On Nov. 20, 2013, Illinois Governor Pat Quinn intends to sign the Religious Freedom and Marriage Fairness Act (the Act), which grants marriage equality to all residents of Illinois. At that time, Illinois will join just 14 other states and soon Hawaii in legalizing same-sex marriage. Same-sex couples that choose to marry in Illinois will be granted rights, privileges and responsibilities that significantly impact trust and estate planning.
Federal Law
In United States v. Windsor, the U.S. Supreme Court recognized same-sex marriage and declared unconstitutional the federal definition of marriage as a legal union between one man and one woman. The Supreme Court further instructed the federal government to defer to a state’s definition of marriage. This ruling set the stage for marital equality. Subsequently, in Revenue Ruling 2013-17, the Treasury Department announced that same-sex couples legally married in any jurisdiction will be treated as married for federal tax purposes, regardless of whether the marriage is recognized in the state where the couple is domiciled.
Illinois Law
The Act recognizes all marriages of same-sex couples occurring in Illinois after June 1, 2014. Under the Act, all Illinois laws relating to marriage apply equally to marriages between heterosexual couples and same-sex couples. The Act also amends the Illinois Marriage and Dissolution of Marriage Act to:
− Redefine “marriage” as a union between two persons (instead of a man and a woman);
− Remove the prohibition on marriages between two people of the same sex;
− Recognize same-sex marriages entered into in other states; and
− Permit same-sex couples currently in civil unions to convert the unions to marriages, which will be effective as of the date the couples entered into the civil union if converted prior to June 1, 2015. Civil unions converted after this date will be effective as of the date they’re converted to a marriage.
Same-sex couples currently in civil unions can remain in those unions, and couples desiring to enter into civil unions may still do so after the Act. However, under current law, a civil union doesn’t confer federal benefits and only provides certain state benefits to the couple. A same-sex couple who lives in Illinois, but has married in another state, currently receives both federal and state benefits as the marriage is recognized by the federal government and also deemed an Illinois civil union. As of June 1, 2014, same-sex couples married in Illinois also will receive federal and state rights and benefits.
Estate-Planning Opportunities
Gift taxes. Married heterosexual spouses have long enjoyed special rights to transfer property tax free to a spouse in accordance with the unlimited gift tax marital deduction. The federal recognition of marriages will allow same-sex couples married in Illinois to take advantage of the marital deduction and transfer property between themselves without paying a transfer tax or using valuable gift tax exclusions or exemptions. This will allow same-sex couples to minimize transfer tax and preserve exemptions for other estate planning transactions.
Same-sex spouses married in Illinois also can split gifts for federal transfer tax purposes. This means that gifts can be treated as made one-half by each spouse regardless of which spouse actually makes the gift. The ability to split gifts allows a couple to maximize the use of available gift tax exclusions and exemptions.
Unlimited marital deduction and estate taxes. Transfers between same-sex couples at death were previously subjected to estate tax if the value of the deceased spouse’s estate exceeded the amount of available transfer tax exemption. As of June 1, 2014, same-sex spouses married in Illinois can pass any amount of property to each other at death without incurring an estate tax. The property can pass either outright to the surviving spouse or to certain types of qualifying trusts. These transfers will qualify for the marital deduction and defer the estate tax liability until the death of the surviving spouse. Same-sex spouses married in Illinois also can take advantage of portability rules, which allow a surviving spouse to claim a deceased spouse’s otherwise unused transfer tax exemption. The portability rules preserve tax benefits and may reduce tax burdens on the combined estates.
Retirement plan benefits. Spouses are granted special rights with respect to retirement plans. A spousal individual retirement account rollover allows the surviving spouse to defer the income tax liability associated with the retirement plan and, in some cases, avoid the mandatory distribution of the plan in a period that can be as short as one year. Spousal consent is also required to name a person other than the spouse as beneficiary of certain retirement plans. This requirement protects spousal rights and was previously unavailable to unmarried same-sex couples.
Tenancy by the entirety. In accordance with the Act, same-sex spouses married in Illinois can hold title to a residence as tenants by the entirety. This type of ownership provides the benefits of joint tenancy and protects the property from the creditor(s) of each spouse. In addition, neither spouse may transfer or convey an interest in the property without the consent of the other.
Elective share. A surviving spouse has certain inheritance rights, including the right to renounce the deceased spouse’s will under 755 ILCS 5/2-8. As of June 1, 2014, same-sex spouses married in Illinois can invoke this right to claim an interest in a deceased spouse’s estate.
Estate-Planning Considerations
After June 1, 2014, Illinois documents that don’t define the term “spouse” will include spouses of a same-sex marriage. Accordingly, same-sex spouses will be accorded full rights of a spouse under many estate-planning documents, including as beneficiary of a trust, as a permissible appointee of a power of appointment and as a fiduciary or successor officeholder. The Act, however, doesn’t apply to documents that define the term “spouse” or those documents governed by the laws of other states. To avoid unintended consequences, individuals should proactively address family relationship definitions in estate-planning documents. Similarly, existing irrevocable documents may be unclear with respect to the treatment of same-sex spouses, and it may be desirable to seek a court modification or interpretation of the governing instrument. To preserve grandfathered tax characteristics, care must be taken when construing trust terms and provisions.
Marriage equality has changed the definition of family. Individuals who reside in Illinois or have estate-planning documents governed by Illinois law should review the impact of these changes on their documents and consider additional planning opportunities.
The authors would like to thank Nicole M. Pearl, a partner in the Los Angeles office of McDermott Will & Emery LLP, for her contributions to this article.