In 2012, A and B were a same-sex married couple living in Connecticut, a state that allowed same-sex marriage. A and B had an estate valued at $7 million. All assets were owned in A’s name; B owned nothing in her name. A died in 2012 and left her entire $7 million estate to B as her spouse. What happened? Although A and B were married under Connecticut law, they were not considered to be married under federal law and were not entitled to take advantage of the unlimited marital deduction available to married heterosexual couples. The estate exemption amount in 2012 was $5.12 million, and the top federal estate tax rate was 35%. Therefore, A’s taxable estate would equal $7 million – $5.12 million = $1.88 million. A’s estate would owe $1.88 million x .35 = $658,000 federal estate tax.
Fast-forward to 2014: Post-Windsor, A and B are considered to be married under federal law as well as state law. If A left her entire $7 million estate to B, her estate would qualify for the unlimited marital deduction, and no federal estate tax would be owed by A’s estate at her death, a savings of $658,000. In addition, B could claim A’s $5.34 million estate tax exemption as her own through a portability clause in her Will or Revocable Living Trust, on A’s Federal Estate Tax Return (Form 706) and be able to pass up to $10.68 million to her heirs at her future death.
The Supreme Court decision in Windsor has opened up new possibilities when it comes to planning for same-sex couples in all areas of federal taxation, but specifically for those couples who need to do planning for their estates. Whereas planners and clients had to think outside the box prior to this decision, it now allows them to look at more conventional ways of planning going forward.
First Republic Private Wealth Management encompasses First Republic Investment Management (“FRIM”), First Republic Trust Company (“FRTC”), First Republic Trust Company of Delaware LLC (“FRTC-DE”), and First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC. FRIM is a SEC Registered Investment Advisor. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client’s expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM and FRSC do not provide tax advice. The levels and bases of taxation can change. Investors’ tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein. Furthermore, all decisions regarding financial, tax and estate planning will ultimately rest with you and your legal, tax and accounting advisors. Any description pertaining to federal taxation contained herein is not intended or written to be used and cannot be used by you or any other person, for purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. This disclosure is made in accordance with the rules of the Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service. Products and/or services offered by First Republic Securities Company, LLC, and First Republic Investment Management are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal. The opinions expressed herein are solely and exclusively the opinions of the Investment Adviser Representative of the Adviser or Trust Officers of First Republic Trust Company or First Republic Trust Company of Delaware LLC, as the case may be, and are not associated with the Broker-Dealer (First Republic Securities Company, LLC). First Republic Securities Co., LLC does not offer investment advice or market commentary.