New York Estate Planning Lawyer Blog

Earlier this week we touched on the fact that estate tax issues need to be on all New Yorkers' radar, because the state tax kicks in at a far lower level than the federal tax. The federal rate was seemingly fixed as part of the compromise legislation that averted the "fiscal cliff" earlier this year. While any law can be changed, the passage of this legislation was assumed by most to signal some level of finality on the matter. Debate had raged for months (even years) about the exemption level and rate. The uncertainty was a challenge for estate planners, because it is more difficult to craft complex protection plans when the tax rules are a moving target

In that vein, regardless of one's own opinion of the estate tax, passage of the compromise bill was a welcome relief--offering stability. But that stability may be short lived, as proposals about changing the federal estate tax have are already making their way back into national political discussions.

Here We Go Again
As reported this week, President Obama released his administration's proposed budget. Part of that proposal calls for changing the estate tax in five years, back to the level and rates that existed in 2009. More specifically, this would mean an exemption level of $3.5 million and a top rate of 45%. That proposal is closer to what the President was hoping to achieve when in the midst of the fiscal cliff avoidance talks--he ultimately settled for a less aggressive tax. According to a Washington Times story, the exemption level in the latest proposal would likely affect about 3 out of every 1,000 taxpayers. According to the President's budget proposal this new rate and level would raise about $79 billion over a ten year period. Obviously he plans to use those funds to fill gaps in the federal budget.

Importantly, the same proposed budget includes various other tax changes and elimination of certain currently available planning tools.

It is unclear how likely it is that the President's budget will pass in any version similar to this proposal. There is a big difference between offering a budget and actually having it become law. That is especially true considering the House of Representatives is controlled by Republicans who have very different ideas about these issues. At the very least, it will be important to see how the debate around these issues take shape to get an idea of what tax changes may actually make their way through the system and affect estate planning strategies.

Much discussion at the end of last year dealt with the estate tax. As federal officials groped for a compromise to avoid the so-called "fiscal cliff," details about the federal estate tax were one part of the negotiations. Democrats wanted it returned to levels during the Clinton Administration while Republicans wanted it eliminated altogether.

Just before the deadline, a law was passed which apparently settled some of the matters of contention. In so doing, it seemed to finally provide some permanence to the federal estate tax. The tax rate now tops off at 40% (a jump from the previous 35%) and begins on parts of the estate over $5.25 million. The exemption level is pegged to inflation, and so it will rise slightly each year.

With news of this new estate tax compromise (and its relatively high exemption level), many have pointed out that the federal tax is now only a concern to a small slice of the population. After all, the majority of residents will not die with assets over $5.25 million, and so estate planning to avoid that federal tax is unwarranted.

Yet, in all the discussion over the tax and the political battle around it, some may be under the impression that the federal estate tax is the only major tax issue with which they need to be concerned regarding their long-term planning. This is misleading. That is because, among other things, many states still have their own separate estate tax. And the state taxes usually kick in at far lower levels than the federal one.

That is certainly true in New York. Our state taxes all assets over $1 million, with a top rate of 16%. While this may still seems like a large amount, there is a mountain of difference between one and five million dollars--and a huge number of families will need to account for New York estate taxes while not worrying about federal estate taxes. When the value of retirement accounts, homes, cars, stocks, bonds, and other assets are all taken into account, it is not uncommon for an estate to pass the $1 million threshold even when community members would not expect it to do so.

The bottom line is that many New Yorkers need to be aware of this estate tax burden. Don't be deceived about news stories touting a $5.25 million exemption level. Be sure to talk with a NY estate planning lawyer and ensure you are best positioned to pass as large a portion of your assets as possible in the manner you desire.

Last week is already being referred to as one of the most important in the history of the equality movement for gay and lesbian couples. That is because, as all news outlets reported on significantly, the U.S. Supreme Court heard two cases related to marriage rights for same sex couples. We have discussed these cases frequently over the last few months, one of them deals with the federal law known as the "Defense of Marriage Act" (DOMA) and the other involves a state referendum in California known as Proposition 8.

