Financial aspects of gay marriage

BOSTON (CBS.MW) -- When friends asked Sharon Rich if she and her partner planned to marry when Massachusetts first allowed them to, Rich said, "I have to talk with my lawyer first."

"One thing I do know is that if we are married, we'll save more than $500 a month in insurance costs, so I'll probably discuss this with my lawyer soon," she says.

That Rich is taking a pragmatic and financial approach is hardly a surprise. She runs Womoney in Belmont, Mass. and is routinely included on any list of the nation's top financial advisers.

While most people focus on the religious, moral and ethical issues around gay marriage, Rich and the financial community are looking at the monetary picture.

It is there that allowing gay and lesbian marriage will make the biggest day-to-day difference in the celebrants' lives, and it is also there that the biggest potential errors may be made.

Talk with any financial adviser who has a large gay clientele and they are likely to acknowledge that their gay customers are more aware of estate planning and tax issues than their straight clients, if only because the system has for years forced makeshift maneuvers aimed at achieving the financial ends that straight couples take for granted.

These include survivor benefits, beneficiary rights and more.

Yet many of these same financial advisers -- particularly here in Massachusetts, the first state to allow gay marriage -- suggest that the couples rushing off to tie the knot may be undoing years of financial planning in the process.

"A lot of people developed domestic partnership or relationship agreements, which functioned like a pre-nuptial agreement," says John LeBlanc of Back Bay Financial in Boston. "But state law supersedes those agreements, so when a couple gets married, those agreements in most cases become null and void. If the couple gets a divorce -- and if there are marriages you can bet there will be divorces -- the careful planning that a couple did when they were not married may be undone by having gone through the ceremony."

There are other landmines for gay couples to negotiate, most notably being the difference between state and federal law.

A couple married in Massachusetts, for example, might file its taxes jointly. Since Massachusetts taxes ride on the federal tax form, the couple would complete a federal tax form as a married couple, and then transfer the information to a Massachusetts form.

And then the couple would toss out the federal form they had prepared, because they're not married in the eyes of Uncle Sam.

That means not only starting over and filing federal returns as singles, it also means enclosing a letter with their federal return saying they are married in Massachusetts -- because if they file as single when they are married, they could be considered guilty of tax fraud.

That's a little twisted.

There are other issues too, such as how Massachusetts tax payments will be split for federal credit and more. And there will be issues surrounding Medicaid, COBRA benefits (the federal rule allowing a worker who loses a job to continue health benefits at his or her own cost), Social Security benefits for adopted children, different forms of property ownership and more.

Eventually, if the debate on gay marriage becomes a federal issue, there will be broader decisions on Social Security, too.

For now, whether it is a marriage or a civil union, there are two sets of rules to be aware of -- federal and state -- and there is the need to remember that major life events require significant financial planning reviews, regardless of your sexual preferences.

For every financial issue gay marriage creates, however, it solves one or two problems.

Rich's insurance case -- where married couples can get discounts singles can't -- is one example. People who are married can make unlimited financial gifts to each other, unlike partners who are subject to an annual gift tax law limit. (This is another area where partners need to be careful, as it will be possible to move money in accordance with state rules but still mess up on federal statutes.)

There are estate tax benefits -- married couples have an unlimited marital tax deduction -- and basic protections. Married spouses who die without a will have their assets automatically move to their partner, which is not the case with an unmarried person.

Says Rich: "The issues are more complicated than heterosexual marriage, so the people who are rushing to get married now need to do this with stars in their eyes but they must take off the rose-colored glasses. Don't assume everything will be very simple, because it isn't."

A recent Internal Revenue Service ruling may put the kibosh on a financial strategy that a large number of financial gurus were touting as a short-term solution to money problems.

The strategy has involved making an IRA rollover, and using the proceeds during the 60-day rollover period as a form of interest-free loan.

In more than 30 prior rulings in the past few years, the IRS had been willing to overlook mistakes where the taxpayer didn't get a rollover completed within the allotted time.

But in the recent case, the taxpayer wasn't trying to do a rollover, he just wanted the cash. Once his financial situation changed, he wanted to put it back in the IRA.

That was not in the cards, so he gets no leniency, and owes taxes and penalties on what is now classified as an IRA withdrawal.

The moral of the story is clear: No matter how attractive an interest-free loan to yourself may sound, don't risk your IRA savings with an unnecessary rollover.

"The IRA is the last place you ever want to take money from," says Ed Slott of E. Slott & Co., who runs the IRAHelp.com Web site. "People advising that you can get away with tapping your money for short-term needs need to know that they have no margin for error any more. Any problem and they will have blown up their savings."

Chuck Jaffe is a senior CBS MarketWatch columnist. His work appears in dozens of U.S. newspapers. His MoneyLife with Chuck Jaffe radio show airs daily from 11am to 1pm ET on AM-1060 WBIX in Boston and can be heard live online at http://www.wbix.com.