On June 26, 2013, the U. S. Supreme Court (the Supreme Court) issued its decisions in the cases of Windsor v. United States and Hollingsworth, et. al. v. Perry et al., thus ending the judicial fight of the validity of the federal “Defense of Marriage Act,” (DOMA) and ending “Round 1” of the judicial fight regarding comparable state law statutes and constitutional provisions.
Windsor Holding
Following the lead of the U.S. Court of Appeals for the Second Circuit Court, the Supreme Court, by a 5-4 majority, affirmed the Second Circuit’s opinion and held that DOMA is unconstitutional as a deprivation of the equal liberty of persons that’s protected by the Fifth Amendment to the U. S. Constitution. As a result of the Windsor decision, the federal government is prohibited from placing any classification on the recognition of marriages. The Supreme Court held that marriage is a state issue, and interpretations and classifications thereof must be left to the states.
Perry Holding
In a move anticipated by some, by a 5-4 opinion, the Supreme Court stated that the Perry appellants (who were involved with the “Proposition 8” voters’ initiative to prohibit same-sex marriage, but weren’t representing the interests of the state of California) didn’t have (U.S. Constitution) Article III standing to appeal the Northern District of California’s order striking down Proposition 8 and therefore were able to avoid a discussion on the merits of the case. The key comment from the opinion is that the injured party (that is, the California) – and only the injured party – may assert its rights in a federal proceeding.
What This Means
The two decisions may be considered to be a “split-decision” on the subject of same-sex marriage – whereas federal DOMA has been deemed to be unconstitutional, the Supreme Court effectively decided (through its lack of standing argument) that with respect to state law, the same-sex question is best left to the individual states.
For federal purposes, same-sex married couples are now treated the same as opposite-sex married couples. This means that many federal benefits afforded to married individuals are now legally available to same-sex married couples. In the estate-planning arena, such benefits include, but aren’t limited to, filing joint income tax returns; claiming the marital deduction for gift and estate tax purposes; naming the spouse as the beneficiary under a qualified retirement account and allowing the spouse “roll over” the account into his own account, thereby potentially extending the ultimate payout of the account; electing portability of the deceased spouse’s unused applicable exclusion amount; simplifying the basis and contribution rules with respect to jointly owned property; splitting of inter-vivos gifts; eliminating adverse tax consequences for the transfer of property pursuant to a marriage settlement agreement; and granting certain social security, Medicare and Medicaid benefits.
Interestingly, because DOMA is deemed to be unconstitutional, technically same-sex married couples have always been treated the same as opposite-sex couples because a statute that is determined to be unconstitutional is deemed to be void ab initio, that is, void from the outset. For those married same-sex couples who may have paid less in federal taxes in prior years had they been permitted to file joint federal income tax returns or claim the marital deduction on the death of a spouse, it’s anticipated that such taxpayers will be filing amended tax returns as soon as possible. There may be some taxpayers, however, for whom the ability to file amended tax returns may be closed due to the passage of the applicable statute of limitations. For these taxpayers, it would seem unlikely that either Congress or the Internal Revenue Service would allow for an exception to the limitations period as a result of the Windsor opinion. Rather, such taxpayers will likely have to proceed through judicial means to attempt to re-open the applicable limitations period.
As a result of the Supreme Court’s “lack of standing” dismissal of Perry, essentially the issue of same-sex marriage on a state law level is left to the individual states. A state’s stance on same-sex marriage has a major effect on certain state law rights of a same-sex married couple. For example, if a legally married same-sex couple switches their domicile and residence to a state, such as Florida, which not only prohibits same-sex marriage, but also expressly refuses to recognize a same-sex marriage from another jurisdiction, the couple will be sacrificing several important state law marital rights such as tenancy-by-the-entirety, homestead protection (when applicable), elective share rights, spousal retirement benefits and spousal governmental benefits.
The parties to a same-sex marriage aren’t the only ones affected by Perry. For example, consider the scenario under which a trust is governed under the laws of a state that doesn’t recognize same-sex marriage, but under which a beneficiary is a party to a same-sex marriage, and the trust contains certain provisions with respect to the beneficiary’s spouse. The trustee of the trust has no clear guidance with respect to whether the provisions of the trust apply to the same-sex spouse. This can affect property passing by trust to the same-sex spouse or others, including the spouse’s descendants, as current property recipients, takers under a power of appointment or as remaindermen. As a result, the trustee is likely to bring the interpretation matter to the court for resolution and may face opposition from other beneficiaries who would stand to receive property if the “spouse” weren’t deemed to be a “spouse” under the trust’s governing law.
To Be Continued
While the federal battle for recognition has ended, the judicial fight within the states continues. Practitioners must be aware of a client’s family relationships and, if the client or a member of the client’s family is a party to a same-sex marriage, special attention must be given, especially with respect to the use of specific terms within the planning documents (that is, it would be helpful to include a definition of formerly innocuous terms such as “spouse” and “descendant” to override any potential non-recognition issues).