Same-Sex Ruling Brings Tax Benefits for Art World Professionals

A decision by the US Supreme Court will bring significant tax benefits to art collectors, artists and dealers who are in same-sex marriages. In a ruling on 26 June, the court said that the US federal Defense of Marriage Act (DOMA), which defined “marriage” as a legal union between a man and woman only, was unconstitutional.

In the lawsuit, widow Edith Windsor had argued that she should be allowed the federal estate tax exemption for all assets passing to a surviving spouse on death. New York law recognised her same-sex marriage, but under DOMA, federal law did not. Federal authorities denied the spousal estate tax benefit, imposing a tax of $363,053.

But the supreme court said that DOMA unconstitutionally “impose[d] a disadvantage” on those entering into same-sex marriages, which had been made lawful by the states that allow them. It struck down the provision.

The court also let stand a lower court decision which struck down a prohibition in the California constitution against same-sex marriages. As a result, same-sex marriage is now legal in California, 12 other US states and Washington, DC.

“For art collectors, artists, and families of artists, this is big news if you are gay and want to marry,” John Silberman, a New York art lawyer, told The Art Newspaper. A key tax benefit for art owners in a same-sex marriage is that there will now be no federal estate tax due on the value of art passing to a spouse.

Under DOMA, no deduction was allowed for assets left to a same-sex spouse. Instead, the full estate tax had to be paid within nine months of death. If art formed a significant part of the estate, then works often had to be sold to raise cash to pay taxes. Same-sex spouses were also denied the tax exemption for lifetime gifts to a spouse.

Under the court’s June ruling, a same-sex surviving spouse can now choose whether and when to sell the inherited art, without the pressure to sell it in a rush or seek payment extensions from the government.

The estates of artists in a same-sex marriage faced an even worse plight under DOMA, Silberman says, because of the difficulty of selling off a major block of work all by the same artist within a short period of time to raise taxes. “The market would be flooded,” he says.

An artist’s same-sex widow or widower will also now be able to terminate the deceased artist’s copyright. Same-sex spouses who, meanwhile, exchange art on divorce can now avoid negative capital gains tax consequences. The Supreme Court ruling opens more than 1,000 other federal benefits such as social security and immigration rights to same-sex spouses.

Lisa Cukier, a lawyer who represents GLBT clients in Boston, Massachusetts, said, however, that it is not clear under the court’s decision whether federal benefits will follow same-sex spouses if they relocate to a different state. “If your marriage is not recognised where you reside, you may not be eligible for federal benefits.” For example, she says, if a couple marries in Massachusetts but moves to Texas, which does not permit same-sex marriage, it is unclear if the estate tax deduction would be allowed.

Possibly, regulations issued by federal agencies implementing the supreme court decision, or lawsuits brought by stymied taxpayers, may resolve such issues.