Update: The below article describes estate tax considerations for couples in same-sex marriages during the time period of 2013-2015. In 2015, in the case Obergefell v. Hodges, the U.S. Supreme Court made same-sex marriage legal in all states. In other words, estate taxes now work the same way for all married couples. For a current discussion of other estate planning issues for same-sex couples, see Estate Planning Considerations for LGBTQ Couples.
When the U.S. Supreme Court ruled that much of the Defense of Marriage Act (DOMA) was unconstitutional in June 2013, it made big headlines—but how many people realized that the case before the court was about the federal estate tax?
DOMA's constitutionality came before the Court because the law prohibited the IRS from recognizing same-sex marriages that were valid under state law. As a result, New York resident Edie Windsor had to pay federal estate tax on the money she inherited from her late spouse, simply because Edie had been married to a woman, Thea Spyer. Had Thea been Theodore, Edie would have inherited everything tax-free; as it was, the estate paid $363,000 to the IRS. (She'll now be getting a refund, plus interest. It's not clear if other surviving spouses in the same position might be entitled to a refund.)
Despite Edie Windsor's victory, the Court's decision didn't make it clear whether or not the IRS would treat all same-sex married couples as married for tax purposes. What if a couple married in one state but moved to another that (at the time) didn't recognize same-sex marriage? Two months after the Court's ruling, the IRS announced that it would treat all legally married same sex couples as married for federal tax purposes, no matter which state they live in.
At that time (before same-sex marriage became available to all Americans), the new law meant that if a couple got married in a state that allowed them to enter into a valid same-sex marriage, and then moved to a state that didn't recognize same-sex marriage, they would still be married for IRS purposes. They would file their income taxes as married and be entitled to the spousal benefits written into the federal estate tax.
States where same-sex couples could enter into a valid marriage in 2013 were: California, Connecticut, Delaware, the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington.
The ruling didn't—and still does not—extend to civil unions or domestic partnerships.
Sixteen states and the District of Columbia currently impose their own estate tax in addition to the federal tax. And like the federal government, these states exempt from the tax all money, no matter how much, that passes to the surviving spouse.
So same-sex couples face the same issue: Will the state recognize their marriage as valid? Most states that have their own estate tax, except Hawaii, Illinois, Oregon, and Tennessee, offer same-sex marriages. That means that surviving spouses in these states should be able to inherit from their late spouses without paying either state or federal estate tax.
District of Columbia
Tennessee (elimintated as of Juanuary 1, 2016)
Six states collect inheritance tax from certain people who inherit from a deceased resident. Surviving spouses are exempt from the tax. Three of these states—Iowa, Maryland, and New Jersey—allow same-sex marriages. In the others, surviving spouses may have to pay state inheritance tax.
For more information on how the Windsor decision on the Defense of Marriage Act affects other legal rights and responsibilities, see The Supreme Court's DOMA Decision.