The Supreme Court’s decision on DOMA and Prop 8 is not only a civil rights win for same sex couples- it’s a financial win for many.
In an unprecedented event last week, the Supreme Court ruled that the 1996 Defense of Marriage Act (“DOMA”) singled out same-sex marriage and treated same-sex couples "as living in marriages less respected than others." This week’s ruling will now give same-sex couples many of the same benefits (and in some cases, drawbacks) as any other married couple in the eyes of the law. Married same-sex couples in a dozen states and the District of Columbia will now be eligible for more than “1,000 spousal benefits previously off limits under DOMA.” And the court's other decision on Wednesday, striking down California's Prop 8, paves the way for same-sex marriages to resume in that state.
Key Aspects of the DOMA Ruling Include:
Income tax: Same-sex couples will now be able to file their federal income taxes jointly. For many couples -- especially those where one person earns significantly more than the other -- merging incomes for tax purposes will result in big savings. In addition, many education benefits, such as the American Opportunity Tax Credit and Lifetime Learning Credit, are now available to the spouse in a same-sex marriage where one spouse pays for qualified expenses of the other.
Health insurance: Some same-sex couples pay income tax on imputed income for the medical benefits one partner receives through the other's health insurance plan; this will now likely change. Meanwhile, many federal employees will likely be granted spousal benefits like partner health insurance.
Estate and Gift tax: Same-sex couples will also be exempt from gift tax when transferring assets to each other. Under DOMA, any gift between same-sex spouses of more than $14,000 (the 2013 annual gift tax exclusion) began utilizing the lifetime exclusion limit of $5.25 million-- after which tax was assessed on gifts exceeding the exclusion. Opposite-sex couples have never been subject to that tax. Same-sex couples will also be eligible to “split” gifts to take advantage of a doubled annual gift tax exclusion ($14,000 above x 2 married individuals or $28,000 for 2013) In addition, the unused lifetime exclusion of the decedent spouse is now portable and will allow the estate of the surviving spouse to utilize it.
Social Security benefits: Same-sex couples will now be eligible for the same federal tax treatment and Social Security benefits as opposite-sex couples in the event that one spouse passes away. This means a surviving spouse will be eligible for Social Security survivor’s benefits and will be exempt from the federal estate tax on assets exceeding $5.25 million. Note: In states where same-sex marriage is banned, this issue still has to be sorted out as the Social Security Administration has based these benefits on the state of residence.
While many will receive the benefits of this ruling; they will also receive its downside. For example, same-sex couples who divorce may be subject to the federal gift tax when dividing assets, or be partially responsible for the back taxes of the divorcing partner. Also, same-sex married couples will now have to file as either married filing joint, surviving spouse or married filing separate. Thus, the “marriage penalty” will impact some same-sex couples.
What the decision doesn't do: While many specifics of the Supreme Court's ruling are still blurry, it appears that couples must be married at a state level for all of these federal benefits to apply -- meaning domestic partnerships and civil unions don't qualify. It's also unclear whether federal benefits will apply to same-sex couples who marry in a state where same-sex marriage is legal but move to a state where it's not recognized.
To learn more check out this special report detailing Post DOMA Tax Implications
We may be based in New York State, however Freed Maxick CPAs provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY. We Serve all 50 States.
Contact us to learn more about our tax services
Court Determines the Gift Tax Exclusion Applies to FLP
Author: Ron Soluri Jr.
Recently, we discussed a case where the U.S. Tax Court held that gifts of interests in a family limited partnership (FLP) qualified for the federal annual gift tax exclusion. The decision in Estate of Wimmer v. Commissioner came as a surprise to some because, in three previous cases, the same court held that the exclusion didn’t apply to gifts of limited partnership interests.
Keeping it in the family
A married couple formed an FLP in 1996, funding it with publicly traded and dividend-paying stock. The FLP was established in part to restrict nonfamily rights to acquire family assets. The husband and wife made gifts of limited partnership interests in the FLP to various family members.
In 1996, the FLP began receiving quarterly dividends from the stock. To allow the limited partners to pay federal income tax, the FLP made distributions from 1996 through 1998. Beginning in 1999, the FLP continuously distributed all dividends — net of partnership expenses — to the partners when they were received. These were made in proportion to partnership interests. Limited partners were also given access to capital account withdrawals and they used such withdrawals for, among other things, paying portions of their residential mortgages.
After the husband died and his estate filed an estate tax return, the IRS returned a tax deficiency of $263,711. The estate asked the Tax Court to find that the gifts of limited partnership interests qualified for the annual gift tax exclusion.
Annual gift tax exclusions are available for “present interest gifts” only, not to gifts of future interests in property. As the court clarified, a gift in the form of a transfer of an equity interest in a business or property, such as limited partnership interests, isn’t necessarily a present interest gift.
To qualify as a present interest gift, the gift must confer on the recipient a substantial present economic benefit by reason of use, possession or enjoyment of either the property or income from the property. In this case the court decided that, because of the significant transfer restrictions in the FLP’s partnership agreement, the donees didn’t receive the rights to immediately use, possess or enjoy the limited partnership interests themselves.
However, the court found that the estate satisfied three requirements for income from the limited partnership interests to qualify the gifts of the interests as present interest gifts: 1) the partnership would generate income; 2) some portion of that income would flow steadily to the limited partners; and 3) that portion of income could readily be ascertained. The court concluded that the limited partners received a substantial present economic benefit.
Wimmer provides an example of the right way to administer an FLP. It’s possible to put restrictions — which often are used to create valuation discounts — on gifted limited partnership interests while still satisfying the requirements for the gifts to qualify for the annual gift tax exclusion. To ensure your clients’ FLP operating agreements walk this fine line, work with an experienced financial advisor.
If you have any questions about the gift tax exclusion or any other litigation support issue, give us a call at 716.847.2651, or you may contact us here.