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Practice after the DOMA opinion: All questions, no answers for estate planners

The U.S. Supreme Court’s landmark decision in U.S. v. Windsor, striking down part of the federal Defense of Marriage Act, has same-sex marriage advocates cheering and opponents re-grouping.

Estate planning attorneys, meanwhile, are left scratching their heads.

Despite the momentous nature of the decision, the immediate impact on same-sex couples in the state of Virginia remains uncertain.

In Windsor, the court, 5-4, held that Section 3 of DOMA, defining marriage as the union of man and woman, was unconstitutional. But the justices specifically left Section 2 of the Act untouched, which allows states not to honor valid same-sex marriages performed in other jurisdictions, explained Joshua S. Rubenstein of New York.

Because of Virginia’s 2006 constitutional amendment limiting marriage as between one man and one woman, therefore, not all federal benefits – which sometimes turn on state law – will be available to same-sex couples in the state.

“We are left with many, many more questions than answers right now,” Rubenstein said.

Melanie Lee of Richmond said she certainly won’t advise her same-sex clients to marry in another state and then return to Virginia. “That’s a little premature,” she said.

Estate planners should be prepared to face a lot of questions from same-sex clients as well as continuing change as the various state and federal agencies begin to work through issues and legal challenges.

“This is such an important, watershed decision but we are left wondering – what does it mean for us in Virginia?” asked Richmond attorney Ashley Payne.

Now what?

The Windsor case was itself an estate planning decision.

Thea Spyer and Edith Windsor married in Ontario, Canada, in 2007. When Spyer died in 2009, she left her entire estate to Windsor.

Windsor sought to claim the federal estate tax exemption for surviving spouses but was blocked by Section 3 of DOMA, which defined “marriage” for the purpose of federal laws and regulations as only “a legal union between one man and one woman as husband and wife.”

She paid $363,053 in estate taxes and then sought a refund, which was denied by the Internal Revenue Service.

Windsor then filed suit challenging the constitutionality of Section 3, arguing that it violated the Equal Protection clause of the Fifth Amendment.

The 2nd U.S. Circuit Court of Appeals agreed with Windsor, and Justice Anthony M. Kennedy, writing for the majority, affirmed that Section 3 is unconstitutional.

“DOMA’s principal effect is to identify a subset of state sanctioned marriages and make them unequal,” he wrote.

The immediate effect of the decision is to make federal benefits – such as Social Security – available to legally married same-sex couples, albeit with some caveats.

President Obama has directed the Department of the Treasury to work through each of the more than 1,100 federal benefits for an individual assessment to determine which may be impacted by state law.

“This is going to evolve over time,” Rubenstein said. “This will be a benefit-by-benefit issue and very hard to predict,” with infinite variables such as residency and applicable state laws.

For example, in the context of immigration, the law where the couple was married trumps, not the law where the couple currently resides, he said, meaning a same-sex spouse legally married in Canada but living in Virginia can apply for a green card based on the marriage.

On the other hand, whether or not a married same-sex couple can now file a joint federal tax return in a state that does not recognize gay marriage remains an open question.

Filing federal tax returns is based on domicile. But the IRS doesn’t have a statute or regulation in place requiring this approach and in fact recognizes the validity of a common law marriage for couples that reside states that do not accept such unions.

What that means for same-sex couples in Virginia is the real possibility of filing joint federal returns, explained Tamara E. Kolz Griffin, co-associate director of the Estate Planning Clinic at Harvard Law School.

“We are expecting guidance from the IRS on this issue and hoping that it will recognize the state of celebration” rather than residency, she said, which would be consistent with the holding in Windsor.

In a mobile society, a married couple living in Massachusetts filing joint federal returns should not then move to Virginia and be forced to file singly in light of the court’s decision that valid same-sex marriages should be recognized by the federal government, Griffin argued.

She said guidance from the IRS on the issue is expected later this year in time for 2013 tax filings.

In addition to tax filing status, other tax-related questions remain for same-sex couples. Filing jointly may implicate issues like the earned income tax credit and the exclusion of gain from the sale of a principal residence. Tax issues tied up in the divorce of a same-sex couple may also arise for the transfer of property, spousal support or IRA transfers.

Planning for change

With unanswered questions swirling, one thing remains clear: the importance of estate planning for same-sex couples, Payne said.

If an individual wants to leave his or her property to a same-sex partner, a will is essential as intestacy laws create the presumption of property passing to the closest blood kin. “For many of my same-sex couples, that is the last place they want their property to go,” Payne said, as family members may have ostracized them for their same-sex relationship.

Susan McMakin of Richmond said she treats same-sex clients like an unmarried heterosexual couple, with separate individual estate plans for each, naming the partner as the beneficiary of the estate and related insurance or benefit plans.

Particularly for older clients, Lee emphasized the importance of planning ahead for medical needs. Designating a same-sex partner using an advanced health care directive can eliminate a lot of problems later by allowing access to a sick partner and the ability to make health care decisions in the event of incapacitation.

Above all, estate planners should be prepared for change as the patchwork of applicable benefits and various state laws play out.

Future litigation is all but guaranteed. Areas ripe for litigation include a challenge to IRS policy if it limits joint filing status to states recognizing same-sex marriage as well as attempts to remove Virginia’s constitutional amendment.

The court’s rationale in striking down Section 3 of DOMA “as a violation of the Due Process Clause of the Fifth Amendment opens the door to Fourteenth Amendment challenge of states’ laws prohibiting same-sex marriage,” Payne predicted.

States that recognize same-sex marriage face their own mountains of questions. Could a same-sex couple argue that because DOMA was declared unconstitutional, they should be allowed to retroactively re-file federal taxes jointly? Or could a spouse seek to recover federal taxes paid on an estate for a deceased spouse who passed away, similar to the facts in Windsor?”

For Virginia Beach’s Neil Rose, the decision is really a call for estate planners to return to the basics.

“What it really says is that estate planners need to talk to their clients, understand their situation and plan accordingly,” he said.

“From a simple perspective when you talk about rights you have a right to leave your property to whoever you want and name whoever you want to be your agent under power of attorney or your agent on an advanced medical directive.”

While Windsor certainly signals a sea change, it won’t be the end of the story, Rose added.

“Continue to be alert about changes in the law, find out from your client what they are trying to achieve and draft accordingly.”

Related article: Practice after the DOMA opinion: Court’s decision could affect employers on several fronts

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