IRS Allows Same-Sex Spouses to Recover Certain Transfer Tax Exemptions

The Internal Revenue Service recently released IRS Notice 2017-15 to provide special procedures for spouses in a same-sex marriage, or the executor of a same-sex spouse, to recalculate their gift and estate tax applicable exclusion amounts and remaining generation-skipping transfer (GST) tax exemptions in certain instances.

The Internal Revenue Code allows a marital deduction against gifts or bequests to a spouse or to certain trusts for a spouse so that those gifts do not use an individual’s applicable exclusion amount.  However, prior to the Supreme Court’s decision in United States v. Windsor and the IRS’s release of Revenue Ruling 2013-17 (discussed here), the IRS did not recognize marriages between individuals of the same sex.  Consequently, transfers between same-sex spouses, or to a qualified terminable interest property (QTIP) trust for a same-sex spouse, were not eligible for a gift or estate tax marital deduction and used a portion of the transferring spouse’s applicable exclusion amount.  The Supreme Court ruled in Windsor that same-sex marriages must be recognized by the Federal government (and therefore the IRS) if the marriage was valid in the jurisdiction where it was celebrated.

The GST tax, or the allocation of GST exemption, applies to certain transfers to an individual more than one generation below the transferor (e.g., transfers to grandchildren).  Under the GST tax rules, spouses are deemed to be in the same generation.  Prior to the Windsor decision, however, a transfer for the benefit of a same-sex spouse or that spouse’s children might have used the transferring spouse’s GST tax exemption, or resulted in GST tax, if the transferee spouse or that spouse’s children were in younger generations under the GST tax rules.

IRS Notice 2017-15 provides that an individual, or an individual’s executor, can recover applicable exclusion amounts and GST tax exemptions used prior to the Windsor decision on transfers to the individual’s same-sex spouse.  Recovering those tax exemptions could preserve them for use in offsetting taxes on transfers to non-spouse donees.  The Notice provides that an affected individual or executor should recalculate the applicable exclusion amount or GST tax exemption on the individual’s next-filed federal gift tax return or estate tax return, or on an amended return filed prior to the expiration of the statute of limitations, noting at the top of the return that it is “FILED PURSUANT TO NOTICE 2017-15” and providing explanations of the restated amounts.  The IRS will provide worksheets on its website, www.irs.gov, for computing and reporting the recalculated amounts.

Unfortunately, Notice 2017-15 does not allow an affected individual to claim a refund for tax paid if an amended return is not filed before the expiration of the applicable limitations period, nor does the Notice extend the time limit on electing to split gifts between spouses.  In addition, if a QTIP or QDOT election would have been required to obtain a marital deduction for a past transfer, a request for relief must be submitted pursuant to Internal Revenue Code § 301.9100-3 to make that election.

Due to time limits on amending tax returns and claiming tax refunds, it is critical that affected individuals promptly investigate whether the procedures outlined in IRS Notice 2017-15 could be utilized to reduce their overall transfer tax burdens.