Financial planners see affluent gay and lesbian clients as an important growth market. But the LGBT community faces unique financial planning challenges – and the ground is shifting rapidly, especially where same-sex couples are concerned.

A growing number of states recognize same sex marriage and civil unions, but the federal Defense of Marriage Act (DOMA) raises an array of problems for financial planners and their LGBT clients. DOMA prevents equal treatment for same-sex married couples on a range of important benefits and legal protections, because it defines the word "spouse" as applying only to different-sex married couples for any purpose involving interpretation of federal law.

That definition affects everything from estate planning and asset titling to Social Security and Medicare benefits. The Supreme Court is expected to consider DOMA's constitutionality soon, and two federal appeals courts already have struck down the law.

Planners have developed an array of responses to help clients cope with the problems created by DOMA. And a growing list of big players in wealth management services are targeting affluent LGBT clients, including Northern Trust, Wells Fargo, Bank of America Merrill Lynch and Morgan Stanley.

Northern Trust, which started its LGBT and non-traditional family practice in Chicago, has since expanded nationally, adding personnel in seven additional locations. “The growth has been very good,” says John McGowan, national practice leader.

Meanwhile, Wells Fargo was involved in starting up an accreditation program to train advisors in the special issues facing LGBT clients, called the Accredited Domestic Partnership Advisor (ADPA). The ADPA is offered through the College for Financial Planning; planners are eligible if they already have another designation of certification, such as a CPA, CFP or ChFC.

As DOMA challenges continue to move through the courts, here are some of the key issues planners face when working with LGBT clients:

Estate and gift taxes. Different-sex spouses can transfer assets between one another tax-free during life and at death, but same-sex couples are subject to the 35 percent federal estate tax on inheritances over $5 million - a ceiling that is scheduled to drop to $1 million in 2013, along with a rate increased to 55 percent.

And transferring assets among LGBT family members during life – directly or by titling jointly – can create a costly gift tax liability, McGowan notes. Transfers at death are subject to estate taxes in the deceased partner's estate, and face estate taxes again upon the death of the surviving partner.

“The lack of the unlimited marital deduction for gift and estate taxes is the greatest financial challenge for our clients' planning,' McGowan says.

Estate taxes were the focal point of the most recent appeals court ruling finding that DOMA is unconstitutional; the case was brought on behalf of Edith Windsor of New York City, whose spouse, Thea Clara Spyer, passed away in 2009. The two had been married in Canada two years earlier, but under DOMA, the Internal Revenue Service couldn't recognize Windsor as a surviving spouse, so she was hit with a tax bill of more than $360,000.

Northern Trust's practice focuses on mitigating such problems through the use of trusts and  careful asset titling.

“Consider a same sex couple, where one partner has brought the bulk of wealth to the relationship,” says McGowan. “The couple purchases a $4 million dream home in Palm Springs and titles it as joint tenants with rights of survivorship – just what our parents always did, in order to make sure the surviving spouse gets the house.

“Here's the bad news: The wealthier spouse has just made a gift of 50 percent of the home's value to her partner, and it's subject to a gift tax so she needs to file a gift tax return that year. And if she dies before her spouse, the surviving spouse will be subject to an estate tax on the inherited share – it's taxed all over again upon her death.”

Often a better alternative, McGowan says: The wealthier spouse purchases the house and places it in a trust with a “life estate” provision. “Upon her death, the surviving spouse has full access and use of the property for the reaminder of her life, but she doesn't own it,” he says. “When the second spouse dies, the trust sells the home and distributes the assets to the remainder beneficiaries, such as children, nieces, nephews, friends or charities.”

Retirement account beneficiaries. Workplace retirement savers have been able to name non-spouse beneficiaries to their accounts since changes in federal law took effect in 2010; a  non-spouse beneficiary can roll over an inherited retirement account benefit directly to an individual retirement account.

