Much has, and will be, written about the two cases currently pending before the Supreme Court of the United States (SCOTUS) that involve challenges to laws either prohibiting, or not legally recognizing, same-sex marriages—Windsor v. United States (Windsor) and Hollingsworth, et al. v. Perry, et al. (Perry).1 With oral arguments for both cases held in March and decisions anticipated in mid-to-late June, the era of separate planning for same-sex married couples may be coming to an end. Although not highly publicized, a group with a heightened interest in the outcome of these cases is comprised of professional fiduciaries who are administering trusts under which a beneficiary is (or may become) a same-sex spouse.
Windsor is an appeal from the U.S. Court of Appeals for the Second Circuit, which held that the federal Defense of Marriage Act (DOMA) is unconstitutional. Many SCOTUS-watchers believe that Windsor will result in a five-to-four decision affirming the Second Circuit’s decision.2 The effect of a SCOTUS affirmation will be that for all federal purposes, including tax matters, same-sex spouses will be recognized as “legal spouses,” which will enable them to:
(1) receive spousal federal benefits (including social security survivorship benefits), (2) declare married filing jointly status for federal income tax purposes, and (3) take advantage of the estate and gift tax marital deductions.
By contrast, Perry is unique in that it relates to a particular state law issue—California’s Proposition 8 referendum, passed by voters in 2008 to strike down legislation that approved same-sex marriages (Proposition 8). At the trial court level, the Northern District of California held that Proposition 8 was unconstitutional, both: (1) under the due process clause of the 14th Amendment to the U.S. Constitution (because no compelling state interest justified denying same-sex couples the fundamental right to marry), and (2) as a violation of the equal protection clause of the 14th amendment (because there was no rational basis for limiting the designation of “marriage” to opposite-sex couples).3 On appeal, the Ninth Circuit affirmed the lower court ruling, but did so in a non-expansive and limiting manner. The Ninth Circuit held that Proposition 8 was unconstitutional because California’s voters had no legitimate reason to use their initiative power to target a minority group to revoke a right that such group possessed.4 In applying this logic, the Ninth Circuit was able to limit the scope of its ruling solely to the California Proposition 8 question; as a result, the Ninth Circuit’s decision has no impact on the laws of any other state.
SCOTUS’ decision in Perry could drastically affect state law concerning same-sex marriage. As of the date of this article, only 10 jurisdictions—Connecticut, District of Columbia, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and Washington—recognize same-sex marriages. Many of the remaining states not only don’t recognize same-sex marriages, but also refuse to give effect to valid out-of-state same-sex marriages.5 Thus, the states seem to be polarized with respect to the acknowledgment or reciprocity of same-sex marriage—seemingly, states either embrace same-sex marriage or they completely refuse to acknowledge its existence.
The general thought is that by accepting certiorari on both cases, SCOTUS will issue a broad ruling with respect to both the federal and state DOMA questions, thereby globally resolving the constitutionality of all federal and state DOMA statutes and laws. However, a reversal of Perry in favor of the petitioners/proponents of Proposition 8 or an affirmation of the Ninth Circuit opinion with the same limitations, that is, application solely to California, will not only fail to resolve the state law quandary, but also will probably result in countless lawsuits within the various states. For example, a state with a DOMA statute can repeal such statute by legislative action; contrast this to states, such as Florida and Texas, with constitutional DOMA provisions, which would require a voter initiative to repeal. Such a ballot measure could lead to Perry-style lawsuits.
If SCOTUS doesn’t deem all state DOMA laws to be unconstitutional, the trustees of trusts under which a beneficiary is (or will in the future become) a party to a same-sex marriage will continue to experience a number of complications and difficult decisions with respect to the manner in which such trusts are administered. The hypothetical fact pattern below and the scenarios that follow illustrate some of these issues.
Mallory, a Florida resident, is a widowed mother of three children, Sterling, Lana and Cyril, and enjoys a warm relationship with each child’s spouse. Her revocable trust, which is governed under Florida law, provides that the trust residue is to be divided into equal shares for her children, with each share to be held in further trust for such child’s lifetime (the child’s trust). Each child’s trust provides for such child’s spouse. Lana lives in New York with her same-sex spouse, Pam, whom she married in 2011 after same-sex marriages became legal in New York. Plenty of correspondence exists indicating that Mallory overwhelmingly approved of Lana’s marriage to Pam. Mallory dies in 2012.6
Based on the fact pattern above, here are five scenarios showing what could happen, depending on what the child’s trust says and whether Lana and Pam have children. In all the scenarios, Ray, as trustee should seek confirmation of the conclusions with the applicable court.
