On June 24, 2011, New York joined Connecticut, Iowa, Massachusetts, New Hampshire, Vermont and Washington, D.C., to become the seventh jurisdiction in the nation to permit same-sex marriages. The Marriage Equality Act (“the Act”), which went into effect on July 24, 2011, is having a significant impact on tax and estate planning for New York residents who are parties to same-sex marriages.
Section 3 of the Act simply provides that a marriage is valid regardless of whether the parties to the marriage are of the same or different sex. Even though many New York statutes have changed to be gender neutral, the statement of legislative intent in Section 2 of the Act, makes a very succinct point:
New York’s Estates, Powers and Trusts Law (“EPTL”) contains a number of provisions that give special rights to surviving spouses. For example, if an individual dies without a will, his or her surviving spouse is entitled to receive the deceased spouse’s entire estate if there are no surviving issue or $50,000 and one-half of the remaining estate if there are surviving issue. A surviving spouse also has the right to elect to take one-third of the assets of his or her deceased spouse regardless of what the provisions of the deceased spouse’s estate plan provide. The legislative intent above makes it clear that whether all the statutes in the EPTL governing these rights have been changed to gender-neutral or not, they are to be considered gender-neutral.
Before the Marriage Equality Act, there was some judicial precedent for extending the benefits of these provisions to the surviving spouses of same-sex marriages. The Act now provides a statutory basis for this extension. But make no mistake, whether it be a same-sex relation or a different-sex relation, these benefits do not extend to unmarried couples, no matter how long the relation existed.
The application of the New York tax rules to same-sex married couples becomes very complicated because of the fact that federal tax law does not recognize same-sex marriages. For most income and estate tax purposes, New York tax law follows federal tax law. Under the Defense of Marriage Act (DOMA), the federal law provides:
New York law requires that a “husband or wife” file state tax returns in the same manner as they file their federal returns. Federal non-recognition of same-sex marriage prohibits same-sex couples from filing federal joint returns. This means that individuals in same-sex marriages would be required to file federal tax returns separately and to calculate their taxable incomes as if they were unmarried. The New York State Department of Taxation and Finance announced that same-sex married couples can and must file New York personal income tax returns as married individuals even though they were required to file separate federal returns.
This announcement provides various New York income tax benefits to same-sex couples. These benefits include: pooling and splitting income, as well as deductions, potentially saving the higher-earning spouse from entering a higher tax bracket and allowing one spouse’s deductions to the income of the other; lower tax rates for some married couples, depending on how much income is earned by each; and deductions that are available only to married individuals who file a joint return. This also forces same-sex married couples to calculate and file very different returns, one for New York and another for the IRS.
New York’s estate tax is also based on federal tax principles. A New York decedent’s taxable estate is the same as his or her federal taxable estate. The federal estate tax law permits a decedent’s estate to deduct from the value of his or her taxable estate the entire value of the property given to his or her spouse so long as that spouse is a U.S. citizen. This is commonly referred to as the unlimited marital deduction. In addition, the estate is permitted to exclude from the value of the gross estate 50 percent of the value of property held jointly with his or her spouse. Federal non-recognition of same-sex marriages denies these benefits to the estate of a decedent who was a party to a same-sex marriage.
Federal non-recognition could have meant that such estates would also lose these benefits for purposes of calculating their New York estate taxes. Because the federal estate tax is currently imposed only on estates worth more than $5 million and the New York estate tax is imposed on estates with values greater than $1 million, the loss of New York estate tax benefits would likely have had a far greater impact on most same-sex couples than the loss of the federal benefits. This will have a much more devastating effect as of 2013 if the federal exemption returns to $1 million.
Again, the New York State Department of Taxation and Finance resolved the filing conflict by requiring that the estate of a New York decedent who was a party to a same-sex marriage compute his or her taxable estate in the same way as a married individual. This is even though they are not permitted to file the federal return as the estate of a married individual. As with the income tax filing discussed above, this greatly complicates the different filings for New York versus for the IRS.
Federal Gift, Income and Estate Tax
Because DOMA prevents treating same-sex married couples as married for purposes of any federal law, married same-sex couples will continue to be treated as separate units for federal income taxation purposes, and will not enjoy spousal rights and privileges under federal estate tax laws. In addition, they will not be able to avail themselves of gift-tax benefits afforded to married individuals, such as gift splitting, which enables a married individual to double the amount of their tax-exempt gifts ($13,000 for individuals versus $26,000 for married couples), and unlimited gift-tax free transfers between spouses when the recipient spouse is a U.S. citizen.
Hopefully there is a light at the end of the tunnel. President Obama announced last February that his administration would no longer defend the constitutionality of DOMA as well as a recent introduction of a Congressional bill to repeal DOMA. A judicial or legislative repeal of DOMA would give New York same-sex married couples the same privileges under the federal tax laws that are allowed to different-sex married couples. Unfortunately, for now, under DOMA and the federal law, same-sex couples will not be able to enjoy over 1,000 various rights that different-sex couples have, from gift, income and estate tax benefits to spousal Social Security benefits. Because of this dichotomy between the federal and state laws, any married, same-sex couples should seek the advice of not only an estate planning attorney, but that of a qualified accountant as well.