On June 24, 2011, New York Governor Andrew M. Cuomo signed the Marriage Equality Act (the “Act”); thereby granting same-sex couples the right to marry in New York. The Act confers the rights and benefits currently enjoyed by opposite-sex married couples under state law to same-sex married couples.

The new law states simply: “A marriage that is otherwise valid shall be valid regardless of whether the parties to the marriage are of the same or different sex. … No application for a marriage license shall be denied on the ground that the parties are of the same, or a different, sex.”

Historic Legislation

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Just how large is the lesbian and gay population in the United States? According to a study recently conducted by the Williams Institute at the UCLA School of Law, an estimated 3.5 percent of adults in the U.S. identify as lesbian, gay or bisexual. That figure implies that there are approximately 9 million adults in this group, roughly equivalent to the population of New Jersey. The historic nature of this new legislation has not been lost on anyone who is following this legal issue in the U.S. New York is now the sixth state in the union to legalize same-sex marriages.

The official memorandum accompanying the legislation that was relied upon to support the new law states: The “freedom to marry” is, in the words of the United States Supreme Court, “one of the vital personal rights essential to the orderly pursuit of happiness by free people.” … Just as the right to marry confers important benefits on individuals, the institution of marriage produces incalculable benefits for society, by fostering stable familial relationships. Same-sex couples who wish to marry are not simply looking to obtain additional rights, they are seeking out substantial responsibilities as well: to undertake significant and binding obligations to one another. … Granting legal recognition to these relationships can only strengthen New York’s families, by extending the ability to participate in the crucial social institution to all New Yorkers.

State vs. Federal Tensions

The Act also exposes the Achilles’ heel of such legislation, i.e., that while states may be willing to recognize same-sex marriage and confer state-based rights, without federal legislation acknowledging these same rights, the discrimination against these couples will continue unabated. Many of these newly conferred state-based rights are ominously overshadowed by federal tax legislation to have much impact in overcoming some of the most burdensome and discriminatory characteristics that are the basis of complaints by same-sex couples. Thus, notwithstanding the magnitude of the legislative changes that have taken place in New York and other states, many of the benefits conferred by those states recognizing same-sex marriage have no recognition at the national level. The reason is simple: a federal law known as the Defense of Marriage Act (DOMA) limits the definition of marriage to a union “between a man and a woman.”

Around the country today

IN WASHINGTON, D.C. The issue promises to be a hot topic in the upcoming presidential election especially since President Obama has publicly stated that he will endorse a bill to repeal DOMA.

IN CALIFORNIA. A federal appeals court panel in San Francisco recently ruled that California’s ban on gay marriages was unconstitutional. The Court stated:

“Proposition 8 serves no purpose, and has no effect, other than to lessen the status and human dignity of gays and lesbians in California, and to officially reclassify their relationships as inferior to those of opposite-sex couples.”

IN MARYLAND. On March 1st, 2012, with the stroke of Governor Martin O’Malley’s pen endorsing the measure, Maryland became the eighth state in the nation to legalize same-sex marriage.

IN MASSACHUSSETTS. Finally, the First Circuit Court of Appeals in Boston will have heard (as of the publication of this newsletter) oral arguments on whether the Defense of Marriage Act, or DOMA, is unconstitutional.

The Wealth Planning Picture

With the enactment of the Act, a surviving spouse of a same-sex marriage is now entitled to the same rights and benefits as other New York state residents if the other spouse dies a domiciliary of New York. Here are some of the more noteworthy wealth planning themes.

Dying Without a Will (Intestate)

Under New York’s new law, if a same-sex spouse dies without a Will, the surviving same-sex spouse, and any of the biological or adoptive children of the decedent, will be the first in line to inherit the assets of the decedent’s estate. Before the new law, a same-sex surviving partner risked having his or her predeceased partner’s assets pass in intestacy to the decedent’s parents or other lineal descendants, as the surviving partner may not have been considered a “distributee.” This situation has now been addressed, and the same-sex surviving spouse, and any of the biological or adoptive children of the decedent, will inherit first before any other family members.

A NEW RIGHT

A surviving same-sex spouse will now have the right to invoke his or her “right of election” in any estate proceeding. Thus, absent the existence of prenuptial planning, same-sex couples will now be eligible to receive a share of the deceased spouse’s estate in the amount of $50,000, or one-third of the net estate (whichever is greater) regardless of the terms of the decedent’s last will and testament.

MARITAL TRANSFERS AND TAX BENEFITS

Married opposite-sex couples enjoy a number of important estate and gift tax planning benefits. But is the cake equally sliced for same-sex couples?

Most valuable among the tax benefits enjoyed by opposite-sex married couples is the ability to make unlimited gifts during life, and unlimited transfers at death, to their spouses. Such transfers of wealth do not cause any state or federal tax to be incurred by the transferor. However, for those same-sex couples that marry in New York, there will still be severe limitations, due to federal tax policy, on how much wealth can be passed tax free between spouses.

Under the Act, any property passing to the survivor of a same-sex marriage from the other is entitled to an estate tax marital deduction at the state level in New York. This means that any property passing to the survivor will be free of New York estate taxes. This is a small but significant benefit conferred by the Act to same-sex married couples. However, until DOMA is overturned, the federal government’s non-recognition of same-sex marriages will inherently limit planning opportunities (and thus the transfer of property) for same-sex couples both during life and at death.

Discrimination in Life

Many have noted that while the federal government has expanded the federal gift and estate tax exemption to $5,000,000 (until December 31, 2012), New York same-sex couples will still be somewhat stymied in their ability to make lifetime gifts, as they will be limited to one’s gift tax annual exclusion of $13,000 unless the transferor decides to use some of his or her available $5,000,000 federal exemption. Said another way, if a wife gives her husband $10,000,000 in 2011 or 2012, there are no tax consequences. The very same lifetime transaction between same-sex couples will result in the transferor-spouse owing $1,750,000 in federal gift taxes ($10,000,000 gift — $5,000,000 federal gift exemption = $5,000,000 x 35% federal gift tax rate). Similar tax discrimination will exist at death for same-sex couples.

The problem will certainly become exacerbated if the federal estate and gift exemption is again changed (and lowered) in the future, which will result in even higher taxes being incurred because of the above-described transfers.

Expect continued heated political debate on this subject as the upcoming presidential election draws closer. SGR will keep all of our clients up to date on the developments in this area of wealth transfer planning.