Top 10 Tax and Estate Planning Considerations for Same-Sex Couples

Nearly a year ago, on June 26, 2015, the U.S. Supreme Court ruled in Obergefell v. Hodges, delivering a historic decision in favor of State recognition for same-sex marriage. Exactly two years prior to this decision, in United States v. Windsor, the U.S. Supreme Court struck down the constitutionality of Section 3 of the Defense of Marriage Act (DOMA), which defined marriage for federal purposes as existing only between one man and one woman. McManus & Associates, a top-rated estate planning law firm with offices in New York and New Jersey, today revealed "Top 10 Tax and Estate Planning Considerations for Same-Sex Couples" as part of its Educational Focus Series. During a conference call with clients, the firm's Founding Principal and AV-rated Attorney John O. McManus shed light on the far-reaching effects of these Supreme Court decisions. To hear how the cases have impacted tax and estate planning for same-sex couples, visit the firm's website at

"In its most basic terms, recognition of same-sex marriage equates to the simple fact that a spouse is now a spouse, irrespective of gender, in the eyes of the law," commented McManus. "Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history."


                    1.  Gender-blind: First and foremost, when discussing the changes born of
                        the recognition of same-sex marriage, the overarching theme is that
                        there is no need to draft estate planning documents any differently for
                        same-sex couples. In the eyes of the federal and state governments,
                        same-sex and opposite-sex married couples are afforded the same tax
                        benefits. Whether a Will was executed before the date of Obergefell
                        (6/26/15) makes no difference. The law that applies is the law at the
                        date of the Testator's death. Pursuant to Obergefell, states MUST
                        recognize same-sex marriage.



                    2.  Unlimited Marital Deduction: Same-sex couples that marry are eligible to
                        take advantage of the unlimited marital deduction for federal estate and
                        gift tax. Prior to Obergefell, same-sex couples had to rely on their
                        applicable exclusion amount with regard to providing for the surviving
                        spouse. It is important for same-sex couples to review with their wealth
                        planning and tax advisors any existing estate planning in order to best
                        utilize the tax-saving vehicles available to them.



                    3.  Portability: In addition to the unlimited marital deduction, the
                        surviving spouse is entitled to the portability provision under federal
                        estate and gift tax law. Pursuant to the portability provision, a
                        surviving spouse may preserve, and thereafter utilize, any portion of
                        the deceased spouse's unused applicable exclusion amount. One benefit of
                        portability is to allow the surviving spouse to make tax-free gifts in
                        order to reduce the estate tax owed upon the survivor's death. For more
                        information on portability, please see an in-depth discussion of the top
                        10 possibilities of portability:



                    4.  Gift Splitting: Each individual is given the right to make gifts on a
                        tax-free basis for federal gift and generation skipping transfer tax.
                        The annual exclusion amount is currently $14,000. Now same-sex couples
                        can enjoy the benefits of gift splitting, whereby one spouse can gift
                        from their own assets, with the consent of the other spouse, in order to
                        utilize both of their annual exclusion amounts (currently $28,000
                        maximum to any individual) resulting in the gifting spouse's applicable
                        lifetime gift tax exemption amount remaining intact. Generally, gift
                        splitting requires the filing of a Form 709 Gift Tax Return; however, if
                        the split gifts total $28,000 or less to each donee, only the donor
                        spouse is required to file a gift tax return.



                    5.  Beneficiary Designation of Retirement Benefits:
                        a.  Retirement account assets of a deceased same-sex spouse can now be
                            "rolled over" into the surviving spouse's account without the
                            requirement of a mandatory minimum distribution or lump sum
                            distribution. This is a positive development because, prior to the
                            recognition of same-sex marriage, this roll-over was not possible.
                        b.  With regard to an ERISA covered plan, the Windsor decision made it
                            possible for the same-sex spouse of a participant in the plan to
                            automatically be the beneficiary. The participant is now required to
                            obtain consent from his or her spouse if that spouse is not the
                            desired beneficiary of the plan.
                        c.  All state-level employment benefits should be reviewed and updated
                            with the same-sex spouse information in order to take advantage of
                            the rights and benefits available to the same-sex spouse. Review
                            employer's benefits policies -- spousal benefits granted to same sex
                        d.  Also review prenuptials and other marital agreements.



