Contact: Daniel Vermillion, Coblentz, Patch, Duffy & Bass (San Francisco, California, USA)
Originally published in BASF Bulletin, October 2012
As you may know, several cases are moving through the court system that could dramatically change the landscape for the tax treatment of same-sex couples.
If the U.S. Supreme Court invalidates the Defense of Marriage Act (DOMA) and Proposition 8 in 2013, there is a path for same-sex couples to be married in California. Beyond simply waiting for the court to resolve those cases, there are steps that same-sex couples can take right now to improve their tax situation and position themselves well whether or not the Court overturns DOMA and/or Prop 8.
Set Up/Revise a Community Property Trust
In estate planning, same-sex couples are severely limited in their ability to transfer assets between each other tax-free. Even commonplace household transfers can trigger liability for federal estate and gift taxes. In contrast, married couples enjoy the often-used marital deduction from federal estate and gift tax when any transfer between spouses is subject to estate and gift tax with an offsetting deduction. For example, when the first spouse dies, the marital deduction defers any estate tax on gifts and bequests made to the surviving spouse until the death of the surviving spouse.
Even without the DOMA and Prop 8 decisions, community property rights will dictate the treatment of property in California. Community property trusts could be used for same-sex couples who are either married or in registered domestic partnerships. Estate planners should consider amending and updating their same-sex clients’ estate plans to add community property trusts.
In anticipation of the overturning of DOMA and Prop 8, estate planners should include contingent provisions in these community property trusts that will adopt the marital deduction automatically if and when it becomes available.
File An Amended Income Tax Return
Attorneys could also recommend that same-sex married clients (clients already married before Prop 8 or married in other jurisdictions) approach their tax preparers to file amended joint returns. The IRS will likely reject these returns as federal law continues to treat same-sex couples as two single taxpayers but the rejected return will preserve the couple’s right to claim a tax refund should DOMA and Prop 8 be overturned. Before filing an amended joint return, tax advisors should evaluate whether any given couple will be better off filing as single taxpayers due to the marriage penalty for joint filers.
Taking these steps will put same-sex couples in an advantageous tax position whatever the Court ultimately decides.
