As Jane Austen began once, “it is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.” This famous line may not be so far off, since married couples catch significant tax breaks because of their relationship status.
In all states that impose estate taxes, as well as at the federal level, married couples receive a “marital deduction.” This deduction allows a deceased spouse to transfer all of his or her assets tax-free to the surviving spouse.
However, one’s feelings and views on marriage tend not to stem from a tax-savings perspective. Take Oscar-winning actor Philip Seymour Hoffman, for instance, who unexpectedly died in February of this year. His decade-old will left most of his $35 million estate to his long-time companion, Marianne O’Donnell. From a tax planning perspective, Hoffman and O’Donnell made a huge mistake in not getting married.
If the couple had been married, Hoffman’s estate would have passed to O’Donnell sans tax because of the marital deduction. Instead, his $35 million estate will owe close to $12 million in combined estate taxes to the federal government and New York. Furthermore, there is potential for double taxation if any of the assets remain in O’Donnell’s estate at her death.
If a couple decides marriage does not suit them, there are other ways to receive the tax benefits of marriage without needing to tie the knot in a few states. For example, the District of Columbia and Oregon recognize domestic partnerships as marriages for estate tax law purposes. Although New York City offers domestic partnerships to opposite sex couples, New York State does not, and so there were no estate tax benefits for a couple with Hoffman and O’Donnell's arrangement.
Marriage is not for everyone, but there are tax reasons to consider it for the protection of one's loved ones and assets.
By: Sarah Mugmon
Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Are estate tax benefits incentive to choose marriage?
Sign up for a free trial of the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.
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