Scenario 1: Trust remainder. Suppose that as to the disposition on a child’s death, the child’s trust provides:
Upon the death of the child of the grantor, if such child is survived by his or her spouse, the balance of such child’s trust shall be held in further trust for such spouse ... or, if no such spouse survives such child, shall be divided into shares, per stirpes, for such child’s descendants as survive such child, or, in default thereof, for the grantor’s descendants as survive such child, and each share shall be held in further trust…
Lana unexpectedly dies in a car accident in 2013, leaving no children. Ray, the trustee of the child’s trust for the benefit of Lana (Lana’s trust), has administered the trust as a Florida trust. While it appears that Mallory intended that the balance of Lana’s trust be held in further trust for Pam, it’s unlikely that Ray would be able to do so because Florida law governs Lana’s trust. Pursuant to Art. 1, Section 27 of the Florida Constitution and Fla. Stat. Section 741.212, same-sex marriages aren’t recognized in Florida. While Pam is legally Lana’s surviving spouse in New York, pursuant to constitutional and statutory law, Florida wouldn’t recognize Pam as Lana’s spouse.
As trustee, Ray would be committing a breach of trust if he were to hold the balance of Lana’s trust in further trust for Pam. Rather, the likely result would be that since Lana has no surviving descendants, Ray would divide the balance of Lana’s trust into shares for Sterling and Cyril and hold such shares in further trust. As a safeguard, Ray should ask the applicable Florida court for a determination of the beneficiaries pursuant to Fla. Stat. Section 736.0201(4)(e). The applicable court would likely determine that no share of Lana’s trust could be created for Pam because Florida law wouldn’t deem Pam to be a spouse.
Scenario 2: Limited power of appointment (POA). Assume the same facts as in Scenario 1, but the child’s trust provides:
Upon the death of the child of the grantor, the principal shall pass in trust for one or more of the grantor’s descendants and such child’s spouse, in portions, equal or unequal, and subject to such lawful trusts, terms and conditions, as such child appoints by Will or by any other written instrument executed with the same formalities as a Will. Any principal not so appointed shall be divided into portions, per stirpes, for such child’s then living descendants, or, in default thereof, for the grantor’s then living descendants, and each portion shall be held in further trust…
Lana’s will exercises the special POA granted to her in Lana’s trust in favor of Pam. Although Pam is Lana’s surviving spouse for all other aspects of Lana’s estate, for the same reasons as discussed in Scenario 1, Pam is likely not Lana’s spouse for purposes of Lana’s trust because Pam isn’t deemed to be a “spouse” under Florida law. Thus, the exercise of the POA in favor of Pam will likely fail.
Scenario 3: Discretionary distributions to spouse. The income and principal of the child’s trust are distributable as follows:
The Trustees may pay so much of the income therefrom and such sums out of the principal thereof (even to the extent of the whole thereof) to grantor’s child, the spouse of such child, and the descendants of such child, living from time to time, in equal or unequal amounts, and to any one or more of them to the exclusion of the others, as the Trustees deem necessary for a particular beneficiary’s health, education, maintenance and support in his or her accustomed standard of living.
Assume that Lana is alive, but is incapacitated as a result of the car accident. Lana had been financially supporting Pam. With Lana unable to provide for Pam, Pam asks Ray for trust distributions for her support.
Under the same analysis as set forth in our first two scenarios, even though Pam is Lana’s legal spouse in New York, Pam isn’t a beneficiary of Lana’s trust under Florida law because Pam isn’t considered to be Lana’s spouse.
Scenario 4: Who are the descendants? Assume that Lana and Pam have two children, Cheryl and Katya, born to Pam through artificial insemination. Lana hasn’t adopted them. Are such children Lana’s “descendants” for purposes of the provisions of Lana’s trust contained in the three scenarios above?
As New York residents, pursuant to New York Dom. Rel. Section 24(1), Cheryl and Katya would be considered Lana’s children, even though neither are Lana’s biological children. This is because under New York law, children born to legally married parents are considered the legitimate children of both spouses.7
However, Florida law governs Lana’s trust and wouldn’t recognize the New York determination of Lana’s parentage of Cheryl and Katya. Unfortunately, the only Florida laws regarding such situations involve the determination of parentage of the genetic parents for children born out of wedlock.8 Because Cheryl and Katya are genetically related to Pam and not Lana, absent an adoption by Lana, Florida law wouldn’t consider Cheryl and Katya to be Lana’s descendants.
Scenario 5: Spousal support obligations. Even without references to a same-sex spouse, discretionary provisions can still cause trouble for a trustee. Consider the following modification to the facts from Scenario 3:
The Trustees may pay so much of the income therefrom and such sums out of the principal thereof (even to the extent of the whole thereof) to grantor’s child and the descendants of such child, living from time to time, in equal or unequal amounts, and to any one or more of them to the exclusion of the others, as the Trustees deem necessary for a particular beneficiary’s health, education, maintenance and support in his or her accustomed standard of living, after considering such beneficiary’s other resources.
The provision doesn’t reference the child’s spouse, but requires the trustee to “consider other resources.” Under N.Y. Dom. Rel. Section 50, a wife’s property is neither “subject to her husband’s control or disposal nor liable for his debts.” By negative inference, under N.Y. Dom. Rel. Section 50, a husband would be liable for the debts of his wife. The question is whether, and how, this applies in a same-sex marriage.