For New York estate planning purposes, the DOMA case has very obvious ramifications. The very plaintiff in the case is a New York resident (Edith Windsor) who is suing in her capacity as executor of her later partner's estate (Thea Spyer). Windsor and Spyer were married in Canada and that relationship was legally recognized in New York. However, because of DOMA, the federal government did not recognize the marriage. The divergent recognition of the couple's relationship was not merely a symbolic difference, it had very real legal impacts. Specifically, Ms. Windsor was forced to pay over $360,000 in estate taxes to the federal government that she otherwise would not have paid if her relationship to Spyer was recognized. It is a pretty cut-and-dry demonstration of how same sex couples are impacted because of a lack of federal recognition of their marriage.

Obviously, the Supreme Court's ultimate determination of the constitutionality of the challenged portion of DOMA will affect the planning of same sex couples.

What will they decide?

Some "court watchers" have made a career out of making predictions about how the U.S. Supreme Court will rule on any given matter based on the questions that the judges pose to attorneys during the hearing. However, it is critical to concede that those questions are hard to judge, and any predictions be taken with a grain of salt.

However, that being the case, there was a clear consensus among pundits about what the hearings suggest about how each Justice is leaning. All told, the justices spent a considerable time discussing the issue of "standing." This refers to whether the group defending the law was the proper party to defend it.. In the DOMA case this is a group of House Republicans referred to a BLAG. Usually these laws are defended by the U.S. Justice Department, but the Attorney General and the President have stated that they believe DOMA is unconstitutional and have refused to defend it. If the Court decides that BLAG does not have standing then essentially they will not reach a judgement about the law itself, and a lower court ruling will stand--the lower court ruling found DOMA to be unconstitutional.

If they determine that BLAG does have standing, then they will actually weigh in on whether DOMA comports with constitutional Equal Protection requirements. Most observers are skeptical that, if the Court reaches the merits, they will keep DOMA in place. The 4 "liberal" justices as well as moderate Justice Kennedy all seemed very concerned about the equal protection issues of excluding same sex couples for federal purposes during questioning.

Ultimately, we won't know anything for certain until late June when the Court will likely release its opinion. It is important for all local families who may be impacted by this decision to keep abreast of the ruling and to visit with their estate planning attorney for guidance on how any ruling may affect their own affairs.

One of the biggest names and personalities in recent New York City history passed away in early February: Ed Koch. Koch has a wide-ranging career, most notable for his three terms as New York City mayor. The mayor emeritus apparently died with healthy bank accounts, as a recent Forbes article suggests that his estate is valued at about $10 million. Apparently most of the wealth was accumulated after he left office in the late 1980s. A high-profile name, Koch made money giving speeches, writing books, appearing and the radio and television.

As usually happens after a celebrity passing, many have asked how Koch's fortune might be distributed. Court documents recently filed in the matter shed light on how it all might shake out--offering yet another example of the need for community members to be vigilant about their affairs to protect against large tax obligations.

According to reports, Koch left most of his fortune to various relatives along with some charities. He made specific cash distinctions to certain relatives (i.e $500,000 to sister and husband, $100,000 to sister in law, etc.), and left the "residuary estate" (everything remaining after specific gifts) to three nephews.

However, what those three nephews will receive will likely be significantly reduced as a result of estate taxes. Most are familiar with the federal estate tax, because it has been a hotly debated issue in recent Washington D.C. political battles. Per terms agreed upon earlier this year, the this rate is set at 40% for portions of an estate over $5.25 million. Considering Koch's estate was well above that, a large federal estate tax bill is due. But that is not the only tax bite--New York state taxes also apply. The estate tax in New York has a $1 million exemption level and a top rate of 16%. All told, some suggest that this means that the estate will owe about $1.45 to the federal government and $1.1 million to Albany.

Observers have already pointed out that it likely would have been a better move for the inheritance to have been left in a trust. In that way a large portion of the tax would have been shielded from the "generation skipping transfer tax." In addition, the money might be protected from creditors, spouses, and others. On top of using trusts, various gifts might have been employed to lower the tax bill. For example, by providing substantial gifts while still alive, Koch might have lowered his New York estate tax bill. The value of his estate would have been lower upon his death--meaning a smaller number upon which the 16% NY estate tax would apply.

We have frequently discussed the federal law known as the Defense of Marriage Act. Passed in 1996, the law essentially prevents the federal government from recognizing as married same-sex couples who are legally wed in individual states. Of course, New York allows gay couples the right to marry. Under state law, all couples, gay and straight alike, are treated the same. However, while in most cases the federal government defers to state law on legal marriages, that is not so for same-sex couples. To this day they are treated as legal strangers for federal purposes, creating a whole host of complex long-term planning, tax, and government support complications.

