How Does DOMA’s invalidation affect Estate Taxes? United States v. Windsor

26 Jun How Does DOMA’s invalidation affect Estate Taxes? United States v. Windsor

How will DOMA’s invalidation affect estate taxes?

How will today’s landmark Supreme Court ruling impact same-sex household finances?

Today, the Supreme Court struck down a key part of the federal Defense of Marriage Act commonly called “DOMA” and declared that same-sex couples who are legally married deserve equal rights to the benefits under federal law that go to all other married couples.

This case began when Edith “Edie” Windsor, 84 years old, sued the Federal government after the Internal Revenue Service denied her refund request for the $363,000 in federal estate taxes she paid after her spouse, Thea Spyer, died in 2009.

Edie Windsor and her spouse, Thea Spyer lived as partners in New York for 44 years. They were married in Canada in 2007. Two years after their wedding, Thea passed away after battling multiple sclerosis.

Under current federal tax law, a spouse who dies can leave her assets, including the family home, to the other spouse without the estate incurring estate taxes. Unfortunately, because their marriage was not recognized under federal law, the federal tax law did not apply and Edie’s inheritance from Thea was taxed ($363,000).

Normally, a couple is considered married for federal purposes if they are considered married in their state. New York recognized Edie and Thea’s marriage, but because of DOMA, the federal government refuses to treat married same-sex couples the same way as other married couples.

How does DOMA’s invalidation affect estate taxes?

Under Federal law, spouses enjoy an unlimited marital deduction. This means that when a person dies, his or her spouse will not incur any estate tax liability with respect to assets left by their deceased spouse. The “marital deduction” allows married couples to postpone any taxes due until the second spouse dies. Ultimately, a married couple is taxed once, at the second spouse’s death.

Under DOMA, no marital deduction was available to same-sex couples and as a result, assets would be subject to estate taxes twice: once when the first spouse dies and again at the death of the other spouse.

So, how does DOMA’s invalidation affect estate taxes? It allows same sex couples to enjoy the unlimited marital deduction as would a heterosexual couple.

 How does DOMA’s invalidation affect gift taxes?

Generally, spouses can make gifts and transfer property to one another without incurring gift taxes. Now that DOMA has been invalidated, the gift tax “marital exemption” should apply to married same-sex couples. Married same-sex couples will not have to file a federal gift tax return if one spouse transfers a home, other property, or cash to the other spouse.

What next?

Regardless of sexual orientation, estate planning is one of the most important components of planning for your financial future. An estate plan can ensure assets are maintained and distributed according to your wishes and can also help minimize the amount of taxes due on an estate. Estate planning can also provide for dependent children, direct end-of-life care and award power of attorney should you become incapable of managing his or her finances.

In light of today’s landmark decision, same-sex couples in California are encouraged to revisit their estate plans. For a free estate planning consultation or more information about planning your estate, estate taxes and gift taxes, call us at (818)649-9110 or email us at info@bazikyanlaw.com.