Supreme Court hears two days of oral arguments on the constitutionality of DOMA in an estate tax case

The United States Supreme Court, in the estate tax case of Windsor v. U.S., is considering the constitutionality of the Defense of Marriage Act (DOMA).  It is a highly anticipated case and is considered such a landmark important case that the Court heard two days of oral argument. The case concerns a surviving same-sex spouse who is seeking an estate tax refund.  An estate tax was paid because assets were left to a same sex spouse and the Internal Revenue Code under DOMA requires that no marital deduction is available for the estate. Although DOMA is not generally a tax law, it carries tax consequences for same-sex couples by requiring that they be treated as unmarried for Federal law purposes. The Court's decision may potentially have a major impact on the administration of the IRC.

By way of background, in 1996, Congress enacted, and President Clinton signed DOMA which in Section 3 defines marriage as the “legal union between one man and one woman as husband and wife.”

 

The district court and the Second Circuit Court of Appeals both found in favor of the Taxpayer and ruled the provision of DOMA requiring a man and a woman for a marriage to be unconstitutional. 

 

While waiting to see if the Supreme Court follows the lower Courts, it is generally recommended that same-sex couples in domestic partnerships or civil unions or marriages file protective claims for refund in the event that DOMA is invalidated.  The impact of the decision may affect income tax as well so stay tuned for the result of what could be a monumental decision.

 

 

The American Taxpayer Relief Act of 2012 (“ATRA 2012”) made substantial estate, gift and generation skipping changes and these changes are ostensibly permanent.  These changes are summarized as follows:
The exemption amount is now $5 million per person, indexed for inflation after 2011. (For transfers in 2013, the exemption is $5.25 million.)  The rate of tax is a flat 40% above the exemption.  Portability is preserved meaning if the surviving spouse files a timely election on the Estate Tax return of the first spouse to die, the surviving spouse inherits any unused portion of the exemption from the predeceased spouse.
There are still many opportunities for tax reduction including using grantor retained annuity trusts (“GRATs”) and discounting through family limited partnerships (“FLPs”) and family limited liability companies (“FLLCs”).
According to a recently issued Congressional Research Service (CRS) report these “permanent” changes may be changed soon. It notes that there are some lingering proposals to crack down on perceived abuses.  These changes include:
GRAT reform - A proposal would impose a minimum annuity term of 10 years, disallow any decline in the annuity, and require a non-zero remainder interest. 
FLP and FLLC reform - Another proposal would disallow discounts for interests in FLPs and FLLCs. Courts will generally allow estates to reduce the fair market value when assets, including marketable securities, are left in FLPs or FLLCs.
Consistent valuation requirement. Currently, there is no explicit rule requiring the same valuation of fair market value of an estate asset for estate tax purposes versus for purposes of stepped up basis in the hands of the heir. A proposal would require the same value for both purposes.
Limit duration of GST trusts. A proposal would limit the life of a Generation Skipping Trust to 90 years.
Coordination of grantor trust and transfer tax rules. And finally, another proposal would cause inclusion of the assets of a grantor trust in the grantor's estate or cause there to be a gift tax if the grantor ceased being owner.

Conclusion:  There are still techniques available to reduce estate, gift and GST taxes, but they may be fleeting, so planning now is very important.