Of Love and Property: With DOMA Struck Down, Same-Sex Spouses Can Pass on Estates Without Penalty

Edith Windsor could not inherit her spouse's property with paying a massive tax bill.

Edith Windsor could not inherit her spouse’s property with paying a massive tax bill.

In a city where many residents’ wealth is wrapped up in their real estate, the ability to pass on a co-op, condo or townhouse to a surviving spouse without paying taxes is a significant benefit. But until this morning, even in New York—one of the handful of states in the country where same-sex marriage is legal—same-sex spouses were not exempted from federal inheritance taxes. Taxes that, when applied to a couple’s lifetime savings and particularly their home, could significantly reduce the value of an estate for the surviving spouse.

Now, in the wake of the Supreme Court decision to strike down the Defense of Marriage Act, surviving same-sex spouses will be able to inherit real estate and other property tax-free—one of the federal benefits that have long been extended to other married couples.

As the decision is being celebrated around New York today for its symbolic import, it’s worth examining its less glamorous practical implications, particularly in a city where the value of many apartments has shot up significantly in the last few decades. For instance, an apartment that was purchased for $250,000 in the 1980s could well be worth $2.5 million today and would be taxed accordingly as part of an estate. A staggering estate tax bill in the hundreds of thousands of dollars could well push a surviving spouse out of a shared apartment—particularly if the bulk of the estate is in the apartment and other assets cannot be used to pay the bill.

Nor does simply buying an apartment in both partners’ names protect the property from inheritance taxes—the surviving partner can still be taxed on the “windfall” of inheriting the other half of her home. And while many same-sex couples have taken steps to shield their shared assets from inheritance taxes—for example, buying in or transferring real estate to a trust (a practice which is not allowed by all co-ops in the city)—the Supreme Court decision will extend protection to all married couples, not only those who have been prudent enough to plan ahead.

Indeed, an inheritance tax bill was the basis of the lawsuit that brought DOMA down (let’s call it a consolation prize to conservatives). After her wife Thea Clara Spyer died in 2009, Edith Windsor was hit with a $360,000 tax bill on Spyer’s $4 million estate—a bill that a spouse in an opposite-sex marriage would have been spared. Among other shared assets, the couple owned a Greenwich Village co-op in both their names. DOMA, which defined marriage as between a man and a woman, precluded the IRS from treating Ms. Windsor as a surviving spouse. The New York City women met in the 1960s and spent decades engaged, long before marriage was even a distant possibility for same-sex couples. They finally married in Canada in 2007—two years before Spyer died.

Although same-sex marriage became legal in New York State in 2011, exempting same-sex couples from New York State inheritance taxes, gay and lesbian couples did not enjoy the same status in the eyes of the federal government.

“The decision will not have much, if any, impact in New York—it simply conforms to the existing state laws,” real estate attorney Stuart M. Saft, a partner at Holland & Knight, told The Observer. “But it will stop the federal government from trying to collect inheritance tax.”

Meanwhile, same-sex couples living in rent-regulated apartments have enjoyed the same rights as opposite-sex married couples since 1990, when the family rule was extended by a New York State appeals court. The rule protects the remaining member of an unmarried couple from being evicted from a rent-regulated apartment if his or her partner dies or moves.