Potential Problems for Same-Sex Couples

Four states allow civil unions and six states, along with the District of Columbia, issue marriage licenses to same-sex couples. New York will begin issuing same-sex marriage licenses on July 25. However, even with a state’s recognition of a same-sex marriage or civil union, the Defense of Marriage Act of 1996 continues to cause financial tax problems for same-sex couples.

During tax season, same-sex couples may end up filling out four different tax forms— individual forms with the federal government, a “dummy” joint form with the federal government, and a married-filing-jointly state form based on the “dummy” joint federal return. In community property states that allow same-sex partner registration, same-sex partners have the added task of determining how to treat community property on their individual federal tax returns.

Same-sex couples also face inheritance and gift tax problems. The government does not allow same-sex couples to take a “marital deduction” when leaving assets to each other, so these assets will likely be taxed when the surviving spouse receives them. Additionally, a surviving same-sex spouse cannot receive assets under retirement plans as easily as an opposite-sex surviving spouse since retirement plans are federally regulated.

One estate planning attorney suggests that same-sex couples leave assets in an irrevocable trust or a “grantor-retained income trust” to help lessen the tax due on a surviving spouse’s inheritance.

See Kelly Greene, Headaches for Same-Sex Couples, Jul. 9, 2011.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.