New York DOMA Challenge
Over the past few years a few legal challenges have been heard in federal courts arguing that DOMA violates federal constitutional principles. In virtually all of those cases the courts have ruled in favor of the plaintiffs, agreeing that parts of the law are unconstitutional. However, considering the magnitude of the issue, it was almost guaranteed that the decision would ultimately lie with the U.S. Supreme Court.

Last year the Supreme Court agreed to hear one particular DOMA challenge filed by a New York woman who was forced to pay significant federal estate taxes after her partner's passing, even though the couple was legally married. If they had been an opposite sex couple, then there would have been no estate tax burden. The case, United States v. Windsor, will be argued in front of the high court later this month.

The matter will be heard in conjunction with another gay marriage-related case, Hollingsworth v. Perry. That matter is somewhat different, addressing the substantive rights of states to ban same-sex couples from getting married. It centers around the "Proposition 8" measure which passed in California banning gay marriage in 2008.

Amicus Briefs
Gay marriage obviously remains a hot-button topic. As such it is perhaps not surprising that a wide range of advocates have submitted "amicus" briefs to the Supreme Court. These are "friends of the court" briefs which are offered by various individuals, organizations, and groups intended to make different legal arguments. Many different briefs have been submitted in the DOMA case. The SCOTUSBlog has helpfully compiled virtually all of them. If you are interested, please Click Here, to take a look at the full list and view any briefs of interest.

The last few months of 2012 were filled with mass speculation about how many federal tax issues would ultimately be decided. One part of the high-profile "fiscal cliff" proposal and competing options was the estate tax. As oft-discussed, the final tax details could have fallen anywhere between a $1 million or $5 million exemption level, with rates anywhere from 35% to 55%. Fearing that no agreement would be made and the country would "go over the cliff," many local residents conducted last minute wealth transfers to take advantage of what was assumed to be relatively favorable rates in 2012 that might disappear in 2013.

As we now know, the country did not go over the cliff. As for the estate tax, the compromise did not see nearly as sharp a rise as expected, with a $5.25 million exemption level and 40% rate (up somewhat from the 35% in 2012).

Considering that the concerns which led to many transfers in late 2012 were false alarms, is there anything that can be done to reverse the transfers? That was the subject of a recent Forbes article discussing the "Buyer's Remorse" of many who pulled the trigger on different financial plans as a result of tax uncertainties.

The story reminds that wealth transfers to others--usually children or grandchildren--can be reversed only in certain circumstances, depending on how the arrangements were crafted. Fortunately, in most cases the transfers were made via trusts with "controls" attached. Those control often allow changes to be made which can help when seeking to effectively take the gift back.

Alternatively, the story explains how having a spouse can have the same effect. That is because in many cases the transfers gave large gifts to children in trust. Those transfers usually allow one's spouse to use the funds (both income and principal) in any way that they chose. In that way, a couple may still have use of funds as if a gift wasn't made.

The only way to know your options for sure are to work with your financial advisor and estate planning attorney to get tailored advice. Each financial transaction is different, and there is significant flexibility in how different trusts are set-up. The options for a "do over" hinge on those details. Even if you did not conduct end-of-year transactions in 2012 ,this situation is a helpful reminder of the need to think clearly in the future about whether or not you want certain planning actions to be revocable or irrevocable. There are different benefits to each, but it is critical to understand what steps are permanent and what steps are not when working through long-term financial planning and asset transfers.

Like it or not, our world is infatuated with technology. Smartphones conduct intercontinental transactions. Friends across the country communicate through instantaneous text messaging, and telephones and tablets close distances and miles through face to face conversations. Because technology plays such an important role in our daily lives, today's estate planning should include an arrangement for organizing and protecting technological and digital assets.

Dividing Up Digital Assets
We have frequently discussed how there are different kinds of digital assets to think about when drafting your estate plan. First, there are your personal digital assets, which would include any email accounts, personal social media accounts and maybe even a personal web site or personal blog. Personal digital assets might also include any photos or documents stored on different websites, like Snapfish, Shutterfly or Dropbox. Information stored in any cloud storage should also be considered personal digital assets.

