THE FALL OF DOMA AND THE RISE OF MARRIAGE EQUALITY IN ILLINOIS
ESTATE PLANNING AND IMMIGRATION IMPLICATIONS FOR SAME-SEX COUPLES
On June 26, 2013, the Supreme Court issued a landmark decision regarding same-sex marriage which had and continues to have substantial impact for same-sex couples. In United States v. Windsor (No. 12-307), the Court held that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional for denying basic due process and equal protection under federal law for same-sex couples who were married in a state that recognizes such marriages. Section 3 of DOMA defined “marriage” as a legal union between one man and one woman and, therefore, prohibited federal law from recognizing same-sex marriages for any and all federal purposes. The DOMA decision provided married same-sex couples with significant planning opportunities that had previously been unavailable, particularly in the areas of estate planning, spousal benefits, taxes and immigration. It is estimated that over 1,000 federal laws, regulations, benefits and protections are affected by the DOMA decision.
Although the DOMA decision made clear that same-sex marriages would be recognized on the federal level, the Supreme Court left it up to the states to define marriage at the state level. The ruling did not result in same-sex marriage being recognized in all states. On November 20, 2013, Illinois became the 15th state to recognize same-sex marriage by signing into law the Religious Freedom and Marriage Fairness Act. In addition to Illinois, there are 14 other “recognizing states” that recognize same-sex marriage, namely, California, Connecticut, Iowa, Massachusetts, New Jersey, Delaware, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Maine, Maryland and Washington. The District of Columbia also recognizes same-sex marriage. New Mexico currently has no law banning or legalizing same-sex marriage and the remaining 34 “non-recognizing states” currently ban same-sex marriage.
As a result of the DOMA decision, same-sex couples residing in Illinois and other “recognizing states” are considered married at the state and federal levels. Unfortunately, the decision did not make clear the treatment of same-sex couples who married in a “recognizing state”, but currently reside in a “non-recognizing state”. Further, same-sex couples in states that registered as a civil union or domestic partnership at the state level did not receive recognition in the DOMA decision of their relationship as a “marriage” on the federal level. Presumably, same-sex couples who have entered into a civil union in Illinois will have to formally go through the process of obtaining a marriage certificate in order to take advantage of the new law.
Despite the DOMA decision leaving us with a patchwork of “recognizing states” and “non-recognizing states”, various federal agencies have since taken steps to address the issue for federal tax and immigration purposes as to the treatment of same-sex couples who married in a “recognizing state”, but currently reside in a “non-recognizing state”. The Internal Revenue Service (IRS), under Revenue Ruling 2013-17, and the U.S. Department of Homeland Security, Citizenship and Immigration Services (USCIS), through a statement by Secretary Janet Napolitano, adopted a “State of Celebration” rule in lieu of the “Place of Residency” rule. Under the State of Celebration rule, any legally married same-sex couple will be recognized as married for all federal tax and immigration purposes regardless of where the couple currently resides. For example, a same-sex couple legally married in California, but currently living in Texas, will be treated for federal tax and immigration purposes as being married.1 Unfortunately, the IRS and the USCIS did not see fit to extend this courtesy to state sanctioned civil unions or domestic partnership, which are still not considered a marriage under federal law.2
Despite the uncertainty for some same-sex couples (which are likely to be addressed over the coming months either through challenges to the laws or federal policy), all same-sex couples should meet with an estate planning attorney or immigration attorney to review their current plan and discuss their options. This is especially true for Illinois same-sex couples in light of the passage of the Religious Freedom and Marriage Fairness Act.
Now that the federal definition of “marriage” includes certain same-sex couples (discussed above), there are a number of estate planning benefits available to such couples, such as:
1. Unlimited Marital Deduction. The unlimited marital deduction provides a significant advantage to married couples by allowing spouses to make unlimited transfers of assets to each other during their lifetimes or at death without incurring any federal gift tax or estate tax. Prior to the DOMA decision, married same-sex couples could not take advantage of the unlimited marital deduction and, therefore, any transfers between same-sex couples could be subject to significant federal gift or estate taxes. The DOMA decision has now opened the door for certain married same-sex couples to adjust their estate plans to take advantage of the unlimited marital deduction.
