There’s an uproar sweeping the country over gay marriage, stemming in part from a Massachusetts court decision, a rush of ceremonies in San Francisco, and President Bush’s call for a constitutional amendment to define marriage as a state that can only be undertaken by a man and a woman. Beyond the political posturing, and regardless of your personal feelings on the topic, there are serious tax and financial planning issues that some of your “civil union” clients will face now and in the future.

For example, it is my understanding, as a practicing financial planner educated as an attorney, that “civil unions” would grant rights under state law to any couple recognized as such under that state’s law. Other states may not be bound by this recognition, nor may the federal government. “Marriage,” however, would grant not only state rights in each state passing a law granting such rights, but may be recognized by other states. Moreover, such a move may very well create federal rights.

For the most part, the federal government recognizes state law for a number of legal definitions. Business organizations such as corporations, partnerships, and LLCs, for example, are created under state law.

So, too, is marriage. Marriage is a union between consenting adults. While several states, including my state of Massachusetts, are debating whether the gender of those adults should be specified to make a marriage valid, you must recognize that individual states have always had the right to establish the criteria for marriage. Those criteria would include determining the age of consent; the degree of family relationship between the adults (i.e., laws against incest); how many adults can be involved in the union (i.e., laws against polygamy); and at one time, the separation of races in a marriage (i.e., laws of miscegenation). This is part of states’ rights unless specifically restricted by the United States Constitution.

As you know, personal financial planning is complex and needs to take place not in isolation, but within the context of an individual’s overall financial life.

In considering the ramifications of the debate over gay marriages and civil unions, remember that not only do individual decisions affect your client’s financial life, the decisions made by one state may affect the planning efforts of advisors within that state and others. Here are some planning issues that will be affected by the outcome of the debate.

Federal Programs and Benefits

If a state recognizes two men or two women as a married couple, then it seems to me that the federal government would be obligated to provide the following benefits:

Retirement Provisions. Under ERISA, the automatic retirement distribution for a married participant in a qualified retirement plan is at least a joint and 50% survivor income for the surviving spouse. Any other distribution–or naming any other beneficiary–requires the spouse’s consent. Under federal law, a spouse is defined as a party in a marriage. “Domestic partner,” “life partner,” or “significant other” is not a currently defined legal term under federal law, even if they are defined as such under state law.

A married spouse can take advantage of an IRA rollover that can provide a longer period of income tax deferral. Minimum required distributions for single participants are larger than they are for married participants, which also enables the couple to extend the tax deferral of these accounts.

Under Social Security, a spouse is entitled to receive survivor benefits. I doubt that the survivor of a civil union would be entitled to such benefits.

Estate and Gift Provisions. Under current tax rules, a decedent who was married at the time of death may pass 100% of his or her assets to the surviving spouse without incurring estate taxes under the unlimited marital deduction (instead of being limited to $1.5 million in 2004 and 2005, scheduled to increase to $2 million in 2006, 2007, and 2008, etc.). There is an “unlimited marital deduction” in the IRC, but nothing about a civil union deduction.

The married couple could pass up to $3 million (the limit in 2004 and 2005, increasing thereafter) in assets to their heirs instead of only $1.5 million before incurring taxes.

Joint survivor life insurance, which typically will cost less than insuring either individual separately, could then be used to fund any remaining estate taxes. This is a benefit for married couples using the marital deduction. Marriage also creates insurable interest for any life insurance. One person cannot purchase life insurance on another without insurable interest. Without recognizing same-gender couples, can domestic partners or significant others insure their life partner?

Lifetime transfers (gifts) to a spouse are also unlimited instead of being limited to $1 million in 2004 and beyond for non-spouse recipients of the gifts. Would that include a domestic partner in a civil union? There is also the benefit of gift splitting between spouses. This would allow $22,000 to be gifted annually to a child instead of $11,000/year.

