Part 3: FAQ for Same-Sex Spouses – Estate and Trust Taxes

This is the third post in a three-part series answering frequently asked tax and financial planning questions for same-sex married couples.

Edith Windsor took legal action against the federal government in United States v. Windsor after the IRS denied her claim to the federal estate tax exemption for surviving spouses. When the Supreme Court ruled in favor of Windsor, same-sex couples were granted access to estate and gift tax exclusions, but questions remain about the procedures for filing 2013 returns and amending previously filed tax returns.

The following are answers to some frequently asked questions about estate and gift tax planning for married couples:

Q: How have estate tax returns changed for same-sex couples?

Before the Windsor ruling, same-sex married couples were not eligible for the marital deduction, which allows one spouse to devise assets to the surviving spouse tax-free. Also, a same-sex surviving spouse could not elect portability of the decedent spouse’s unused portion of the estate tax exemption.  Now same-sex couples are eligible for the unlimited marital tax deduction and a same-sex surviving spouse can elect portability of the unused exemption.  Fiduciaries that previously filed estate tax returns under the pre-Windsor rules should analyze the relevant facts to determine any financial benefit to filing amended returns.

Q: Are transfers between same-sex spouses exempt from the gift tax?

Yes. Previously, same-sex married couples were subjected to a gift tax when transferring property or money from one spouse to another in an amount exceeding the annual gift exclusion (currently $14,000 per donee). When the Supreme Court federally recognized same-sex marriages, those spouses automatically became eligible for the marital deduction, which allow an individual to give unlimited assets to his or her spouse with no tax on the transfer. Taxpayers who believe they are owed a refund for a previously paid gift tax return or a reduction in a previously allocated exemption can amend those returns.

Q: What is gift-splitting?

Gift-splitting is an election where married spouses consent to report half of the couple’s overall gifts on each of the spouse’s gift tax return.  Effectively, the spouses can combine their gift exclusions and exemptions.  For example, spousal consent to split gifts can be elected when one spouse makes the actual gift and the other spouse consents to using his or her exemptions to shelter half of the transferred assets from tax.  Any lifetime transfers that exceed the annual gift exclusion amount automatically count against the lifetime unified exemption ($5.34 million per individual in 2014).

Q: What is portability and what does it mean for same-sex couples?

Portability allows a surviving spouse to use any of the decedent spouse’s unused estate tax exemption. For example, in 2014, if the first spouse to die has used $1 million of his exemption, the remaining $4.34 million can be transferred to the surviving spouse.  Therefore, by using the portability rules, the spousal couple is able to effectively use their entire combined estate tax exemption ($5,340,000 x 2 = $10,680,000) to shelter assets from gift and estate tax. To take advantage of the portability rules, an estate tax return must be filed when the first spouse dies – even if no tax will be due at that time.

Q: Are individuals in a registered domestic partnership or civil union eligible for the marital deduction for gift and estate taxes?

No. Only couples who are validly married (by state or foreign country) are eligible for tax exemptions associated with marriage.

Q: Can same-sex spouses who were married before the Supreme Court ruling amend past tax returns to be eligible for refunds?

Yes. The Supreme Court ruling in Windsor was enforced proactively and retroactively, meaning that same-sex spouses married before the ruling are now eligible to obtain refunds on taxes paid in years past.

Amending past returns can result in significant refunds to married couples.  There is a statute of limitations of three years on retroactively amending returns for same-sex couples, making tax years 2010-2012 eligible for refunds this year.

If you have questions or concerns about your estate and gift tax exemptions, please contact me or another member of our estate and trust services team.