New Rules for Same-Sex Couples
Bruce and Bill were married under the laws of New York, where same-sex marriage is legal. Bruce was offered an executive position at Wal-Mart and the couple moved to Arkansas. Same-sex marriage is banned by a state constitutional amendment in Arkansas. Thus, Bruce and Bill’s New York marriage is not recognized by the state of Arkansas and they are considered legal strangers under Arkansas law.
In United States v. Windsor, the United States Supreme Court held that Section 3 of the Defense of Marriage Act (“DOMA”) violated the equal protection provisions of the United States Constitution. The court held that the federal government cannot treat a same-sex couple who are validly married under the laws of their state of residency any differently than a traditional couple who are validly married under the laws of that same state. The court recognized that the determination of marital status is, for the most part, the domain of the state.
In his dissent to the majority opinion, Chief Justice Roberts rightfully points out the majority opinion found that DOMA undermined the dignity conferred to the states in the exercise of their sovereign power to expand the traditional definition of marriage. He further states, “[w]e may in the future have to resolve challenges to marriage definitions affecting same-sex couples. That issue, however, is not before us in this case, and today that we lack jurisdiction to consider it in the particular context of Hollingsworth v. Perry.” Thus, under a narrow reading of the holding in Windsor, Bruce and Bill would not be recognized as a married couple for federal and state law purposes because their marriage is not recognized under the laws of Arkansas, their state of residence.
In Revenue Ruling 2013-17, the Internal Revenue Service provides that a married same-sex couple, married in a jurisdiction which allows same-sex marriage, will be treated as married for all purposes by the IRS. This goes beyond what the Supreme Court ruled in Windsor.
The IRS made this determination based on its expansion of Revenue Ruling 58-66, 1958-1 C.B. 60, and on the ruling of the Supreme Court in Windsor. Under Revenue Ruling 58-66, the IRS determined the marital status for federal income tax purposes of a couple who had entered into a common law marriage. The IRS ruled that in states where common law marriage was recognized, it would recognize the couple as married for federal income tax purposes, allowing the couple to file joint income tax returns and take advantage of favorable exemptions, deductions, and marginal tax rates for married couples. Furthermore, the IRS ruled that, if the couple moved to a state that did not recognize their common law marriage, the IRS would continue to recognize the common law marriage, despite the fact the couple’s new state of residence did not recognize their marriage. The IRS held that “[a] rule under which a couple’s marital status could change simply by moving from one state to another would be prohibitively difficult and costly for the Service to administer, and for many taxpayers to apply.”
The IRS goes on for many pages with analysis of the terms “marriage,” “spouse,” “husband,” and “wife,” and concludes its analysis with a ruling that the terms “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex, if they were lawfully married in a state whose laws authorize such marriages.
This expansion of the holding in Windsor means that, despite the fact that Bruce and Bill are not legally married under Arkansas law and would be treated as unmarried for purposes of filing state income tax returns, they would be able to file a joint income tax return for federal income tax purposes. The revenue ruling applies not just for federal income tax purposes, but for all federal tax purposes. Thus Bruce and Bill would be able to take advantage of the unlimited gift and estate tax marital deduction and the portability provisions available to traditional married couples, as well as spousal rollover of IRAs, etc.
Presumably, this would be equally applicable to Victoria and Vivian, residents of Georgia, who traveled to New York on vacation and got married on their visit to the Big Apple. Because their marriage was valid under New York state law, they would be considered legally married for federal tax purposes. This is despite the fact that they never resided in the state of New York, where their marriage occurred. However, like Bruce and Bill, Victoria and Vivian would be considered married under federal law and legal strangers under the law of their state of residence (Georgia).
Revenue Ruling 2013-17 also provides that a same-sex couple in a civil union, domestic partnership, or similar relationship will not be treated as married under federal law. This is a change from previous rulings where the IRS treated relationships, such as California registered domestic partnerships, as the equivalent of marriage for same-sex partners. Same-sex partners who are currently in such relationships will have to determine whether they should get married if they want to continue to be treated as married for federal tax law purposes.
While this Revenue Ruling makes the determination of the tax treatment of married same-sex couples administratively simpler, it will not simplify planning for married same-sex couples who reside in a state that does not recognize their marriage. They would still be treated as unmarried for purposes of state income tax, state gift tax, state estate tax, and state inheritance tax purposes. They would also continue to be treated as legal strangers for purposes of making health care decisions, priority of appointment as guardians, conservators, and executors and with regard to inheritance in the absence of an estate plan. As such, it remains imperative for same-sex couples to have comprehensive estate plans, including wills, powers of attorney, advance health care directives (or similar documents designating a health care agent), HIPAA authorization forms, and, in many cases, a joint revocable or a separate revocable trust for each partner.
Our law firm provides advice to married and unmarried same-sex couples regarding their estate planning alternatives. Our lawyers provide comprehensive estate plans to same-sex couples who are married, who have entered into a civil union or domestic partnership, or who remain unmarried. We also offer trust administration and probate services at the death of a same-sex spouse or partner. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information relevant to estate planning, including same-sex couples. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.