And what if one of the spouses is not a U.S. citizen, but only resides in the country? One way to postpone estate taxes until the death of the second, non-citizen spouse is to use a qualified domestic trust (QDOT), which is set up before the death of the first spouse. Would QDOTs be allowed for the domestic partner in a civil union?

Taxes, Marriage, Divorce. Couples who are recognized as married under state law should be able to file joint tax returns. This may not, however, be a benefit until all of the “marriage penalty” provisions are phased out. Advisors representing same-gender couples need to advise them that their income taxes may actually increase if they marry.

When considering marriage issues, you must also consider divorce. The income tax consequences of alimony and child support payments would seem to be covered as well. Of course, same-gender marriages will likely create more future business for divorce attorneys and planners who specialize in divorce.

State Programs and Benefits

Within a particular state, all sorts of benefits are created by marriage. It would appear that couples in a civil union or a marriage can receive health insurance under a family plan. Here are some other state ramifications of marriage:

Laws of Testate and Intestate Succession. Under most state laws, a surviving spouse has the right to claim against a will if that spouse does not receive a specified share. For example, a married decedent leaving behind a spouse and children may be required under state law to pass at least half or one-third of his estate to that spouse. Otherwise, the surviving spouse can elect against the will.

If a decedent was married at the time of death and dies without a valid will, the spouse takes a statutory share under most state laws. Again, this may be a half or one-third of the estate.

Will these provisions be extended to survivors of a civil union?

Ownership of a Primary Residence. In many states, a married couple can own their residence as “tenants by the entireties,” providing significant asset protection. This is a special form of joint ownership reserved, in most states, for the primary residence of married couples. Some states expand this protection for other properties held by married couples.

Any two people, whether they are of the same gender or not, can hold a property as joint tenants with rights of survivorship. As such, both owners are jointly and severally liable for any claims. That means that each is 100% liable, not just 50%. A creditor claim against one partner in a jointly held property, regardless of whether that claim arises from that property, makes the unprotected assets of both parties accessible by the creditors of either one.

However, under most state laws, the only creditors that can attach a “tenants by the entireties” property are the government and the mortgage holders. Does this protection apply to civil unions?

Education Funding. The children living in the household of a same-gender married couple could either benefit from or be adversely affected by the combined income and assets. A child receiving financial aid could lose those benefits when his or her parent marries. This has been true for male/female couples and would appear to be true for same-gender couples. Advisors need to be sure to provide counsel to any couples contemplating marriage that their decision could result in losing benefits such as these (or gaining benefits if the newly added spouse has a great deal of debt).

Long-Term Care and LTC Insurance. Most carriers will provide a discount when both spouses of a marriage purchase long-term care insurance. For clients without LTC insurance, issues of state-sponsored Medicaid programs must be evaluated to determine how custodial care will be provided. The healthy spouse of a married couple can retain the home even if the individual needing custodial care is in a nursing home funded by Medicaid. Will this protection be afforded to members of a civil union? Medicaid qualification looks at the assets of both spouses. This may cause someone who otherwise could have qualified individually to lose that benefit based on the other spouse’s assets and income.

Business Succession Planning. Under current law, a male business owner can marry his female business partner and pass the business between them by marital deduction during lifetime or at death. If permitted by state law, two male business partners or two female business partners could marry and transfer ownership without incurring costs or taxes.

As advisors, we need to be aware of the potential implications of the decisions our clients make. The CFP Board’s Financial Planning Practice Standards make an excellent template for planners who wish to broaden the planning engagement with the client to include more than one module of financial planning. Those standards also help ensure that planners are providing a high level of service that minimizes the risk of unpleasant misunderstandings with the client later, regardless of who they choose to spend their lives with.

Herbert K. Daroff of Baystate Financial Planning in Boston is an attorney by education, a member of the bar in Pennsylvania and Massachusetts, and a Certified Financial Planner by profession. He specializes in estate and business planning for the owners of closely-held and family-owned businesses. He can be reached at 617-585-4502, or at hdaroff@baystatefinancial.com