How Striking Down DOMA Affects Unlimited Marital Deduction

Monday, July 8, 2013

by Scott Greenberg

On June 26 2013, the United States Supreme Court ruled Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. In a 5-4 decision, the judges said, “DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”

Striking down DOMA means that same-sex married couples can now access over 1,000 benefits that have been traditionally only available to heterosexual married couples.


How was DOMA brought into the Supreme Court?

It’s important to note that DOMA ended up before the US Supreme Court in the first place because it was basically a lawsuit about federal estate tax liabilities.

DOMA plaintiff Edith Windsor was forced to pay $363,053 in estate taxes when her wife died—something that would not have happened if her spouse was male. After paying the taxes, Windsor filed a lawsuit against the IRS, claiming that DOMA prevented her from being a spouse under federal tax law, resulting in a $363,053 tax liability that traditional married partners would not have been subjected to.

The U.S. District court for the Southern District of New York ruled that $363,053 worth of damages be paid to Windsor. Then the Second circuit Court of Appeals ruled in favor of Windsor. After that, the Supreme Court considered the case.


How will this affect Unlimited Marital Deduction?

The Unlimited Marital Deduction allows an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from tax. This is one benefit that DOMA restricted from spouses of the same sex.

By striking down DOMA, the unlimited marital deduction benefit, along with hundreds of other benefits, is eligible for same-sex married couples. This also meant that Windsor won her case and was awarded $363,053 plus interest.

However, there may still be some confusion about tax treatment for legally-married, same-sex couples that live in states where same-sex marriage is recognized[1] or not. Where a couple resides (State of Residence) versus where a couple was married (State of Celebration) will have an impact with respect to some federal benefits for the 29 states that have currently have bans on same-sex marriages, unions, or don’t recognize them at all.

Next month, we will explore how DOMA will impact insurance planning for same-sex couples.

[1] There are currently 11 states that recognize same-sex marriages: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington, and the District of Columbia. By August 1, Minnesota and Rhode Island will also recognize same-sex marriages. There are also 4 states that recognize same-sex civil unions: Hawaii, Illinois, New Jersey, and Colorado.