As previously cited, N.Y. Dom. Rel. Section 10-a(2) provides:
…[w]hen necessary to implement the rights and responsibilities of spouses under the law, all gender-specific language or terms shall be construed in a gender-neutral manner in all such sources of law.
Applying this statute to N.Y. Dom. Rel. Section 50, would this mean that neither woman in a same-sex marriage would be responsible for the debts of the other? To the contrary, would this have the effect of treating both women as responsible for the other’s debts? The same questions could be asked of a male same-sex marriage.
Suppose that the answer to the above rhetorical questions is that both Lana and Pam are responsible for the other’s debts and that Pam has sufficient funds, owns the house where she and Lana reside and pays for all of their household bills and expenditures. The question becomes whether Ray must take Pam’s support obligations as to Lana into consideration when effecting a discretionary distribution to Lana. Since the trust is administered under Florida law, Lana wouldn’t be considered Pam’s spouse, and if there’s no spousal relationship, it’s questionable whether Ray can legally consider Pam’s support obligations.
Changing the Results?
Note that it may be possible to circumvent these results by changing the governing law of Lana’s trust. If either the applicable governing law of the trust or the trust language itself allows for the governing law to be changed, the trustee may consider a shift to a jurisdiction that recognizes same-sex marriage. Other factors, such as trustee qualification, federal and state income taxes and creditor’s rights, should be weighed before such a move could occur. Further, to effect such a move, Ray may have to notify the other beneficiaries, who could object in the event that their interests in Lana’s trust are impacted.
Court Guidance Needed
Absent a complete, across-the-board determination that all laws regarding the prohibition of same-sex marriage—both federal and state—are unconstitutional, fiduciaries administering trusts in states where such anti-recognition laws are effective must be cognizant of the issues facing trust beneficiaries who are parties to a same-sex marriage. Such concerns aren’t limited to when the same-sex spouse is a potential current or remainder beneficiary, but include the determination of a discretionary distribution to the beneficiary subject to a support obligation. The safest course of action for any such fiduciary is to turn to the appropriate court for guidance. This way, the fiduciary has the security of following a judicial mandate should a beneficiary question or object to the fiduciary’s actions.
1. Orders issued by the U.S. Supreme Court (SCOTUS) as 568 U.S., 12-307 and 12-144 (Dec. 7, 2012). For further procedural history for both cases and potential outcomes, see Frank S. Berall, “Same-Sex Marriage Update,” LISI Estate Planning Newsletter #2031 (Nov. 26, 2012) (Berall, LISI #2031) and George D. Karibjanian, “Windsor v. United States: Precursor to a Potential Supreme Court DOMA Showdown,” LISI Estate Planning Newsletter #2015 (Oct. 22, 2012).
2. For example, see Berall, LISI #2031.
3. Perry v. Schwarzenegger (referred to in the pertinent appellate opinion as “Perry IV”), 704 F. Supp.2d 921 (N.D. Cal. 2010).
4. Hollingsworth, et al. v. Perry, et al. 671 F.3d 1052 (9th Cir. Feb. 7, 2012); see also Berall, LISI #2031.
5. For example, see Florida Constitution Art. I, Section 27 and Fla. Stat. Section 741.212; Texas Constitution, Article 1, Section 32, Texas Fam. Title 1, Section 2.001 and Texas Fam., Title 1, Section 6.204; Ohio Revised Code
6. Florida and New York were selected for this example given the polar views on the topic within the laws of each state, with New York acknowledging same-sex marriage and Florida, both statutorily and constitutionally, refusing to do so. The examples also work in other similar states, that is, for the state of residency of the beneficiary, any of the other 10 previously cited jurisdictions acknowledging same-sex marriage, and for the state of administration and governing law of the trust, any of the states that globally don’t recognize same-sex marriage, such as Texas.
7. N.Y. Dom. Rel. Section 24(1) provides:
1. A child heretofore or hereafter born of parents who prior or subsequent to the birth of such child shall have entered into a civil or religious marriage, or shall have consummated a common-law marriage where such marriage is recognized as valid, in the manner authorized by the law of the place where such marriage takes place, is the legitimate child of both birth parents notwithstanding that such marriage is void or voidable or has been or shall hereafter be annulled or judicially declared void.
The application of this provision as to same-sex married individuals is created by N.Y. Dom. Rel. Section 10-a(2), which provides, in pertinent part:
2. No government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage, whether deriving from statute, administrative or court rule, public policy, common law or any other source of law, shall differ based on the parties to the marriage being or having been of the same sex rather than a different sex. When necessary to implement the rights and responsibilities of spouses under the law, all gender-specific language or terms shall be construed in a gender-neutral manner in all such sources of law.
N.Y. Dom. Rel. Section 10-a(2) causes N.Y. Dom. Rel. Section 24(1) to be interpreted as gender-neutral, thus legitimizing the children of a same-sex marriage as to both spouses.
8. See generally Fla. Stat. Section 742.10.