Boston Divorce Attorneys

Money Matters

• Tax-Related Divorce Issues
• Pros and Cons of Keeping the House
• How to Protect Your Credit
• Hiring a Financial Planner
• Effect of Divorce on Wills, Trusts and Insurance

Tax-Related Divorce Issues

Tax consequences follow every decision made in a divorce or settlement agreement.  Often, the ramifications of these decisions last for many years.  Accordingly, divorce requires careful divorce planning, which must be accomplished just as soon as you begin to realize divorce is inevitable.

The eight issues with the most important tax consequences are:

1.  The marital home.  Your dream house can, and may, become your nightmare, since your house is probably your largest asset, and one which you would like to keep, or if it has to be sold, to pay as little capital gains tax as possible.  Under current tax law, married taxpayers can exclude from taxation up to $500,000 of their home profit, so long as during the past five years prior to sale: (1) they both lived in the house for at least two years (the so-called “use” test) and (2) at least one spouse owned the home for at least two years (the “ownership” test).  But what happens if you and your spouse only lived in the home for a very short term and you got the house as either part of the settlement agreement or division of the marital estate?  Be careful; you might have to pay tax in any gains associated with the sale.

2.  Child support payments.  Child support does not count as taxable income to the recipient nor is it deductible by the payer.

3.  Alimony.  Paying the least possible amount of alimony should be a priority because the tax ramifications might be severe.  While permanent alimony may be tax deductible to the payer and taxable to the recipient, temporary alimony may not be deductible or taxable since it could be considered installment payments of a property division.  In either case, talk to your attorney about a payment structure that maximizes the money that goes to the spouse and minimizes the money that goes to the IRS.

4.  Property division.  If you transfer the marital home to your spouse in exchange for other property equal to the equity you would be giving up, a taxable gain may result.  You may have to pay income tax on the amount of the value of the equity you receive.  Similarly, the tax consequences on transferring appreciated stock to your spouse may also effect the bottom-line of your divorce.

5.  Filing status.  What matters most as it relates to the IRS is what your marital status was on December 31st.  If you are divorced by then, you are considered divorced for the entire year.  So, if your divorce is nearing settlement by year-end, you can then choose whether you want to be divorced this year or next.  Obviously, filing status can be a powerful tool in negotiations.  Analyze the tax consequences of each option and plan accordingly. 

6.  Dependency exemptions:  Generally, the person with custody gets the exemptions.  Do not claim the exemption on your taxes if you are not legally entitled to it.  Since the IRS requires social security numbers of any dependent claimed, you will likely get caught if you both try to claim the same child or social security number.

7.  Refund checks.  If a joint tax refund is coming, it is wise to have it sent to your attorney.  Although illegal, it is not uncommon in divorce situations for one spouse to sign the spouse’s name and keep all the money.

8.  Legal fees.  Your attorney’s fees are deductible as they pertain to tax planning and advice, but beyond that you can’t deduct any other legal fees.  Accordingly, before you agree to pay your spouse’s fees, get an itemized breakdown of such expenses and assess how it would effect your bottom line in the financial aspect of your divorce.

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Pros and Cons of Keeping the House

The marital residence is usually one of the first assets that has to be dealt with in a divorce.  The house is visible, valuable, and emotional.  There are good reasons to stand you ground and keep the house:  continuity for the children, emotional attachment and sometimes even convenience.  There are also some not-so-good reasons:  vindictiveness, ego gratification and just plain greed. 

As the two of you negotiate the issue of who keeps the house, if you are ultimately unsuccessful, the court may order a sale of the home.  When it becomes sold, the court will take the proceeds – if any – and divide them equitably (which means fairly, but not necessarily equally) between the parties.

Maybe you want to keep the house.  Sometimes one spouse will give the house to the other spouse – out of guilt, for a waiver of alimony, or in trade for some portion of the retirement accounts or the family business.  In this event, there is still the mortgage and other housing expenses to deal with.  The spouse that gets the house must have sufficient income to pay these expenses after the divorce.

Another way to deal with the house is for one spouse to buy out the other.  You can agree on a price or you can have the house valued by an appraiser.  If you cannot agree on an appraiser, you can each hire one and average the two values, or have your lawyers or appraisers select someone to value the property independently.  Sometimes the parties will agree to subtract a percentage for costs of sale – six or seven percent would be reasonable for real estate agents and recording.

Most often, if children are still living in the home, both parties own the house jointly until the children finish school, or until the resident ex-spouse remarries or cohabits.  You agree to sell the house after the children graduate and split the proceeds evenly.  Whoever stays in the house in the meantime can pay the mortgage payment, while all other costs of maintaining the house plus taxes and repairs are split evenly.  The only drawback is that this continues a tie between the two of you that may create some stress.  Moreover, if both of your names remain on the mortgage, you need clear language in your settlement agreement as to what remedies you have if one spouse defaults on their obligation; after all, you’d be jointly and severally responsible on any default on the loan.

The legal issue as to who ends up with the marital home is such a fact-based situation, but no matter which approach you take, you should always remember to approach your divorce like a business. 

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How to Protect Your Credit

Of all the assets that you have the one you are most likely to protect is your credit rating.  It is very easy to let your credit rating deteriorate during a divorce.  Divorce HQ reports you might not think maintaining or establishing a good credit rating in your name is very important, but you will one day find out exactly how important it is to your financial well-being.  Under certain circumstances it is sometimes unavoidable that credit rating is affected, but you can take steps to maintain a good credit rating:

1.  Get a copy of your credit report.  Get a copy from each of the major credit bureaus as the information may vary from bureau to bureau.  Go over every detail of the report.  If there are items or sections of the report that you don’t understand, then call the bureau that you received the report from and ask them to explain it to you.

