The Surviving Spouse in Same-Sex Marriages: A New Federal Approach in New York

Several foreign countries, eight states, and the District of Columbia now permit gay couples to marry.  Many gay couples who are New York domiciliaries have been married in these jurisdictions.  New York recognizes these marriages, granting these couples equal protection under state law.  As to federal law, these duly married couples have until now been denied the same protection under federal law. 

On 23 February 2011, the Obama administration took a new legal position with respect to the 1996 Defense of Marriage Act (DOMA), in effect granting federal legal protections to married gay couples.  Section 3 of DOMA states: “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

The administration's position does not go to the issue of whether same-sex couples should be allowed to marry.  Instead, the focus is on preventing federal discrimination against same-sex couples after they have been legally married.

Under this new approach, the burden of proof will now shift from a gay spouse or same-sex couple who challenges a federal statute to show that they are not prohibited under DOMA from making the claim and places the burden on the federal government to show that DOMA does not impermissibly discriminate against the gay spouse or couple.   

Courts will now apply a heightened standard of legal review to cases involving DOMA.  Since the passage of the law, courts have applied a legal standard of review called rational basis to all sexual orientation discrimination cases that concern federal issues.  For instance, same-sex couples who sought equal protection of the law under the Fifth Amendment (the Fourteenth Amendment's equal protection clause applies to the states) were generally denied equal protection so long as the government could state a rational basis for the existence of DOMA.  The government almost always won a legal challenge under rational basis review because the challenger of DOMA had the burden to show that there was no legitimate purpose to the law and that the means used to enforce the law were not rationally related to its purpose. 

But moving forward, the government will no longer defend the law under rational basis review.  Instead, a heightened standard will used by the federal courts in cases involving DOMA.  Henceforth, the burden will fall on the government to show that the law is substantially related to an important government objective.  The government will base its position on the legislative record used to pass the law. 

One case that will be affected by this new position is Windsor v. United States, No. 1:10-cv-8435,  filed in U.S. District Court in the Southern District of New York on November 9, 2010.  In the complaint, the plaintiff Edith Windsor seeks "a refund of the estate tax levied on a married same-sex couple, which would not have applied to a married straight couple, and which consequently violates the United States Constitution."  In 2007 Edith Windsor and Thea Spyer were married in Canada after an engagement lasting 40 years.  Two years later, Spyer passed away as a result of complications from a heart condition.

26 U.S.C. § 2056(a) permits an unlimited marital estate-tax deduction that allows property to pass from a decedent spouse's estate to the surviving spouse free of the federal estate tax.  But because of DOMA, married same-sex couples are denied this marital estate-tax deduction that is enjoyed by every other married couple.

Both spouses had done extensive estate planning, each creating revocable trusts.  According to the complaint, Edith "in her capacity as executor of Thea's estate, filed a Claim for Refund and Request for Abatement (Form 843) and a Disclosure Statement (Form 8275) with the IRS on April 7,2010, stating that Edie and Thea were lawfully married in Toronto, that New York State recognizes that marriage under local law, and that DOMA unconstitutionally discriminates on the basis of sexual orientation. As a result, Edie argued, Thea's estate is entitled to the marital deduction and to a refund in the amount of $363,053.00." (Windsor, at 19).

The IRS replied and denied the refund because "under DOMA '... the words [sic] "spouse" refers only to a person of the opposite sex who is a husband or a wife'. Section 2056 is inapplicable because the surviving spouse is not a spouse as defined by DOMA (Id.)."

But under the new Obama administration position, the federal government will no longer defend the legal position articulated by the IRS.  According to the letter from Attorney General Eric Holder to Speaker of the House John Boehner dated 23 February 2011, " heightened scrutiny is the appropriate standard of review and that, consistent with that standard, Section 3 of DOMA may not be constitutionally applied to same-sex couples whose marriages are legally recognized under state law."

The net effect of the Holder memorandum is that the government will not file a motion to dismiss on or before March 11, 2011.  The case will move forward with the government still a party in the case, but the court will be instructed to apply a heightened standard to the case, and to remove Section 3 of DOMA as a barrier to possible recovery in this case.

If you would like to discuss your own personal situation with me, review your current Will, or put together an estate plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.
 
I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

The Federal Estate Tax: A Brief History

In many ways, the United States inherited the model for the federal estate tax from the British.  In feudal England, the monarch owned all of the real property and granted use of real estate to his nobles during their lifetime (life estate).  When the nobleman died, his heir could continue to use the land upon payment of an estate tax to the sovereign.  These death taxes provided needed income to the Crown to pay for war debts.   In default of heirs, the estate reverted to the Crown (escheat).  The statute Quia Emptores passed in 1290 finally granted the right to of an individual to hold an estate in land in fee simple (freehold) and to sell it (alienation), but it left the matter of the estate tax in the hands of the Crown.

