While the Supreme Court wrestles with the issue of whether the federal government should recognize gay marriages, advisors should not let married gay and lesbian clients wait on the sidelines for a decision, estate lawyers say.
Instead, encourage some of these clients to file for a tax refund -- now.
Under current law, gay widows and widowers do not get any of the tax breaks their straight peers do, including the exclusion from paying estate tax. So clients who were legally married in the nine states that recognize gay marriage -- Connecticut, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington -- plus the District of Columbia are on the hook to pay far more in taxes than if their late spouse were of the opposite sex.
In one of the same-sex marriage cases before the Supreme Court now, Edie Windsor is applying for a refund on the $363,053 she had to pay on the estate of her wife, Thea Spyer, because she was not granted the marital deduction on federal estate taxes.
The paperwork clients should file is called a protective refund claim, and they should file it as soon as possible, said Philip T. Davies, an estate attorney in New York. The law may be in some state of flux, but it's always better to file promptly (including corrective claims) based on your best rational and reasonable position, rather than wait for the law to be clarified, he says. Were we to wait forever there would have been no Boston Tea Party.
He adds that there would be no negative repercussions for clients who file, even if the Supreme Court upholds the Defense of Marriage Act, the federal law forbidding gay marriage. The worst case is simply the taxing authority rejects your claim, but even that outcome may take some time. Better an outright rejection of claim than having an uncertain claim you never filed.
The statute of limitations on tax refunds is ordinarily three years, says Matthew Erskine, an estate tax lawyer whose Worcester, Mass., firm also provides family office services. But gay and lesbian clients may get a break on timing; he notes that the IRS has extended filing windows in the past for unusual circumstances, and adds that a change in federal treatment of marriage could constitute such a circumstance.
Depending on how the high court rules, married same-sex couples may also be able to take advantage of numerous other federal tax provisions that provide benefits to married persons, Florida tax attorney Charles Rubin has noted in his Rubin on Tax blog.
Among the provisions that Rubin suggests cites: (a) the federal gift tax marital deduction, (b) joint tax return filing rates and permissions, (c) favorable stretch and rollover provisions for IRAs and other qualified retirement plan distributions to a surviving spouse, and (d) portability of unified credit amounts between spouses."
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