In Texas, despite the Defense of Marriage Act (DOMA) being overturned, we are in a state of limbo regarding the complex set of financial and estate planning concerns of same-sex couples. The complexities of this planning are further complicated by today’s existing patchwork approach to marriage equality on the state-level.
The majority of US states still do not offer any type of relationship recognition for same-sex couples. And for those 21 states that do, they are fairly limited in scope to state-level benefits only. Additionally, the Federal government is restricted from recognizing any of these unions due to DOMA, a federal law defining the term marriage as a union between one man and one woman.
At the center of one of the two cases heard last month, US v. Windsor, is an 83-year-old woman from New York named Edith Windsor. Edie and her partner of 40+ years, Thea Spyer, wed during a trip to Toronto in 2007. At the time of Thea’s passing in 2009, the State of New York did not yet allow same-sex couples to marry, however they did recognize unions entered into in other jurisdictions. Since the Federal government did not honor their union in the same manner, Edie was required to pay a Federal Estate Tax on the assets inherited from Thea–a bill that totaled $363,000!
A comparison with an opposite-sex married couple would reveal a different outcome. Because of the unlimited marital deduction which allows opposite-sex spouses to pass an unlimited amount of money to one another without federal estate or gift taxes, if Thea were Theo, Edie’s husband of 40+ years – or even one year, for that matter – the assets inherited by Edie would have been free of any estate tax. A $363,000 difference based solely on whom Edie married.
At the very least, a basic understanding of Federal and State Estate and Inheritance taxes is critical for LGBT couples. It may be beneficial to think about about how these taxes may apply in the event of an upcoming life change. For instance, you may wish to consider the potential impacts of these taxes if you plan to move to another state upon retirement, if your employer plans to relocate you to another state, or if you plan to acquire property in multiple states.
If you determine that a tax liability will exist upon your passing, you may wish to consider having your partner purchase a life insurance policy on your life. In doing so, they are assuring that upon your passing, they will receive a death benefit payment in the amount of the potential tax liability. Having liquid cash to satisfy the tax liability will preserve the assets you pass along. This is even more important if the majority of your assets are tied up in real estate and/or retirement accounts, both of which are semi-illiquid assets and both of which carry their own tax liabilities to liquidate.
Estate and Inheritance taxes may impact fewer couples going forward because of the $5,250,000 estate tax exclusion, but same sex couples still need to plan around the gifting limits. If one spouse is the primary earner depositing money into a joint account, that means making house payments, or buying a car could result in a gift to the other spouse that may need to be reported.
When properly implemented, there are a number of strategies that can be highly effective in reducing the impact of estate, inheritance, and gift taxes. This is an ideal time for the professionals in your life: your financial advisor, estate planning attorney, and CPA can help coordinate efforts to help you and your partner work through these complex discussions.
The US Supreme Court has changed the course of this discussion. Along with Edie Windsor, we as a nation celebrate the decision, but even though DOMA has been overturned, education and preparation remain of the utmost importance for all LGBT couples.
Wells Fargo Advisors is not a tax or legal advisor. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and separate nonbank affiliate of Wells Fargo & Company.