Thursday, March 28, 2013

When does inheritance tax matter to "unmarried" couples?

In reviewing the Supreme Court hearings about the Defense of Marriage Act (DOMA) on Wednesday, it’s important to note that the spousal benefit upon inheritance applies only to the “unlimited” tax-free inheritance.
Any individual beneficiary (including adult child or for that matter, gay spouse) can benefit from an exclusion amount, which in 2013 will be $5.25 million, according to the law passed January 1, 2013 (as part of the “Fiscal Cliff” resolution).  However, at that point, the rate goes up in increments that can reach 40%.  Non-citizen heterosexual spouses are not protected, although there exists an instrument called a Qualified Domestic Trust. 

From the viewpoint of DOMA (at least until it was litigated) and the IRS, when a "legal" marital partner passes away, the household continues intact as it was and no inheritance should be taxed.
The details are on Wikipedia here
There’s another good discussion at “How Stuff Works” here.
The ACLU has a story on Edith Windsor here. Windsor had been married in Canada, and also paid more than $200000 in taxes to New York State despite NYS’s adoption of gay marriage since then.

Non-spouses (including adult children) can be faced with sales of businesses or residences to pay taxes, when the book values or businesses or assessed values of homes or real estate is large.   It is not always possible to live in a home one has inherited for this reason. This can become very important to a survivor who does not have strong economics of his or her own (to qualify for a home or rental by oneself after a death).  

Patricia Cain, Santa Clara University, speaks here:

Cain warns people to be wary that some day Congress could drop the $5 million exemption (it almost happened because of the Fiscal Cliff until Congress acted New Years Day).  The video also explains the concept of "community property" in some states' laws, especially California and Texas (and seven other states).  You can't tax a "community property" transfer of property, and this also sounds like a Full Faith and Credit Issue.  Cain also traces marriage exemptions back to laws passed in 1948 and then 1981.  . 

Cain also discusses gift taxes and an IRS project to research the practice of "gift taxes" without consideration.  

Remember that an "inheritance tax" is different from an "estate tax".  For example, in some states (like Ohio), an "estate tax" must be paid before distribution to heirs.

(Cain's video is also mentioned on GLBT blog, Dec. 14. 2012.) 

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