Along with personal digital assets, there are also financial digital assets, which would include any online banking or financial account information. Many people choose to pay their bills electronically, and even automatically, through their banking system or their bank's website. Others may use a company's website to pay their bills directly through that site, such as paying a monthly credit card bill using the bank's credit card website or using a utility company's online billpay system. Often, paying bills can be a mass of online passwords, dates and accounts. Any of these passwords, or the information contained in any of these accounts, would be considered your financial digital assets.

Finally, there are your business digital assets, which would include anything related to your business itself or business records.

Planning for Digital Assets
So how do you include your digital assets as part of your estate plan in this age of technology?

Organization is the first step. First, you need to begin organizing your digital assets, so that you know what digital accounts and information you have. Begin to take note of all of your different accounts and passwords, and explore a safe, secure and easy solution for storing your passwords, as explained in this Forbes article. Once you have this list, you will also want to update it frequently with new accounts or password changes. In your organization, you may also want to consider which information you'd like family members to be able to access, like family photographs or important family documents, and create a space in cloud storage for multiple family members to access.

After you've organized your accounts and information, you'll likely want to think about how these accounts and information within these accounts should be handled after your own passing. For example, do you want your social media site to live on after your own passing? Or would you rather it be deactivated? After you've thought through how you'd like this information handled after your passing, then you should incorporate instructions regarding this information into your estate planning. It may be wise to ensure that your estate planner, as well as your executor, knows how to access your organized list of online accounts with passwords, and your instructions for the accounts and information. With a bit of forethought, organization and planning, your digital assets can be a well thought out part of your overall estate plan.

One of the most common concerns that parents have when creating an estate plan in New York is worrying about passing on too much wealth to children who cannot properly handle it. After a lifetime of hard work, ingenuity, and prudent planning, the last thing many families want is to see a child obtain an inheritance and then lose it. One need only check newspapers headlines to see celebrity examples of younger individuals with too much money whose lives take a turn for their worst as they fail to handle their wealth carefully.

A Wall Street Journal article last week discussed this issue in the context of the now seemingly permanent federal estate tax rates. Per the "fiscal cliff" agreement, the estate tax law will allow each individual to shield up to $5.25 million. For a couple, that allows $10.5 million to be given to others tax-free.

While this is good news for those who have this much wealth to pass along, it does raise some questions for families. Is your child--no matter what age--prepared to handle an inheritance of this size? Will it be lost to creditors? Taken by a spouse? WIll the money change the child's motivation or long-term goals?

It is entirely prudent to ask these questions and work with estate planning attorneys to come up with creative ways to protect against one's concerns.

Of course, the trust is the crucial legal instrument that allows wealth to be passed on with certain protections and limitations set up, depending on your specific situation. Every trust is managed by a trustee. The trustee can administer the legal entity to ensure that beneficiaries are taken care of while protecting the principal. For example, the trustee can work with the beneficiaries to dole out funds when necessary--for college or a wedding--while not giving the beneficiary free control right away. Alternatively, disbursements to the beneficiary can be made in pieces, with a certain percentage of the inheritance given in five year increments.

At the end of the day, there are many different options that are available to families of considerable wealth to ensure that they pass on an inheritance without concern about how it will be used or affect their children. The first step is to visit with an estate planning lawyer who can provide tailored advice about what legal tools can be used to meet the specific needs of your family.

Like the monster from a horror movie that will not stay still no matter what is thrown at it, there are already suggestions that the apparent "final" decisions related to the estate tax may not actually be all that final.

As we previously explained, as part of the fiscal cliff compromise bill certain estate tax issues were seemingly made permanent. The exemption level was kept at $5.12 million and indexed to inflation. The top rate was set at 40%. Both of these figures were less intrusive than that original proposals from the White House and far less severe than those mandated by the fiscal cliff itself. Many observers were happy with the outcome, no matter what their personal preferences, for the fact that it at least offered some stability. Having an uncertain tax rate is never a welcome prospect when planning for the future.

Also, as pointed out in a recent article discussed the estate tax components of the bill, the tax will continue to be "portable." This means that one spouse may use their deceased spouse's "unused" portion of the exemption level. This is a very helpful tool which allows more assets to pass tax-free without the need for more complex estate planning techniques.

Not Over?
However, that actual permanence of that estate tax situation is in doubt. For one thing, there is actually never any assurance that any current tax will remain indefinitely. That is because Congress always retains the ability to pass new legislation to alter things. In practical terms, "permanent" is usually used to refer to tax rates that have no sunset date (like the current one).

