Time to Rethink Using Sex and Marital Status to Confer Federal and State Benefits*
On June 26, 2013, the United State Supreme Court issued its 5-4 opinion in the case of United States v. Windsor. This opinion found that section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. Section 3 defined the word “marriage” to mean “only a legal union between one man and one woman as husband and wife, and defined the word “spouse” as only person of the opposite sex who is a husband or a wife. 1 U.S.C. §7.
With this ruling, the high court changed the coverage of over 1000 federal laws and many 1000s of regulations promulgated thereunder, that use marital status to confer, withhold or affect person’s federal rights. While the Court’s majority opinion does not actually come out and say that the decision is based on a Federalism argument, it hints at it. The Court essentially has now re-affirmed that it is the states that have the power to continue to be the final word on family relations. What this means is that there will still be plenty of unanswered questions surrounding real property rights of same sex marriages so long as some states permit and recognize same sex marriages while others adhere to the traditional definition of marriage.
Thus, far twelve states (Maryland, Massachusetts, Connecticut, Iowa, Vermont, New Hampshire Minnesota, Rhode Island, Delaware, Washington, Maine and New York) and the District of Columbia have legalized same-sex marriages. While those laws may have settled the big question on who can get married, they raise a number of practical real estate questions.
One question arises from the manner in which co-owners hold title to their property. Traditionally, co-owners can own their property as tenants in common or as joint tenants with rights of survivorship. Married couples have the additional advantage of being able to own real property as tenants by the entirety. Now, same-sex couples can own real property as tenants by the entirety. What does this mean and why is it relevant?
Tenants in common each share their percentage interest in the real property. Business partners typically use tenancy in common as their preferred way to hold title. Each co-owner can sell and/or borrow against his percentage interest in the property. One main attribute is that each co-owner can bequeath his interest in his will. Each co-owner's creditors can attach that co-owner's percentage interest in the real property to satisfy their claim.
Joint tenants with rights of survivorship are each deemed to own their pro rata interest in the real property. If there are two joint tenants, then each is deemed to own a 50 percent interest. A joint tenant cannot sell or borrow against his interest. Any attempt to do so will convert the joint tenancy into a tenancy in common. A joint tenant also cannot bequeath his interest. By definition, when one joint tenant dies, his interest automatically gets transferred to the surviving joint tenant. Many same-sex couples use the joint tenancy to ensure that upon death, their partner becomes the 100 percent, sole owner. However, one main drawback is that property held in a joint tenancy is vulnerable to the claims against all other joint tenants. So for example, if one joint tenant is held liable for a car accident, and has a judgment entered against him, that judgment is a lien and will attach to his interest in any real property he owns.
The strongest way to hold title, available only to married couples, is the tenancy by the entirety. Like the joint tenancy, the tenancy by the entirety has the attribute of survivorship. Meaning, when one tenant dies, the surviving tenant automatically becomes the sole owner. The reason this is considered to be the strongest form of ownership is that the claims of one tenant's creditors do not attach to the real property owned by the tenancy by the entirety. The one exception is if the creditor is the Internal Revenue Service.
After Windsor, same sex couples who now own real property as joint tenants, and who marry, should consider re-titling their property as tenants by the entirety. Re-titling is a relatively simple matter. All that is involved is to prepare and record a new deed. Deeds to modify the tenancy are exempt from transfer and recordation taxes in all three local jurisdictions. Re-titling will allow married same sex couples to enjoy the protections against creditors that the tenancy by the entirety provides? Unless estate planning dictates otherwise, tenants in common should also consider re-titling their property into a tenancy by the entirety." Until states recognize same sex marriages, transfer and recordation taxes between “spouses” will need to be factored into any re-titling decision.
Since the Windsor case, was itself an estate tax case, it did resolve the issues of the disparate treatment of same sex couples for state and federal estate and gift tax purposes. Since many other provisions of the federal estate and gift tax statutes now cannot apply the traditional definition of marriage and spouse this decision will have significant impact on same sex couple estate plans as well. It would appear that since federal estate and gift tax laws can no longer use the traditional definition of a marriage or spouse, they will look to each state’s definition for guidance. But this of course can always be supplanted by additional federal legislation and accompanying regulation.
Additional questions arise when same-sex couples residing in Maryland or the District own property in a state that has not yet legalized same-sex marriage: Can or should that couple re-title their second home or investment property? What happens when one partner dies? Which state's inheritance laws apply?
The answers depend on the state where the property is located. For example, in states which currently recognize civil unions, but not gay marriages, same-sex couples can hold real property as tenants by the entirety, but in order to re-title property already owned, the law requires that all lenders consent to such change. For example, in Delaware, clients with second homes have not experienced any problems obtaining lender consents. However, in Virginia, which does not recognize same-sex marriages, civil unions or domestic partnerships, a joint tenancy with rights of survivorship remains the strongest form of ownership available.
At the federal level, the Garn-St. Germain Act provides that real property transfers between spouses are exempt from the "due-on-sale" clauses contained in virtually all mortgages. It appears that when a same-sex couple resides in a state where gay marriage is legal, transfers between those partners will also be exempt. But what about when that same couple seeks to transfer property located in a state that does not recognize their marriage? Will they be subject to the onerous due-on-sale clause that permits a lender to declare the loan to be in default and accelerate the entire unpaid principal balance? The recent Windsor decision would appear to leave this as an open question. The penultimate sentence on the majority opinion states that “This opinion and its holding are confined to those lawful marriages,” i.e., marriages which are already lawful in the 12 states making same sex marriages lawful.
These issues are far from clear. As with most radically new laws, it will take many years for the regulations and subsequent court cases to clarify just how the new laws will apply to the various real world scenarios impacted. Regulators and jurists should use this opportunity to re-think whether marital status should be a factor at all when determining federal and or state private property rights. If all persons were treated equally under both state and federal laws regardless of their sex or marital status, cases like Windsor would never be necessary. Perhaps striking of Section 3 of DOMA is a good first step toward a gender and marital neutral world.
* This article was previously published in the August 2013 issue of Title News, the National publication of the American Land Title Association (ALTA).