2.  If you believe that any of the information on the report is incorrect, notify the credit bureau.  They will send you a form that you must fill out.  They will then verify your information with the creditor and send you an update.  If you disagree with the outcome you are entitled to add your own statement to the report.

3.  Make sure that your bills are paid on time.  If you think you will hurt your spouse by not paying your bills on time during the divorce, you are absolutely right.  The only problem is that you will be hurting yourself as well.  If the account is in your name only, then you are only hurting yourself.  A divorce decree or property settlement does not change any liability, even if it states that one person is responsible for the debt.  If your spouse does not pay any debt, the creditor can and most likely will seek payment from you.

4.  You can place a fraud alert on your credit report.  If you are willing to give up the opportunity to get instant credit, you can notify the bureaus to add a statement to your report requesting that creditors not approve new accounts without calling you first.

Banks, retail stores, credit card companies and other lenders report to credit agencies.  Public record such as tax liens, bankruptcies, or judgments against you will also appear on your credit report.

The three major credit reporting bureaus are:

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Hiring a Financial Planner

One of the best financial moves in your post-divorce planning should be hiring a financial planner to help you with advice in setting, then reaching, your financial goals.

Start by taking stock of your assets and liabilities.  While you already did this in creating your financial statement, times have likely changed since then, and you have new questions you now need to ask yourself:

• Do you need extra cash right now on a monthly basis to supplement your income?
• Do you need to use up some of your assets to pay off any debt?
• Do you want to buy a house?
• Do you want your money to grow as fast as possible to fund your retirement?

If you told a planner that you wanted an extremely safe investment that creates
extra income while growing fast, they would tell you to forget about it!  You are asking the impossible.  You may be able to find a blend of two out of the three, but not all three!

As you search for a Financial Adviser, here are some questions to ask:

1.  Do you have the CFP (Certified Financial Planner) or ChFC (Chartered Financial Consultant) designations?  This ensures that they have some specialized training in the field of financial planning.

2.  Do you have specialized training in the area of divorce? 

3.  Do you work alone, or in an office with other professionals such as financial planners, accountants, etc.?   There is no one person who can know all the aspects of financial issues, tax laws, retirement issues, etc.  When they have other professionals to bounce ideas off of, then you end-up the winner!

4.  Do you continue with your education and keep up with the changing trends?  Countless classes, conferences, and educational meetings are available for those who are truly interested in keeping up.

5.  Can you give me the names of some of your clients?  Ask for referrals who have worked with them for a minimum of three years.  How do these people say their portfolio has done with the advisor?

6.  How do you charge?  There are three options:  fee only, commission only, or fee plus commission.  Most agree that a fee only basis, billed on the size of your portfolio, puts more of an onus of performance on the planner.  As the investments pay off, you build wealth and the planner gets a piece of your growth!

7.  Where do you get your financial advice?  A terrific question, and one that will surprise them.  Some rely solely on information generated from their company, while others aggressively seek other sources.  Find out where and what.

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Effect of Divorce on Wills, Trusts and Insurance

Many individuals lose site of estate planning issues that most often arise during and after a divorce.  This is especially easy to do when a divorce has been less than amicable and you just want to put everything behind you and move on to the next stage of your life.  However, these issues can be extremely detrimental if left attended.

Wills

Your will does not get revoked just because you file for divorce.  In Massachusetts, even after you have been to court for your divorce, there are waiting periods of three to four months, during which you remain legally married to your former spouse.  This means that unless your agreement provides otherwise, your soon to be ex- may inherit some or all of your assets – not your children, parents or siblings!

Once your divorce is final however, it revokes any disposition of property to a former spouse, as though they had predeceased their original spouse, unless the will expressly provides otherwise.

Trusts

After divorce, you need to create trust accounts are set-up so that your money goes to your children at a certain age.  Obviously, if something happened to you, giving $100,000+ to an unemancipated child – or even one under 30 – may not be the most prudent move; that’s why you may want to find a trustee to hold these monies in trust for the benefit of your children.  Called “parenting from the grave,” all you must do to formulate this trust account is leave money in trust to a trustee, with written instructions as to how the money is to be managed, then hope they will use their best judgment in managing the monies before it goes to the children.

Life Insurance

If you or your spouse already had life insurance, Massachusetts’ Rule 411 automatic financial restraining order takes effect upon commencement of legal divorce proceedings.  Among other things, this prohibits any changes in beneficiaries of life insurance, pension or retirement plans.  However, until the proceedings are officially commenced, there is no such prohibition on changing these beneficiaries!

As part of a divorce judgment, life insurance is common in the order or agreement to secure payment of child support, alimony, or other financial obligations in the case of the payor’s death.  This order is made to ensure that there will be sufficient funds to support the children or former spouse should the parent die.

Clients often ask what can be done to insure a former spouse keeps current with the court order to keep the said policy in effect.  Our suggestions:  Make sure the agreement is written in clear, unambiguous terms so that nobody could question the responsibilities of the parties.  Furthermore, it would make sense to take ownership of the policy so that you are provided with complete and unrestricted access to the information needed.

For help from our attorneys on estate planning, contact us.

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