2. Portability. As indicated above, spouses can transfer an unlimited amount to each other without incurring estate or gift tax. In addition, each spouse is entitled to a lifetime exemption from gift taxes for transfers made during life and from death taxes for transfers made at death to individuals other than a spouse. As of 2013, a person can transfer up to $5,250,000 during his or her lifetime or at death to one or more individuals without incurring an estate of gift tax. To the extent the person dies without using up his or her entire exemption amount, the balance can be transferred to the person’s surviving spouse. This is called “portability” and prior to the DOMA decision was not available to married same-sex couples. After the DOMA decision, married same-sex couples are now able to generate significant tax savings by being able to transfer any unused exemption to the surviving spouse.
3. Joint Tax Returns. Married same-sex couples will have the opportunity for the first time to file joint federal income tax returns. Of course, any decision to file jointly should be discussed with your accountant to determine the income tax consequences, if any. To the extent possible, same-sex couples should preserve their rights to a tax refund by filing a protective claim. For example, an employee may be eligible for a refund on FICA taxes paid for employer-sponsored benefits offered to his or her same-sex spouse.
4. Federal Benefits. After the DOMA decision, married same-sex families may be eligible for a deceased spouse’s Social Security and Veteran Benefits. In addition, a same-sex spouse may be eligible to take time off to care for his or her sick spouse under the Family and Medical Leave Act. A same-sex spouse in the military may be eligible for health coverage and housing allowances.
5. Gift Tax. Prior to the DOMA decision, any transfers of assets between same-sex couples during lifetime beyond the annual exclusion from gift tax (currently $14,000) would either result in a gift tax or cause a reduction in the lifetime exemption amount. This was a particular problem with transfers of all or a portion of real estate between same-sex couples, which could inadvertently generate a significant gift tax consequence. After the DOMA decision, married same-sex couples can transfer or share title to real estate or any other asset without incurring any gift tax.
6. Retirement Plans. With the DOMA decision, a same-sex spouse may be able to roll-over his or her deceased spouse’s IRA or other retirement account. Same-sex couples should review all of their current beneficiary designations.
7. Unwinding Existing Plans. Prior to the DOMA decision, same-sex couples may have executed unique estate planning techniques to preserve wealth, minimize tax or provide for their partner. For example, a Grantor Retained Income Trust (GRIT) was a common estate planning tool to pass assets to a partner while minimize the gift tax consequence. In order for a GRIT to be effective, the beneficiary must not be a family member (including a spouse). After the DOMA decision, married same-sex couples utilizing a GRIT may now run afoul of the IRS restriction. It is unclear how the IRS will deal with this issue and any other planning techniques that made sense prior to the DOMA decision, but it may cause issues and potential penalties after the decision.
As the DOMA decision is fairly new, it is necessary to be patient as the federal government and the states determine the consequences. It is likely we will continue to receive guidance over the course of the few next months and years. Nevertheless, same-sex couples should begin re-evaluating their current estate plan, look at the makeup and title of their assets, review their current beneficiary designations and consider preparing new documents to take advantage of the rights currently available to them.
The DOMA decision had an equally profound effect on the immigration community. Prior to the Supreme Court’s decision, DOMA effected immigration cases in a variety of ways, such as:
1. Foreign Nationals Married to U.S. Citizens. According to Immigration Equality, there are approximately 36,000 bi-national same-sex couples in the United States and that about half of these couples are raising children. In most circumstances, a U.S. citizen is able to sponsor his or her foreign national spouse for U.S. permanent residence. However, since immigration benefits are granted under federal law, and DOMA defined marriage as a legal union between one man and one woman, a U.S. citizen in a legal same-sex marriage under the laws of the state where they were married was unable to sponsor their spouse for U.S. permanent residence.
