On Friday, May 18, 2012, the Court of Appeals ruled that Maryland will recognize same-sex marriages legally entered into outside the Maryland jurisdiction. The case was Port v. Cowan, a divorce case in which a same-sex couple sought a divorce in Prince George’s County. The couple was initially denied such right based upon the fact that same-sex marriage in the State of Maryland was not recognized and thus no divorce would be granted. This is now no longer the case.
But, what effect does this have on estate planning for same-sex couples?
The answer is yet to be known. Estate planning has many different components. First, does this case change how same-sex married couples will be subject to estate taxes in Maryland? Second, does this case change how same-sex married couples will be subject to Maryland inheritance taxes? Third, does this case change how same sex married couples are treated for non-estate tax related estate planning matters, related to Maryland intestate laws and Maryland laws related to spousal rights in estates, i.e. the elective share?
Maryland Estate Tax
As you may know, in Maryland, the estate tax exemption is $1,000,000. Anything passing over $1,000,000 is subject to estate tax. With traditional married couples, assets passing to a surviving spouse in an estate in excess of $1,000,000 were not subject to estate tax in Maryland because of the spousal exemption. Additionally, the surviving spouse could elect Qualified Terminable Interest Property (QTIP) treatment, i.e. placing the assets above the $1,000,000 exemption into trust for their benefit, but sheltering them from further estate tax upon their own death.
However, in Maryland, the laws expressly state that a QTIP election can only be made if the QTIP would qualify under Federal QTIP law. Since Federal law recognizes the Federal Defense of Marriage Act, the sentiment is that a same-sex surviving spouse in Maryland could not make such QTIP election because it would not qualify for Federal QTIP treatment. Therefore, any estate proceeds distributed over $1,000,000 to a same-sex spouse would not pass estate tax free. Interestingly, the Obama led White House has vowed not to enforce the Federal Defense of Marriage Act in Court. Thus, we anxiously await to see whether, if an election in Maryland or DC is made for QTIP treatment, and denied by the Register of Wills, if a challenge is taken to Court, and whether that challenge is upheld.
Maryland Inheritance Tax
Maryland law states that property passing to a direct family member, lineal descendant, non-profit organization, a corporation, if all stockholders are direct family members or lineal descendants, or property passing that is not in excess of $1,000, is not subject to inheritance tax. Pursuant to Port v. Cowan, the issue is whether a same-sex spouse is now considered a direct family member. Again, with this ruling just being issued on May 18, 2012, the inheritance tax issue has yet to have become an issue with the Register of Wills. However, unlike the estate tax issues above, the inheritance tax matter is governed pursuant to Maryland law alone. Thus, it is arguable that the recognition of same-sex marriage in Maryland subjects a same-sex spouse to inclusion as a “direct family member” and thus not subject to inheritance tax. The issue will no doubt some up sooner rather than later and we will have to wait and see how the Register of Wills rules.
Maryland Intestacy and Spousal Rights
Maryland Law also provides statutory rules with regard to a spouse’s share of an intestate estate as well as a spouse’s right to elect against the Will. For example, in a situation where a spouse dies without a will and with no minor children, the surviving spouse is entitled to the first $15,000 plus one-half of the remaining estate. Prior to Port v. Cowan, a same-sex spouse would be entitled to no percentage share of an intestate estate.
Similarly, a surviving spouse also has a statutory right to elect against the Will if, for example, they have been omitted from their spouse’s Will, or if the election provides for a larger distribution than should they follow the terms of the Will. By way of illustration, a surviving spouse can elect against a will and, if there is surviving issue, they will receive one-third of the net estate, if no issue, they will receive one-half of the net estate.
In both instances, it is too early to tell how the decision in Port v. Cowan will affect how a same-sex spouse is treated. However, like inheritance tax, if Maryland law recognizes same-sex marriages, then it is arguable that a same-sex spouse will be held inclusive as a spouse for spousal statutory rights with regard to an estate.
On its face, the ruling in Port v. Cowan appears to be a victory for same-sex couples. But I believe it to be a small victory in a battle continuing to be fought. This past March, Governor Martin O’Malley signed into law new legislation legalizing same-sex marriage in Maryland (effective January 1, 2013). It is possible that on January 1, 2013, this discussion will be null because same-sex spouses will be subject to identical treatment. However, in the meantime, in light of the Port v. Cowan and the upcoming law change, estate planning for same-sex couples is more important than ever. Stay tuned as this surely is the beginning of what may be a series of changes in an ever-changing area of law.
- Gary Altman, Esq. and Adam Abramowitz, Esq.