Category: Estate Tax

Tax Implications of SCOTUS’ DOMA Decision

Tax Implications of U.S. Supreme Court’s Decision on Same Sex Marriage (DOMA)

Surviving Spouse of Same-Sex Marriage Sues U.S. Government over Taxes

Edith Windsor and Thea Spyer were lawfully married in 2007 in Ontario, Canada but lived in New York. Spyer died two years later and left her estate to Windsor. Windsor attempted to claim a the “surviving spouse” exemption from the death tax when Spyer passed. The Defense of Marriage Act (DOMA), however, prevented her from taking the exemption. The term “spouse,” according to DOMA, applies only to the marriage between a man and woman. The IRS relied upon DOMA to rule that the surviving spouse exemption did not apply to Windsor, no matter where she married. Windsor ended up with a $363,053 death tax bill, causing her to sue the federal government.

U.S. Supreme Court Strikes Down DOMA’s Definition of “Spouse”

SCOTUS DOMA Decision
SCOTUS’ DOMA Decision Provides New Tax Benefits for Same-Sex Couples

The U.S. Supreme Court heard Windsor’s case and ruled that DOMA’s definition of “spouse” violated a myriad of Constitutional principles. The Court’s decision authorized same-sex couples, who are legally married, to claim the surviving spouse exemption. The U.S. Treasury Department and IRS changed its tax policy as a result of the decision. They will recognize same-sex married couples as married for federal tax purposes.  This is true even if the couple moves to a state that doesn’t recognize same-sex marriage. This treatment applies to all federal taxes, not just the surviving spouses exemption.

Tax Implications of Federal Recognition of Married Same-Sex Couples

The U.S. v. Windsor case will provide a number of new tax benefits for same-sex couples:

  • Annual Gift Tax Exemption: An individual can give another person up $14,000 (as of 2013) without tax consequences. The gift can be cash, property, or other assets. Anything above $14,000 must be reported to the IRS. Married couples, however, may give unlimited amounts to their spouse without tax consequences.
  • Death Tax Exemption: An individual can leave a non-spouse up to $5.25 million upon their death without tax consequences. A married individual, however, can leave their spouse an unlimited amount without tax consequences.
  • Unified Credit: Tax law combines the annual gift tax exemption and death tax exemption to create the “Unified Credit.” Untaxed amounts given annually as a gift count towards the $5.25 million that is exempt from the death tax. Married couples, however, don’t face limits on annual or lifetime gifts or transfers of property to the spouse. This includes the Unified Credit limitation.
  • Portability of Marital Exemption: The unused portion of $5.25 death tax exemption passes from the deceased spouse to the surviving spouse. This means a surviving spouse can give up to $10.5 million before the death tax kicks in (depending on how much of the death tax exemption the deceased spouse used).
  • Gift Splitting: A gift by a married individual only counts 50% towards the annual gift tax exemption. The IRS treats the married couple as a single tax entity when it comes to this exemption. This means a married individual can give up to $28,000 without tax consequences. Their spouse, though, could not give any amount as a gift that particular year without facing tax consequences.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.
Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.

Bill Davidson’s $2.8 Billion Estate Tax Bill

Estate Tax Bill the Size of a Small Nation’s GDP

 

Estate Tax
Estate taxes tend to be a bit more

The estate of billionaire Bill Davidson is suing the IRS. Their beef: a $2.8 billion tax deficiency notice. That’s in the neighborhood of GDP for small nations like Greenland and the Cayman Islands! A private man, most would know Mr. Davidson for owning the Detroit Pistons sports franchise. He financed the purchase of his beloved Pistons through a personal fortune amassed running the family business of glass manufacturing, Guardian Industries. Forbes estimated his wealth at $3.5 billion when he passed in 2009.

The heart of this tax dispute focuses on tax planning strategies and accounting methods Mr. Davidson employed prior to his death. The sheer magnitude of the financial dispute is rare, but the techniques his estate used are not uncommon when managing wealth. The IRS’ laundry list of complaints include:

  • Transfers of wealth to family.  

Lawyers drafted several trusts on behalf of Mr. Davidson, months before his death, for his children and grand-children. Each trust is valued at tens of millions of dollars and are funded by Guardian Industries stock. The IRS claims, however, that accountants undervalued each stock by up to $1,500. Davidson’s lawyers counter that the IRS’ accounting does not consider a free fall in automotive and construction stocks occurring in late 2008 and 2009 when valuing the stocks.

  • Self-Cancelling Installment Loans (SCIN’s).

Mr. Davidson also transferred wealth to his heirs through a series of “self-cancelling installment notes” (SCIN’s). SCIN’s operate like a loan or mortgage. Mr. Davidson gave certain assets (e.g. homes, boats, cars) to his heirs. The heirs, in turn, had to make regular payments on the gifting of these assets. The big difference between typical loans and SCIN’s, however, kicked in when Mr. Davidson died. The debt his heirs owed owed on the gifted assets evaporated and they owned the assets free and clear. The IRS claims the payments on these SCIN’s should have been higher. These low payments, therefore, qualify the assets as “taxable gifts.” Morbidly, the IRS’ assertion that the payments were too low is because it believes a 5 year life expectancy for Mr. Davidson was too long when lawyers drafted the SCIN’s.

  • Transfers of wealth to his spouse.

Not to be left out of the fun, the IRS argues that Mr. Davidson made taxable gifts to his wife for tens of millions of dollars. His wife also used money from his fortune to build a home for her daughter and son-in-law. The IRS claims lawyers left these figures out when settling his estate.

The IRS ended up calculating Mr. Davidson’s taxable estate and gifts to be worth $4.6 billion. It arrived at the $2.8 billion tax deficiency by figuring $1.9 in estate tax and penalties, as well $900 million in other taxable gifts and back taxes. Outside groups, however, say the IRS is double-counting to come up with a $2.8 billion figure. This is likely true because the IRS cannot later add amounts it did not initially include in its deficiency notice. It would not be surprising to see a settlement or judgment that results in a figure far below the IRS’ stated deficiency.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.

Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.

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