Same-Sex Marriage Estate Tax Milestone

Recently, with a landmark decision in U.S. v. Windsor, the U.S. Supreme Court has determined that a stipulation of the Defense of Marriage Act (DOMA) is unconstitutional. The decision in this benchmark case paves the way for gay couples to receive tax refunds on taxes paid because the federal government didn’t recognize their marriage.

The plaintiff of this particular case is Edie Windsor, who married her longtime partner, Thea Spyer, in Canada in 2007. The two lived in New York and when Spyer passed away in 2009, Windsor was left to pay her estate taxes as if the two were unmarried.  While New York recognized their marriage, the U.S. Government, because of DOMA, did not.  Windsor proceeded to sue the federal government to overturn DOMA and refund her estate taxes.

With the recent decision, Windsor will receive a state estate tax refund of $275,000 plus interest and a federal estate tax refund of $363,000 plus interest.

While the decision does not change the entirety of the law in regards to same-sex marriage, it does significantly impact the estate plans of couples in states that recognize same-sex marriage, including the receipt of federal benefits that were previously withheld from them.  These benefits include receiving an inheritance without paying a federal estate tax.

Although this is a significant milestone, it does not ensure this benefit to all gay and lesbian couples.  Much of the power still remains with individual states.  This case only targeted federal estate tax laws, retaining the DOMA provision that individual states that do not recognize gay marriage do not have to recognize the marriages legal in other states. While married same-sex couples are now entitled to the same estate tax eligibility as heterosexual couples, state death taxes are another issue all together.  Because same-sex marriage is recognized in New York, Windsor was able to secure a state estate tax refund as well.

This will pose the largest problem for couples married in states that recognize gay marriage, who then move to a state that does not. After all, some federal benefits such as Social Security depend on state law.

Because each state has varying laws regarding same-sex marriage, civil unions, and domestic partnerships – and because each state has varying laws on state estate and inheritance taxes – it is best to check the current laws in your individual state. There are currently 20 states (plus D.C.) that have some for of death tax – 16 of these states recognize spousal benefits for same-sex couples.  Massachusetts is one of these states.

There are only 5 states where same-sex couple will continue to be subject to paying state estate taxes when the first partner passes away.  As the law stands right now, it would be extremely unbeneficial for same-sex couples to move to one of these states in the near future – Kentucky, Nebraska, North Carolina, Pennsylvania and Tennessee– where previous marriages will not be legally recognized and taxes will be paid as though the couple is not married.