The Windsor Decision – One Year Later

One year ago this month, Edie Windsor won her case in the U.S. Supreme Court, securing a refund from the IRS of the $363,000 estate tax bill that she paid upon the death of her spouse (and partner of more than 42 years) Thea Spyer. The tax would not have been due had the couple’s marriage been federally recognized. The Court’s decision in United States v. Windsor paved the way for surviving spouses to claim the federal estate tax marital deduction on property inherited from a same-sex spouse.

But United States v. Windsor is more than an estate tax case. It has been hailed as one of the most important civil rights cases of our time, with far-reaching effects in every corner of federal law pertaining to families. Until the Windsor decision was issued, DOMA’s Section 3 limited federal recognition of marriage to those marriages between a man and a woman. In the 5-4 opinion authored by Justice Anthony Kennedy, the Court struck down Section 3 as unconstitutional, requiring the government to treat same-sex spouses and opposite-sex spouses equally for all purposes under federal law.

Implementation of the Ruling

Although the concept of equal treatment is straightforward, implementing Windsor has proven to be anything but simple. Since Windsor, the Obama administration has worked toward expunging Section 3’s effect from “every federal law, rule, policy and practice in which marital status is a relevant consideration,” according to a report issued by Attorney General Eric Holder earlier this month.

Over the past year, dozens of federal agencies have grappled with complex legal issues in implementing Windsor, such as how far back a same-sex marriage must be recognized (retroactivity), whether legal marriages should be recognized based on the state in which the couple was married or the state in which they live (“state of celebration” vs. “state of domicile” rule), and whether federal or state law should govern federal benefit programs administered by the state (choice of law).

Due to widely differing state laws related to the recognition of same-sex marriage – 19 states and the District of Columbia allow same-sex marriage, while 31 states do not – the impact of Windsor has not been uniform, even across federal law. For example, if a couple were legally married in Washington state in 2012 but now lives in Arizona, they would be treated as married by the IRS for federal tax purposes but would not be eligible for Social Security spousal benefits. But despite the ongoing challenges, dozens of federal agencies have rolled out guidance over the past year as to how they will implement Windsor, and several answers are now available. Some highlights include:

Federal Taxes:  The IRS will recognize same-sex marriages lawfully performed in any state or foreign jurisdiction for all federal tax purposes no matter where the couple lives (“state of celebration” rule). See Revenue Ruling 2013-17. In the estate tax realm, same-sex spouses may now take advantage of planning options such as the marital deduction, portability of a deceased spouse’s unused exclusion amount, the double-step-up in basis for community property assets, QTIP trust planning, and lifetime tax-free gifting between spouses. On the income tax front, the IRS now requires same-sex married couples to file as “married” – whether jointly or separately – from tax year 2013 forward. See IRS publication titled Answers to Frequently Asked Questions for Individuals of the Same Sex who are Married under State Law. While this may simplify tax filings for same-sex spouses, particularly in community property states, such as Washington, where complex income-splitting rules used to apply, the income tax result will likely be different. Couples may experience a marriage “penalty” or marriage “bonus,” depending on each couple’s specific situation.

Immigration:  Department of Homeland Security and the U.S. Citizen and Immigration Services (USCIS) have announced that lawful same-sex marriages will be treated as valid for U.S. immigration law purposes no matter where the couple lives (“state of celebration” rule). See USCIS, Same-Sex Marriages. This means that U.S. citizens and lawful permanent residents can now file petitions to sponsor their same-sex spouses for family-based immigration visas, and similarly can file petitions based on engagement to a person of the same sex. All other immigration benefits conditioned on marriage or status as “spouse” can now include same-sex marriages. Additionally, USCIS is also reopening all previously denied immigrations petitions and applications denied solely because of Section 3 of DOMA.

Social Security: The Social Security Administration (SSA) will extend social security retirement benefits to same-sex spouses, but only if the individual who paid into Social Security is domiciled in a state that recognizes the marriage at the time of the application, or while the claim is pending (“state of domicile” rule). See Program Operations Manual System, Same-Sex Marriage – Benefits for Aged Spouses. The “state of domicile” rule applies in the context of Social Security as well as in the context of Veterans’ benefits because a federal statute requires SSA and Department of Veterans Affairs (DVA) to extend marriage-related benefits based on the law of the state in which the married couple resides or resided. A handful of bills have recently been introduced in the legislature to change this, including the Social Security and Marriage Equality Act introduced by Senators Mark Udall and Patty Murray, but until such legislation is passed, the “state of domicile” rule will likely continue to be applied by SSA and DVA.

On another note, SSA has indicated that it will process claims involving non-marital legal relationships – such as a domestic partnerships or civil unions – if the state law in which the couples resides allows the claimant to inherit from his or her partner on the same terms that a spouse could inherit. See Social Security – Same Sex Couples, Important Information for Same-Sex Couples; and Processing Instructions, Non-Marital Legal Relationships. This may be a significant consideration for non-married couples in deciding whether to wed – even in marriage recognition states such Washington, which allows domestic partnerships for couples with at least one partner over the age of 62 and confers spousal inheritance rights on such partners under state law. The SSA is encouraging such couples to apply for benefits.

IRAs and Qualified Retirement Plans:  The IRS’s “state of celebration” rule extends to retirement plans such as 401(k) plans (also referred to as “qualified retirement plans”) and IRAs. See IRS Notice 2014-19. Same-sex spouses can now take advantage of the spousal rollover rules allowing them to roll their deceased spouse’s 401(k) plan or IRA into their own IRA and treat it as their own, which often results in stretching out the tax deferral benefits inherent in such plans. Same-sex spouses should also be aware that “spousal consent” rules apply – for example, in situations where a spouse wants to leave the retirement plan benefit to someone other than the spouse, or when a spouse wants to take a loan against their 401(k), the other spouse must consent in writing. Spouses may need to update beneficiary designations to ensure these rules are complied with.

Windsor’s Momentum Continues

A year after the Court’s decision in Windsor, the case’s momentum is still strong. According to Freedom to Marry, litigation is underway in all 31 states in which same-sex marriage bans still exist. In the past week, the U.S. Court of Appeals for the Tenth Circuit ruled that state same-sex marriage bans are unconstitutional – an issue that was sidestepped by the Supreme Court in Windsor’s companion case, Hollingsworth v. Perry. Meanwhile, on June 27, 2014, two just two days after a U.S. District Court’s decision struck down a same-sex marriage ban in Indiana, the U.S. Court of Appeals for the Seventh Circuit issued a stay of the District Court’s ruling, putting a halt to same-sex marriages in Indiana. The U.S. Supreme Court will likely be asked to rule upon the issue of a state’s right to ban same-sex marriage again soon.

Finally, change continues to be afoot even here in the state of Washington, which has recognized same-sex marriage since 2012. Today, June 30, all Washington state domestic partnerships – with some limited exceptions – will automatically turn into marriages. This time of change means that the legal landscape – even those in marriage recognition states like Washington – is still in a state of flux for same-sex spouses.

We at Amicus Law Group, PC, are committed to staying up to date on these important issues and assisting our clients with navigating their estate, tax and business planning to their greatest advantage with all of these developments in mind.

Alison J. Warden is an estate planning and tax attorney with Amicus Law Group, PC. Amicus is a law firm in Seattle, Washington that focuses on tax planning and compliance, estate planning, business planning, tax controversy, and self-directed IRA consulting. Alison can be reached at alison@amicuslawgroup.com