The original Thirteen Colonies were the result of real estate grants and licences from the British Crown founded on the principles of Quia Emptores.  Whether New York still retained vestiges of Quia Emptores in its real estate law was  the subject of debate in the 19th century.  The court in De Peyster v. Michael, 6 NY 467 (1852), held that Quia Emptores had never been in effect in the colonies, meaning that land was not freely alienable in New York.  Seven years later, in Van Rensselaer v. Hays, 19 NY 68 (1859), the court in that case held that Quia Emptores had always been in effect in New York.  The question was settled in New York State Constitution Article 1 §12 which states "all lands within this state are declared allodial, so that, subject only to liability to escheat, the entire and absolute property is vested in the owners, according to the nature of their respective estates."  In a prior post, I have addressed the issue of the possibility of an estate escheating to the State when an individual dies without a Will (intestate). 

In 1765 the British Crown had imposed the Stamp Act specifically on the American colonies, the purpose of which was to help defray the military expenses, mainly troop salaries,  for the recently-fought Seven Year's War with France.  Among the provisions of the Stamp Act was a requirement that legal documents, such as Wills, be produced on special stamped paper produced in London and containing a revenue stamp.  Thus any colonist wishing to make a Will had to pay a tax.  Colonial discontent with taxes such as these would lead to the Revolutionary War.

Ironically the new government did not abandon this practice of enacting a tax on Wills to raise money to pay for military debts.  In an article published in the Journal of Business & Economics Research,  Eddie Metrejean and Cheryl Metrejean demonstrate an historical pattern whereby federal inheritance taxes began to be enacted to pay for wartime expenses.  Just a few years after the Revolution, the new Congress passed the Stamp Act of 1797 establishing a tax on Wills related to the transfer of property after death, once again to pay for a war in 1794 (albeit undeclared) with France.  But the law was quickly abolished before it could take effect.

The issue of an inheritance tax would not arise again until the Civil War.  A wartime inheritance tax was passed as part of the Revenue Act of 1862 affecting only the northern states, whose purpose was to raise over $1 million from estates valued at over $1000.  After the war, the inheritance tax was abolished by the Revenue Act of 1870.  Another short-lived inheritance tax was passed in 1898 to raise revenue for the Spanish-American War.  It was repealed in 1902.

Congress passed its first permanent estate tax with the Revenue Act of 1916, three years after the passage of the 16th Amendment and the institution of the federal income tax.  The constitutionality of new federal estate tax was challenged in New York Trust Co. v. Eisner, 256 U.S. 345 (1921), and in an opinion delivered by Oliver Wendell Holmes the Supreme Court held that the new law posed no "unconstitutional interference with the rights of the states to regulate descent and distribution" (256 U.S. 345, 348 (1921).

In order to close the loophole in the tax that allowed people to escape the inheritance tax by giving away their property, Congress passed a gift tax in 1932 that was declared constitutional by the Supreme Court in Heiner v. Donnan, 285 U.S. 312 (1932).  In 1948, the marital deduction became law, allowing property to pass to one's spouse without paying any estate tax.

The most significant changes to the federal estate tax occurred with the Tax Reform Act of 1976.  The Act enacted the following changes:

• a single unified rate structure for transfers of property at death;
• a single unified rate structure for lifetime property transfers;
• a unified exemption from taxes for certain transfers made either during one's lifetime or at death;
• a generation-skipping tax, taxing the transfer at the unified rate of the "skipped" generation if the beneficiary was two or more generations younger than the donor.

There have been other significant additions to the law.  In 1980, the "stepped-up" basis restored to the pre-1976 provisions, giving the beneficiaries a significant break in the amount of capital gains they would pay on transferred property that they later sold. 

In 1981, the martial deduction became unlimited, but with a catch.  With proper estate planning, the surviving spouse can escape paying any estate tax.  Without estate planning, the surviving spouse is left with a much larger estate on which the estate tax will be imposed.

In 2001 President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001.  The law repealed the federal estate, gift, and generation-skipping taxes after 2009, meaning that anyone dying during 2010 is able to pass on his or her estate free of any federal estate, gift, or generation-skipping taxes.  However, state inheritance taxes may still be in effect.  But the 2001 law contained an expiration date:  all of the provisions of the 2001 law are set to expire on December 31, 2010.  Should Congress not act, then the pre-2001 estate tax will automatically reappear in 2011.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.