2. Same-sex partners of Individuals receiving Family or Employment Based Visas. Typically, the spouses of foreign nationals who receive a temporary or permanent visa to travel to the United States is permitted to accompany that spouse to the United States as a dependent, and depending on the visa classification of the principal, their spouse might be eligible for employment authorization or a permanent visa to the United States as well. Again, because Section 3 of DOMA prohibits the federal government from recognizing same-sex marriages, the same-sex spouses of individuals obtaining family or employment based visas to the U.S. cannot accompany their legal spouses to the United States as a dependent. In some limited circumstances, the legal same-sex spouse of a visa recipient may be able to obtain visitor’s status in the U.S., but this is usually not a viable substitute for a full dependent status.
3. Waiver or Relief from Deportation. The spouse of a U.S. citizen or permanent resident may be eligible to apply for a waiver or relief from removal if the removal of that individual from the United States would cause hardship to their U.S. citizen spouse. However, under DOMA, immigration judges are not permitted to look at the hardship that would be created for a US citizen or permanent resident same-sex partner of an individual facing deportation.
After the DOMA decision, the administration’s reaction to the repeal of Section 3 was swift. On the same day that the court released the decision, Janet Napolitano, the Secretary of Homeland Security, issued a statement that DHS is “working with our federal partners, including the Department of Justice, [to] implement today’s decision so that all married couples will be treated equally and fairly in the administration of our immigration laws.” Two days after the Supreme Court Decision and Secretary Napolitano’s decision, Latimer LeVay Fyock partner Ian Wagreich moderated a panel for the USCIS Open Forum at the Annual Conference of the American Immigration Lawyers Association where he pressed USCIS leadership as to how swiftly they would begin following the Supreme Court Decision and approving the Immigrant Petitions for U.S. citizens who petitioned for their same-sex partners with whom they had entered into a legal marriage. USCIS leadership told Mr. Wagreich that he would have to wait until policy guidance was developed by USCIS. However that very afternoon, an immigrant petition for a legal same-sex marriage between a US citizen and a foreign national spouse was approved!
In addition to acting swiftly to approve the Immigrant Petitions for individuals petitioning for their foreign national same-sex partners, the USICS has issued guidance on the effects of the repeal of Section 3 of DOMA in a number of areas. These include granting benefits to other individuals who are eligible for benefits under the meanings of the terms “marriage” or “spouse” including spouses accompanying or following to join family sponsored immigrants, employment-based immigrants and some nonimmigrants, and individuals granted refugee status or asylum. Additionally, individuals in same-sex marriages with US citizens may be eligible for a reduced waiting period for citizenship, just like individuals in opposite sex marriages, and may be eligible for certain waivers of inadmissibility based on hardship to their U.S. citizen spouse.
While the administration has moved swiftly in approving Immigrant Petitions for the legal same-sex foreign national spouses of US citizens married in states that recognize this type of marriage, there are a number of questions left unanswered. For example, several states, including Oregon, Nevada, Illinois, Hawaii, and Colorado, have enacted same-sex relationship laws that grant some version of status other than marriage. It is likely that the USCIS will not allow individuals to petition for their foreign-national partners if their relationship was registered in these states. With Illinois’ recognition of same-sex marriage, it is unclear how prior registered civil unions will be treated.
Federal agencies and states continue to react to the Supreme Court’s decision in DOMA, causing a fast-changing landscape of laws, regulations and benefits for same-sex couples. Given the positions of the Internal Revenue Service and U.S. Department of Homeland Security, Citizenship and Immigration Service recognizing same-sex couples who legally marry in a “recognizing” state but reside in a “non-recognizing” state, some same-sex couples may travel to “recognizing” states, such as Illinois, New York and California to get married.
LLF will continue to watch for developments in this area. However it may be worthwhile for you to begin reviewing your personal immigration, financial and estate plans in light of the above developments. If you would like to discuss the estate planning or immigration consequences of the Supreme Court decision related to DOMA and the Illinois Religious Freedom and Marriage Fairness Act with experienced practitioners, please reach out to your LLF contact who can put you in touch with the appropriate attorney at LLF for a deeper discussion of the issues raised in this article.
2 IRS guidance for registered domestic partners or couples in civil unions can be found here.