But there are already some concerns that the estate tax is not necessarily out of the woods. That is because this compromise bill does nothing about the possible spending cuts. Congress and the White House will again have yet another showdown in the coming months to hash out agreement over those cuts and possible need to raise the debt ceiling. Anytime that the parties are in negotiation over these large budget issues, virtually all taxes are theoretically on the table. That means that it is not out of the question that the estate tax rate or exemption level may be edited in some way as part of those future deals.

At the end of the day, none of this alters the inescapable fact that estate planning should be done now. As the last year has demonstrated explicitly, there will never be complete certainty about these issues. But planning by experienced professionals is able to adapt to those permanent uncertainties to provide the security you need.

Timing is of critical importance with estate planning matters. Obviously, a plan must be in place early enough to be of use before one falls ill or suffers from mental issues. For example, creating a will or trust may be impossible after one suffers a stroke or succumbs to serious effects of Alzheimers. This is why we continue to encourage residents to make plans early and consistently update them.

Time also factors into matters after a death. Many beneficiaries may face hardship if they are forced to wait months (or even years) to have an estate settled. One of the key benefits of an inheritance plan is to minimize the risk of a long delay between the actual passing on of assets, often focused on avoiding probate and preventing feuding.

Celebrity Example
The latest developments in the estate battle of Huguette Clark offers an example of the consequences of a drawn-out legal battle. Ms. Clark was the reclusive daughter of Guilded Age baron Senator William Andrews Clark. He amassed a fortune in the copper and railroad industries and is known as the founder of the city of Las Vegas. An intensely private individual, Huguette spent the last three and a half decades in Manhattan hospitals, even though she was not actually ill. In the several decades before that she rarely left her Fifth Avenue apartment.

Ms. Clark died over a year and a half ago, in May of 2011. However, her assets--valued between $300 and $400 million--have yet to be distributed. That is because a dispute arose between the woman's extended family and others close to her. Two wills were apparently found, signed by the heiress six weeks apart. The first will gave most of the fortune to her extended family while the most recent will left them nothing. The extended family contested the second will, as they have concerns about the undue influence her network of nurses and doctors may have had over the elderly woman. There are claims of coercion related to gifts totaling tens of millions of dollars that were given to some of those individuals.

The legal battle is still unresolved. However, according to a Huffington Post story from this week, one of the potential heirs recently died. A 60-year old great nephew of the heiress was found last week under a bridge in Wyoming. The man was apparently homeless and died as a result of exposure to the elements on the cold winter's night. Had he survived he may have stood to gain nearly $20 million as a result of the inheritance. His cut of the inheritance will now go to his other relatives.

The case is a sad reminder of the many ancillary consequences of not having detailed estate plans in place to handle matters as efficiently as possible.

Chances are you have already heard that a bipartisan agreement was reached on New Years Day which averts the significant tax increases and spending cuts demanded by the so-called "fiscal cliff." The agreement certainly went down to the wire, with the Senate passing a bill on the last day of the year and the House passing the same bill the following day. Up until the end it was unclear if a compromise could be reached, as House leaders initially claimed that they would amend the Senate bill and send it back to that chamber. In the end, however, a vote was taken on the Senate bill without any changes, passing with support from members of both parties.

The compromise legislation does not resolve all of the issues in disagreement between the parties. More negotiation and legislation will be needed in the coming months to settle those other matters.

The Basics of the Deal
A few aspects of the compromise have direct bearing on long-term planning for New Yorkers. Perhaps most obviously, the estate tax levels have been set, presumably for the indefinite future. Per the agreement the highest tax level will be 40%, with a $5 million exemption level pegged to inflation. That is a far higher exemption level and lower rate than would have taken effect if the fiscal cliff proposals were enacted. It is also better for opponents of the tax than the main proposal offered by the Obama Administration of a 45% rate and $3.5 million exemption level.

Additionally, the agreement makes tax changes to retirement accounts that many community members use as part of their long-term financial planning. The new law will convert 401(k)s into Roth IRAs. Essentially, the change alters when the funds put into these special retirement accounts are taxed. While 401(k) contributions can be deducted right away (providing a tax savings on the front-end), Roth IRA contributions cannot be deducted. Conversely, while a Roth IRA withdrawal is not taxed, a 401(k) withdrawal is taxed. Lawmakers are pushing residents away from 401(k)s so that more tax revenue is collected in the short-term instead of the long-term.

