage. The rulings will substantially impact financial and estate planning for same-sex couples living in jurisdictions that recognize same-sex marriage. In the following interview, we talk to Susan Von Herrmann of FOX Thought Leaders Council Member Schiff Hardin about the rulings and what they mean for same-sex couples’ estate planning.
The Supreme Court recently ruled on two cases regarding same-sex marriage: United States v. Windsor and Hollingsworth v. Perry. Can you talk a little bit about how the Court ruled?
In United States v. Windsor, the Court held that Section 3 of the Defense of Marriage Act (DOMA), a federal statute that defines "marriage" as the union between one man and one woman, to be unconstitutional under the equal protection clause of the Fifth Amendment. The Court’s holding has the effect of extending all of the federal rights and responsibilities of marriage to same-sex couples who are validly married under state law.
In Hollingsworth v. Perry, the Supreme Court was asked to consider the constitutionality of Proposition 8, the 2008 measure that amended the California constitution to ban same-sex marriage. Instead of addressing the merits of the case, the Court held that the official sponsors of Proposition 8 lacked standing to appeal the trial court’s decision holding that the amendment is unconstitutional — and so it stands. As a result, same-sex marriage is once again available in California. The impact of the Perry case is limited to California. Because the Supreme Court did not reach the issue of whether Proposition 8 is unconstitutional, the Court’s holding leaves undisturbed the laws of other states that ban same-sex marriage.
So what do these rulings mean for same-sex couples?
As a result of the Court's holding in United States v. Windsor, couples currently residing in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia will soon be eligible for and subject to over 1,100 spousal rights and responsibilities afforded under federal law, including:
  • The ability to transfer unlimited assets to a spouse during life and at death, which means the payment of any estate tax due can be deferred until the second death;
  • The option to file joint federal tax returns, which gives couples with significantly disparate incomes the ability to lower their overall effective tax rate;
  • For a surviving spouse, the right to receive Social Security survivor benefits; 
  • The opportunity to sponsor a foreign-born spouse for citizenship; and 
  • Access to veterans' spousal benefits. 
While it is clear that same-sex married couples living in jurisdictions that recognize same-sex marriage will be eligible for these federal benefits, there are still unresolved questions for those residing elsewhere. 
What remains unresolved?
While the United States v. Windsor ruling is an enormous development, many questions remain. The opinion does not address whether states can continue to ban same-sex marriage or whether states that prohibit same-sex marriage are required to recognize marriages performed in other states. In addition, federal agencies have different approaches when it comes to deciding which state’s laws apply for determining whether a couple is married for the purposes of federal law, and it is possible that a couple that is legally married but living in a state that does not allow same-sex marriage will have certain federal rights but not others. The only guaranteed safe harbor is for married couples who reside in states that recognize same-sex marriage — these couples will have all the rights and obligations of married couples under federal law when the decision goes into effect (25 days after it was issued). So, it is clear that additional work will need to be done to clarify these issues.
In the meantime, what can same-sex couples do to optimize their estate plans?
It is critically important that same-sex couples, regardless of their legal status, review their estate plans in light of these new rules.
  • For high net worth couples, adding provisions to wills and trusts that allow them to take full advantage of the unlimited marital deduction from estate tax will be important.
  • Couples of more moderate means may be able to simplify their plans by relying on the relatively new concept of portability, which allows a surviving spouse to utilize any unused estate tax exemption of the first spouse to die.
  • Couples in community property states may obtain tax advantages by transmuting property from separate to community, which is possible now that lifetime transfers between same-sex married couples in recognition states do not constitute taxable gifts.
In addition, many couples may now wish to marry. It is important that these couples are aware of the financial implications of marriage and enter into the appropriate pre-marital agreements if necessary. Couples who are currently registered domestic partners or in a civil union, and who have previously entered into an agreement governing their responsibilities, may need to update the agreement.

About Susan von Herrmann

Susan von Herrmann is a partner in the Private Clients, Trusts and Estates group at Schiff Hardin LLP. She focuses her practice on estate planning and estate and trust administration. She actively advises clients on strategies to minimize estate and gift tax liability and charitable planned giving. Ms. von Herrmann regularly assists clients with the formation of entities including family limited liability companies, family limited partnerships and private foundations, and advises family-owned businesses on succession planning. In addition to counseling traditional families, she has a significant breadth of experience in assisting nontraditional and blended families in estate planning matters.