Here's a very interesting estate planning case involving a lesbian couple and estate tax.
But before we go into the facts, let's break down some quick estate tax concepts, so that you can understand the story.
Brief primer on estate tax. Estate tax is a tax levied on the estate of a dying person. So once a person dies, all of his or her assets are valued. If her assets have a value over the estate tax limit, then the estate must pay estate tax from the assets. For 2012, the estate tax limit is $5.12 million and for 2013, it's still TBD, but will likely be $1 million.
Estate tax marital deduction. Under the laws of estate tax, an estate can avoid paying tax in its assets if all of the assets are gifted to a surviving spouse who is a citizen of the United States.
Now, going into the facts of the story — Edie Windsor and Thea Spyer were a couple for 44 years. They were legally married in Canada in 2007, and Spyer passed away shortly after.
The marital deduction didn’t apply to Spyer’s estate, when the IRS came knocking. So everything Spyer left to Windsor was taxed. So, Edie Windsor took her estate tax problems to the American Civil Liberties Union, who helped her file a lawsuit for a tax refund.
The IRS helld the position that a same-sex couple wasn’t considered married, under the Defense of Marriage Act (DOMA). But here’s the thing — DOMA might be on its way out. It was ruled unconstitutional by the Second Circuit Court of Appeals earlier this year. The Second Circuit Court of Appeals is the federal appeals court that hears cases in New York.
In considering Edie Windsor’s case, the Second Circuit found that it was unconstitutional for the IRS to discriminate against her marriage. So, in the end, she was allowed to take a tax deduction and she got her tax refund.
What does that mean for New Yorkers who are planning their estates? Same-sex couples in New York who are legally married can go ahead and give their entire estate to their surviving spouse — tax free, just like every other married couple in the state.
- Search Directory of New York Estate Planning Lawyers (FindLaw)
- Beware of Formula Clauses and Estate Tax Uncertainty (New York Estate Planning News)
- Estate Tax Law (FindLaw)