Gay workers who started with their employers before 2010 should re-visit their beneficiary designations. But they also should check to make sure their employers are complying with the new law. Only 86 percent of corporations that have rollover provisions have made the adjustments needed to extend benefits to same-sex partners, according to the 2012 Corporate Equality Index, an annual survey of corporations by the Human Rights Campaign Foundation (HRC), a non-profit research, education and advocacy group.

Likewise, a gay worker who has a defined benefit pension may be able to extend lifetime annuity-style income to a spouse through a pension survivor option.

State-by-state variables. The patchwork of laws and recognitions for same-sex couples from state to state poses one of the biggest planning challenges for LGBT couples, McGowan says. “Many of our clients own property or businesses in multiple states, where their relations may be recognized in one place but not the other.”

“In some states, there are full marriage rights, in other cases only civil unions or registered domestic partners. Yet we're in a really mobile society, so families are operating under various legal authorities. “It's very complicated, and until there is a single definition on national level it will stay complicated.”

Social Security. Social Security's valuable spousal and survivor benefits aren't extended to LGBT couples, and won't be unless DOMA is repealed.

Under Social Security's rules, spouses can receive the greater of their own benefit or half of a spouse's benefit. And a surviving spouse can receive the greater of his or her own benefit, or 100 percent of the spouse's benefit. Average Social Security benefits are 32 percent lower for LGBT couples than for heterosexual couples, according to The Williams Institute, a think tank focused on sexual orientation and gender identity law and public policy at the UCLA School of Law.

Medicare. Eligibility for Medicare is based on the number of quarters in which you have paid payroll taxes into the system. At age 65, anyone with a work history of at least 40 quarters can enroll for Medicare Part A (hospitalization) without paying a premium. Everyone pays a premium for Part B (doctors' visits), Part D (prescription drugs) or a supplemental Medical policy. But access to the entire program is predicated on Part A enrollment. You also can enroll without paying a premium if a spouse qualifies.

DOMA means that a legally married same-sex spouse lacking those 40 quarters must take the other route into Medicare -- buying into the system by paying a hefty Part A premium out of pocket. This year, the monthly Part A premium is $248 for beneficiaries with 30 to 39 quarters of work history, and $451 for those with less than 30 quarters in the system.

Communication issues. McGowan finds that many financial advisors still aren't comfortable asking direct questions that are critical in understanding financial planning needs of same-sex couples. “The gap I see is on the sensitivity and and cultural side of the equation – the importance of creating a comfortable environment for clients.

“Many of our clients accumulated their wealth in a world that wasn't particularly accepting of their sexual orientation, so they spent much of their careers avoiding open discussion of it. They may not be as comfortable talking about all the important people in their life, yet that's critical to any financial plan. We need to know everyone that our clients want to care for.”

“There's still some discomfort in the advisor community about asking the questions directly. If two men are sitting across the table, asking them if they are married, or have entered into a civil union? Do they plan on legalizing their relationship, and in which state?

“If a client uses the word 'partner,” and you let that pass without probing further – that's a test. It took some bravery for that person to bring up the fact that they are in a same-sex relationship, and they want you to ask about it. It's a test from the client.”

Planning tools. A survey that will be released later this month by the Financial Planning Association (FPA) will underscore challenges planners face when using popular financial planning software programs in working with unmarried couples living together.

The survey of FPA members found that many who work with non-traditional households use home-grown spreadsheets to work around common problems, which include calculating benefits for non-spouse beneficiaries from qualified retirement plans, allowing for varied drawdown percentages on a couple's aggregated portfolio, modeling the tax impact of asset transfers and variations on data entry for individuals who are viewed as a married couple at the state level but not for federal purposes.

“Most of the software programs make the assumption that the clients are legally married,” says J.T. Hatfield Charles, a co-author of the report and a board member of PridePlanners, a professional planners' group working to educate planners on LGBT issues. “Many planners are using a spreadsheet to handle some of this, but it's only going to be as good as the assumptions that are built in.”

Mark Miller is a journalist and author who writes about trends in retirement and aging. Mark edits and publishes RetirementRevised.com, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living(John Wiley & Sons, 2010).