Same-Sex Spouses Entitled to Estate Tax Deduction, Second Circuit Rules

Title:
Same-Sex Spouses Entitled to Estate Tax Deduction, Second Circuit Rules
Publication:
The December 2012 Riker Danzig Tax and Trusts & Estates Alert
Attorneys:
Practices:

Same-Sex Spouses Entitled to Estate Tax Deduction, Second Circuit Rules

On October 18, 2012, the Second Circuit U.S. Court of Appeals held that a section of the Defense of Marriage Act that defines marriage as between a man and a woman violates the Equal Protection Clause of the Fourteenth Amendment of the Constitution.  As a result, a New York woman was entitled to take advantage of the unlimited marital estate tax deduction to eliminate the estate tax that would have otherwise been imposed on the inheritance she received from her deceased wife.
The plaintiff was initially denied the benefit of the marital deduction because the federal government did not recognize her same-sex marriage in Canada.  As a result, she was assessed more than $336,000 in federal estate taxes.  Federal law generally allows married individuals to transfer assets during life or at death to their spouse without incurring federal gift or estate taxes.


However, same-sex married couples are specifically denied this benefit because the 1996 Defense of Marriage Act defines marriage as the legal union of a man and a woman.  Therefore, under the Defense of Marriage Act same-sex couples are not considered legally married and cannot take advantage of the marital deduction.  In this case,  the couple married in Canada several years before New York legalized same sex marriage in 2011, and they had resided in New York for more than 40 years at the time of the decedent’s death in 2009.  Typically, foreign marriages are recognized in the U.S., and because New York is one of six states that have legalized same-sex marriage, the court held that New York would recognize the plaintiff as a surviving spouse of the decedent.  Therefore, she was entitled to the federal marital estate tax deduction.


It is unclear whether this case will be appealed to the Supreme Court or how the Supreme Court would rule in such a situation.  Last May, the First Circuit U.S. Court of Appeals ruled that the Defense of Marriage Act discriminates against married same-sex couples who are denied federal benefits such as the right to file joint federal tax returns, to receive Social Security survivor benefits after the death of a spouse, and to access health insurance benefits of spouses who work for the federal government.
In light of these recent decisions, same-sex couples who are considered to be legally married under state law are encouraged to review  their  current  estate  plan  to  ensure  that  their  plan takes advantage of the available tax deductions and is consistent with their intentions.