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Supreme Court's same-sex marriage decision and estate planning


Amid all the excitement last month over the U.S. Supreme Court's ruling invalidating the Defense of Marriage Act, many people tended to gloss over an important detail. The case at issue in the ruling was a dispute over taxes on an inheritance in a same-sex marriage. The big court decision was really about estate administration, and it could mean big changes in estate planning for many same-sex couples. It also illustrates some important points for heterosexual couples and estate planning.

The case in question, United States v. Windsor, specifically concerned a marital tax deduction that allows spouses to transfer unlimited amounts of money to each other tax-free during the marriage, as part of a divorce settlement or upon death. Ordinarily, a transfer of a large amount of money from one person to another triggers a gift tax, and, over a certain amount of money, a transfer upon one person's death triggers an estate tax. There are even limits on how much a parent can transfer to a child without triggering gift taxes, but spouses are free to transfer as much as they want to each other.

However, under DOMA, the federal government was not allowed to recognize the marital deduction even when the spouses were married in a jurisdiction where same-sex marriage was legal. As a result, the plaintiff in United States v. Windsor had to pay $363,053 in federal estate taxes after her partner of 44 years died. The Supreme Court agreed that this meant that DOMA was violating her constitutional right to equal protection under the law.

The State of Washington has had legal same-sex marriage since late last year, but DOMA meant that even legally married same-sex couples here were denied many federal benefits, including the marital deduction. The Supreme Court's decision will mean that same-sex couples can plan their estates without having to worry about gift or estate taxes taking a chunk out of their finances.

Source: Forbes, "How The Supreme Court Decision Will Change Estate Planning For Same-Sex Spouses," Deborah L. Jacobs, June 26, 2013

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