In addition, many different changes were made on tax rates in general. The 2% payroll tax reduction was allowed to expire, which will affect virtually all residents. The income tax on high-income earners ($400,000 for individuals and $450,000 for couples) will rise, and the capital gains tax on those same high-income households will also rise.

If you have any questions about how these federal legal changes might affect your estate planning in New York, be sure to contact our office to see how we can help.

Only a few days remain in the year, and most financial activity for 2012 has come to a close. However, the end of year action has already brought one of the most active seasons ever. Financial advisors, estate planning attorneys, and others have all seen community members of all different income brackets seek out help understanding how possible legal changes in the new year might affect their own financial health and long-term prospects.

A Forbes story last week explored one of the main reasons for confusion and the seeking out of help: the "give now or pay later" problem. This is an issue that mostly affects those with significant assets who may be affected by gift and estate tax changes. As has been documented exhaustively, Congress is considered what to do with the gift and estate tax. Over the past ten years the tax rate has steadily fallen and the exemption level has risen. In 2010, the estate tax was eliminated altogether. However, what will happen in the new year remains to be seen.

Many different options are on the table--from a permanent elimination of tax (unlikely) to a return to pre-2001 rates. A table from the Tax Policy Center (viewed here) offers a helpful snapshot of the options and how many people would be affected by each. One comparison offers the range of possibilities. If the current rate continues, about 3,800 estates will be affected next year. Those estates would bring in about $12 billion in taxes. Conversely, if the 2001 rates returned then 47,000 estates would be affected and over 300% more tax revenue would be generated.

For those families affected, the possible significance of changes is clear. The Forbes article points to a helpful example. Right now if you give another person $5 million, then you pay no taxes on that gift. Without action, next year the same gift with also come with a $2 million gift tax bill. This is no minor change.

Of course, even though we are only days away, almost none of the uncertainty has been eliminated. As before the best option is to watch the debate and policy action closely while keeping in contact with your planning professionals to determine if any changes are needed in the future to account for any changes in the law.

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The political wrangling to avoid the so-called "fiscal cliff" continued this week. Many different issues are all tied up in the negotiations, including income tax rates, defense spending, entitlement spending, and control of the debt limit. However, various reports suggest that the both sides in the political battle--primarily the Obama White House and U.S. House Republican leaders--are now trying to work out some agreement on estate taxes.

Still Wide Disagreement
Most discussion of tax issues and the fiscal cliff affecting upper income Americans revolved around the income tax. There is disagreement about whether current income tax rates for those in the highest bracket should increase slightly or stay the same. Both sides publicly believe that current rate should be extended for middle tax brackets. Because of the focus on income taxes, real negotiation of estate taxes has been pushed to the side. That appears to be changing.

According to a recent NBC story on the situation, the parties are now trying to reach some common ground on the estate tax. The current rate is 35% on all assets over $5 million. If no agreement is reached and we go over the fiscal cliff, then the exemption level drops to $1 million at a 55% rate. This represents a significant change with very real implications for many New Yorkers. In general, Republicans oppose any change to current rates while most Democrats (including the President) propose a compromise with higher rates and a lower exemption levels than at present but not as stark as the fiscal cliff amounts. The President has proposed a 45% rate with exemptions up to $3.5 million.

One complexity in the negotiations is that there may be disagreement within the Democratic party. Some leading figures have agreed with Republicans that current rates be extended. The concern is that lowering the exemption level and increasing the rate might hurt certain groups, like family businesses and farms.

Yet, figures from the Tax Policy Center suggest that of the 3,270 families that paid the estate tax last year, less than 50 involved small businesses and farms. Instead, the collections seem to be concentrated among a certain groups, with the top 1% of earners in the country paying 80% of the total estate tax.

In any event, all families who may pass on assets over $1 million must pay careful attention to these negotiations, as changing rules may impact their long-term planning.

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The U.S. Supreme Court made headlines on Friday when it agreed to hear two cases which may have significant implications on the rights for same-sex couples in New York and throughout the country. The stage is now set for a few months of speculation and commentary on possible outcomes before the Court finally hears the cases. It is important for same-sex couples to understand the implications of each case, as the legal issues in each are different.