                    6.  Insurance: Insurance planning may have been part of same-sex planning
                        prior to the Obergefell decision. All policies, along with beneficiary
                        designations, should be reviewed in conjunction with the new planning
                        concepts for a streamlined flow of assets upon both the first death and
                        the death of the surviving spouse.



                    7.  Previously Filed Federal Tax Returns: Same-sex spouses may amend
                        previously filed federal estate, gift, and income tax returns from
                        single to married status, subject to the statutory limitations period of
                        three years from when the tax return was originally due or filed (if on
                        extension) or two years from the date the tax was paid, whichever is
                        later. Married couples living in states that did not recognize same-sex
                        marriages prior to Obergefell may be able to amend filed state income
                        tax returns for the years 2012, 2013, or 2014, depending on the law of
                        the state.



                    8.  Natural Born and Adopted Children: A child, whether born or adopted into
                        the same-sex union, needs to be specifically identified throughout the
                        estate planning documents. The relationship of the child to the adoptive
                        parent or parents or birth parent in a same-sex married couple can be
                        cause for contest at the death of the legal parent if not planned for
                        ahead of time.
                        a.  If a child is born to one spouse, the other spouse should strongly
                            consider adoption of the child to legalize the relationship. If
                            there is no legal relationship between the child and the spouse of
                            the natural parent, a relative of the natural parent could fight for
                            custody if the natural parent dies or fails to care for the child.
                        b.  The same issue applies to a child who is only adopted by one spouse.
                            Same-sex couples may consider co-parent adoption to ensure that both
                            parents have rights regarding child custody and guardianship.
                        c.  If a partner has a child and the other partner plans to adopt that
                            child, he or she is eligible to receive an adoption tax credit. This
                            credit is not available for a spouse adopting his or her spouse's
                            child. If a couple is planning to marry and an adoption is part of
                            the big picture, it may be more advantageous for the adoption to
                            take place before the couple marries.



                    9.  Non-Citizen Spouse May Consider Becoming a Citizen: Non-citizen same-sex
                        spouses are afforded the opportunity to become U.S. citizens on the
                        basis of their marriage to a spouse of the same sex who is a U.S.
                        citizen. This eligibility should be considered carefully, taking all
                        ramifications into account. For example, as a U.S. citizen the
                        individual would be taxed by the U.S. on their worldwide income.
                        Also, expatriating from the U.S., renouncing your U.S. citizenship, and
                        returning to your native country can be an expensive proposition. To
                        expatriate, you generally must prove five years of U.S. tax compliance.
                        If you have a net worth greater than $2 million or average annual net
                        income tax for the five previous years of $160,000 or more, you must pay
                        an exit tax. It is a capital gain tax as if you sold your property when
                        you left. In addition, the U.S. State Department has raised the fee for
                        renouncing U.S. citizenship from $450 to $2,350.



                    10. Current Estate Plan:
                        a.  Due to the tax-saving venues opened to same-sex couples, it is
                            beneficial for the couple to review all existing plans in order to
                            maximize federal and state estate, gift, and income tax planning.
                        b.  Beneficiary designations for insurance and retirement benefits
                            should be reviewed in order to align the designations accordingly.
                        c.  Re-title any property with joint ownership to ownership by the
                            couple as tenancy by the entirety. In community property states, the
                            couple may want to convert separately-owned property to community
                            property in order to receive a step up in basis upon the death of
                            the survivor of the spouses.
                        d.  Confirm that definitions in the estate planning documents correctly
                            reflect relationships, for example "spouse," "husband," "wife,"
                            and/or "children," whether naturally born or adopted.
                        e.  Determine if there is a necessity for a "no contest" clause to be
                            incorporated in the event family members disapprove of the same-sex
                            couple's lifestyle or decisions regarding the estate plan.



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