The IRS has released guidance for same-sex spouses to recalculate their lifetime deductions for estate, gift and generation skipping tax under United States v. Windsor.
A single person has a lifetime exclusion of $5,450,000 for estate, gift and generation skipping tax. Transfers between spouses are not considered taxable under the marital deduction. Therefore living spouses can make transfers or gifts to one another in any amount tax free. Further, married couples can combine their lifetime exclusion which is known as portability. Meaning, at the first spouse to die, transfers to the second spouse will not be taxed and the second spouse will enjoy any unused portion of the lifetime deduction of the first spouse. Put plainly, the couple has a maximum potential exclusion of $10,900,000 at the death of the second spouse.
In 2013, the Supreme Court handed down a landmark decision in Windsor whereby the Defense of Marriage Act (DOMA) was deemed unconstitutional, thereby legalizing same-sex marriage, in this case, for federal tax purposes. Prior to Windsor, same-sex couples were not able to take advantage of the marital deduction and transfers between living same-sex spouses were subject to federal gift tax. Unused portions of the lifetime $5,450,000.00 exclusion could not be added to the second spouse at the death of the first spouse, and ‘generations’ for generation-skipping tax purposes were calculated solely on age and not on actual lineal generations. After Windsor, same-sex couples legally married in any state were eligible for the martial deduction, taking advantage of each other’s unused lifetime exclusion, and the same calculations for generation skipping tax. Further, that the law would apply prospectively and same-sex spouses could file for amended or adjusted returns, including refunds for overpayment of tax based on the new calculations.
The previous time limitations to do so have recently been lifted and the IRS has issued guidance to same-sex spouses to file for a recalculation of their lifetime exclusion based on the marital deduction and portability. Any 706 estate tax return or 709 gift tax return must be filed with a statement at the top of the return stating that the return is “FILED PURSUANT TO NOTICE 2017-15” and include a statement supporting the claim for marital deduction, adjustment to any generation skipping tax, and supporting the recalculation of the lifetime exclusion remaining to both spouses for gifting purposes, or a surviving spouse for portability. Instructions and a worksheet will be available on the IRS website.
Madison Porzio Schneider, Esq., LL.M., an associate in Vishnick McGovern Milizio LLP’s Trusts and Estates Practice Group, concentrates in the areas of Trust and Estate Administration, Litigation and Planning. She earned a Masters of Law (LL.M.) degree in Taxation with a concentration in Estate Planning and a Juris Doctor degree, both from New York Law School.