DOMA & State Bans on Marriage
One of the cases which the Court will hear is United States v. Windsor. As we have often discussed, at the center of the Windsor case is the Defense of Marriage Act (DOMA). Several appellate courts have now found that parts of DOMA violate the U.S. Constitution in that they deny federal benefits to legally married same-sex couples solely on the basis of their sexual orientation. In granting the petition of those appealing the lower court rulings, the U.S. Supreme Court will likely settle the matter once and for all.

Alternatively, the second case that the Court agreed to hear, Hollingsworth v. Perry, stems from the Proposition 8 ban on same-sex marriage in California. Unlike the DOMA case which deals with federal recognition of these unions, the Prop 8 case has implications for individual state decisions on marriage rights. There is a bit more legal complexity to the Prop 8 case, as the district court and the U.S. Circuit Court of Appeals both struck down the Proposition but for slightly different reasons. The bottom line is that, depending on the U.S. Supreme Court's decision in that case, same-sex marriage may not be allowed in California, be allowed in parts of California, all of California, or even in every state in the union. However, because same-sex marriage is already legal in New York, the rights of gay couples in our state will likely be most directly affected by the outcome in Windsor.

Interestingly, in both cases there are "standing" issues. That means that there is disagreement regarding whether the specific parties seeking the appeal even have the right to be in court on this issue at all. Therefore, on each case the Supreme Court has the option of rejecting the appeal without actually reaching the merits of the case.

What Is In Store
The actual hearings for these two cases will likely take place in late March--perhaps even on the same day. Following those hearings, the Court will deliberate and eventually reach a decision. Opinions will be written and then officially released to the public, likely sometime in late June.

Perhaps the only immediate change for local couples is that, becase the Windsor case was accepted, there is a "stay" on the lower court decisions in DOMA cases. In other words, had the Supreme Court refused to hear these cases, then there is a chance that DOMA may not have had effect in those jurisdictions where courts found it unconstitutional. However, as expected, the Supreme Court itself will have the final say. Until they declare otherwise, DOMA is in full effect, and same-sex couples in New York--even when married legally--need to conduct unique estate planning to account for their disparate treatment under federal law.

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The Story Behind the New York DOMA Challenge

You cannot turn on the TV, flip open a newspaper, or pull up a news website this month without seeing the words "fiscal cliff." As many are aware, this refers to sweeping, mandatory federal tax and budgetary changes that are set to take effect January 1st unless the Congress and White House pass legislation with an alternative plan. Essentially the "cliff" is about $7 trillion worth of tax increases combined with significant spending cuts across the board--including everything from Medicare and Medicaid to the military.

What is interesting about the cliff is that virtually no one on either side of the aisle actually wants it to take effect. Instead, it was only put into place as a compromise over a previous debt ceiling legislative fight. The idea was that that the cliff would be so abhorant to both sides that its impending appearance would force a compromise. However, as the end of the year gets closer, more and more observers are worrying that even with the serious consequences of the cliff, no compromise is in sight.

Currently, the Obama Administration and Congressional leaders (most notably, the Republican House leaders) are trying to reach agreement on an alterantive to prevent the mandataory changes. As part of that effort, President Obama recently released his "first offer." As summarized in a recent article, the offer is far from what the Republican leaders have proposed, so it is unlikely that it will be taken seriously. Essentially, it calls for around $1.6 trillion in tax increases over a ten year period--mostly related to expiration of the so-called "Bush tax cuts." In addition, it calls for modest stimulus spending. The proposal would also permanently eliminate Congressional control over the debt ceiling level (which caused the current crisis to begin with).

On the one issue that has the most direct impact on estate planning, the proposal calls for estate tax rates to return to 2009 levels. That is a $3.5 million exemption level and a top rate of 45%. That is compared to a current $5.12 million exemption at 35%.

What Does It Mean For You?

No matter what the final resolution, advocates, advisors, attorneys, and others on all sides of the issue agree that stability is key. For planning purposes, it is always advisable to know what the rules will be for the future, instead of having the risk of major changes every two years.

For those hoping to dig deeper, the Tax Policy Center has a "Fiscal Cliff Calculator" that allows you to plug in your own details and see how various proposals and the cliff itself will personally affect you. You may be surprised at the significant nature of the results. For example, the "cliff" affects everything from unemployment benefits to payroll taxes, and so everyone is likely to be affected, no matter what their current situation. Be sure to keep a close eye on the possible proposals as they are discussed in the coming weeks. It is also important to talk to your financial advisors and visit with estate planning attorneys to learn more.

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