Same-Sex Couples Can Face Higher Estate Tax Liability

OCTOBER 30, 2000 VOLUME 8, NUMBER 18

Gay and lesbian couples need to take special steps to make sure that their wishes are carried out at death. The law makes some assumptions about the intentions of married couples—that they usually intend to leave their property to one another, for example. There are also tax rules benefiting married couples that are not available to same-sex couples.

Mary Scott and Lucille Horstmeier lived together in Illinois for nearly twenty years. Ms. Horstmeier was a locally prominent businesswoman, while Ms. Scott managed the household, handled the couples’ finances and took care of housework and repairs. For some of the time they lived together, Ms. Scott worked at the school Ms. Horstmeier managed, but her earnings were considerably lower than her partner’s.

In 1975 the two women moved into a new home in Glenview, Illinois. Ms. Horstmeier made the down payment and all subsequent payments, and took the title in her name alone. While Ms. Scott contributed some of her earnings to the household over the ensuing years, she never contributed directly to the mortgage payment on the home.

Ms. Scott maintained that the two women agreed that they would own the home jointly, and that her name was left off the title only because she did not have a down payment or a steady income at the time they bought their home.

One problem that frequently arises in similar situations can occur when the couple separates, or one partner dies, and no arrangement has been formalized for division or transfer of the property. Ms. Horstmeier, however, had planned for her own death—she made a will leaving all her estate to Ms. Scott and naming Ms. Scott as her executor.

When Ms. Horstmeier died in 1993, however, there was still a problem. Because she had been successful her estate was large enough to incur an estate tax liability. If Ms. Scott could have been treated as a surviving spouse there would have been no problem, since estate tax law permits an unlimited amount of money and property to pass to a spouse without tax. But Ms. Scott’s problems with the IRS were even larger.

Since she believed that she was already a one-half owner of the couple’s home, Ms. Scott reported only half the value of the home (minus half the remaining mortgage) on Ms. Horstmeier’s estate tax return. The IRS disagreed, insisting that the entire home had belonged to Ms. Horstmeier. The distinction was important, since the IRS position produced an additional $157,404 in taxes.

The IRS position prevailed in the Tax Court, and Ms. Scott appealed. The appellate court agreed with the Tax Court, and ordered the tax paid. Scott v. Commissioner, September 8, 2000.

What could Ms. Horstmeier and Ms. Scott have done differently? They could have taken the title in their joint names and made joint payments on the mortgage, or even signed a written agreement in advance. The planning they did complete was good—without it the home might have gone to Ms. Horstmeier’s relatives instead of Ms. Scott. They should also have anticipated yet another problem facing same-sex couples in their effort to achieve the benefits routinely available to married partners.

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