In a recent landmark decision, the U.S. Court of Appeals for the Second Circuit (New York) ruled in favor of 83-year-old widow Edith Windsor, finding that the Defense of Marriage Act (DOMA) was unconstitutional.  In becoming the second federal circuit court to reach this conclusion, the Second Circuit identified Section 3 of DOMA as violating the equal protection clause.  Section 3 contains the much-debated definition of marriage as being between one man and one woman and has been the target of every successful DOMA challenge.

Facts

Edith Windsor married her partner of 40 years, Thea Spyer, in Toronto in 2007. Spyer died in New York in 2009.  At this time, though same-sex marriage was not yet legal in the state, New York did recognize same-sex marriages legally performed in other jurisdictions.  After Thea’s death, Edith owed no state estate tax on her inheritance, because, under New York state law, outright transfers to a surviving spouse aren’t taxable.  However, she received a federal estate tax bill of over $363,000, because her marriage wasn’t federally recognized.  Edith sued for a refund on this amount, challenging the constitutionality of the definitions of “marriage” and “spouse” presented in section 3 of DOMA.  The U.S. District Court for the Southern District of New York ruled in favor of Edith in June 2012.  The government appealed and lost.

What It Means

This decision is particularly notable due to the court’s holding that laws that classify people based on sexual orientation, like DOMA, should be subjected to a heightened form of scrutiny when examining the government’s claimed reasons for enacting such laws.  No court has previously applied “intermediate scrutiny” in its analysis of DOMA.

However, same-sex married couples should take heed before lining up to revise their estate plans in anticipation of new rights on the back of this decision.  A long fight still remains.  George D. Karibjanian, senior counsel in the Personal Planning Department at Proskauer, in Boca Raton, Fla. explains:

Right now, estate planning for same-sex married couples is still in limbo, because it’s anticipated that the Windsor opinion will not be citable as precedent until the U.S. Supreme Court hears the issue. Until then, same-sex couples are advised that the IRS will not recognize these court decisions as they still deem DOMA to be governing law.

Though Windsor is the second case in which a circuit court has struck down DOMA, it’s the most likely candidate to be granted certiorari, as the previous decision, Gill et al. v. Office of Personnel Management, 682 F.3d 1 (1st Cir. 2012), would involve a potential recusal, stemming from then-Solicitor General Elena Kagan’s involvement in that litigation.

So, how should advisors proceed?  According to Karibjanian, here are some points to consider:

  • In accordance with Internal Revenue Service guidance issued during the week of Oct. 8, 2012, same-sex married couples shouldn't file any tax forms claiming their status as “married.”   Any attempts to do so under current law will most likely be rejected.  It may be advisable to proactively inform your same-sex married clients of this fact before an innocent mistake is made.
  • In many cases, filing an income tax return as a married couple can produce a smaller tax.   If DOMA is overturned, a same-sex married couple may be able to amend prior income tax returns to change their filing status to “married” and obtain a refund for overpaid taxes.  However, the ability to amend prior returns is limited to only those returns filed in the past three years.  The passage of time may prevent returns that could be amended today from being amended in the future if DOMA is overturned.  Fortunately, the IRS allows taxpayers to file forms that designate certain returns as amendable beyond this deadline.  Advisors should discuss these forms with any same-sex married clients.
  • For estate planning purposes, if a same-sex married couple would have different dispositions if the applicable tax laws treat them as being married, you may wish to recommend that they include alternate plans within their estate planning documents.  For example, one provision to apply if they are considered to be married and the other to apply if they aren’t.  Be sure to take extra time in explaining the ramifications of this course of action with your clients, as the respective clauses can create wildly divergent estate plans within the same set of documents based on which law is in effect at the time of death.

As more and more courts find DOMA unconstitutional, it’s become an inevitability that the U.S. Supreme Court will have to address the issue of same-sex marriage in the very near future.  However, there’s no guarantee that the Supreme Court will strike it down as well.  As advisors, the best we can do is to try and temper our same-sex married clients’ excitement and craft an estate plan that both protects them and puts them in the best position to capitalize on a possible positive outcome.