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IRS Issues Guidance for Tax Treatment of Estates of Same-Sex Married Couples

Contributors: Daniel Gelerman, Staff, Tax & Business Services & Michael Feinfeld, Manager, Tax & Business Services

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On January 18, 2017, the Internal Revenue Service ("IRS") published administrative guidance in Notice 2017-15, providing specific policy and procedures for retroactively changing the tax treatment of federal estate, gift and generation-skipping transfers (GST) in the estates of same-sex married couples whose marriages were not legally recognized prior to the United States Supreme Court's decision in United States v. Windsor.

Overview

The Notice describes IRS policy and techniques for seeking refunds or credits and restoring taxpayers' previously used estate/gift tax and GST exemption retroactively, by recognizing estate and gift transfers (outright or in trust) as qualifying for the marital deduction or generational reassignment for GST tax purposes after the Windsor decision.

Background

In United States v. Windsor, the Supreme Court declared as unconstitutional sections of the Defense of Marriage Act (DOMA) which required the interpretation of the terms "marriage" and "spouse" in all federal statutes as referring to unions between persons of the opposite sex and to a "husband and wife." Before Windsor, legally married same-sex couples had to use their estate/gift tax or GST tax exemptions in making gifts or death transfers to their spouse or spouse's family, since the marital deduction and GST marital generation assignment were unavailable to them. After Windsor, the IRS ruled that the marriage of same-sex couples in any state would be recognized for federal tax purposes and that such couples could file amended returns or refund requests.

The Marital Deduction

The unlimited marital deduction's deferral of estate and gift tax until the death of the surviving spouse is an essential estate planning and preservation tool previously denied to spouses of same-sex marriages. This notice provides instructions on how to seek relief from the denial of the marital deduction in prior years. Couples may now seek a refund or credit (if the limitations period has not expired) or a recalculation of previously used estate/gift tax exemption by filing an estate or gift tax return or an amended or supplemental return, together with a statement claiming the marital deduction and a recalculation of the exemption amount. A separate application must be filed with the revised return if an election for a marital trust (e.g., a QTIP trust or QDOT) is necessary to receive the marital deduction.

The GST Exemption

Same-sex married couples may now establish generational relationships for GST tax purposes via familial relationships that recognize their marriage and assign their spouse as being in the same generation. Notice 2017-15 allows an adversely affected same-sex couple to seek a refund or credit for paid GST taxes (if within the period of limitations) and/or to recalculate the amount of a decedent or transferor's GST tax exemption on a gift or estate tax return in the same manner as it does for the retroactive application of the marital deduction.

If you have any questions related to the provisions of this Notice, or the impact of the United States v. Windsor decision on your marriage, please contact your Marcum tax professional for assistance.

 
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