The most significant tax reform in thirty years was signed into law December 22. With barely a week to understand how it impacts all open and future divorce cases, it became effective January 1, 2018, unless otherwise noted. Many of the provisions have sunset dates, upon which rules will revert to pre-2018, unless extended.
Alimony, beginning January 1, 2019, will not be tax deductible for payer, nor taxable to the recipient. Modified orders, after that same effective date, will adhere to the previous tax deductible/taxable treatment in the original orders, unless it is specified in the modification orders that the new not deductible/not taxable treatment will apply. Although the effectiveness of this dramatic change has been delayed for a full year, we will need to pay attention to it immediately for any active cases that are not expected to conclude before December 31, 2018.
Tax Brackets have been adjusted more than normal annual inflation adjustments. Some for the better, others not so much. Most Tax Rates have changed a few percentage points: 10% remains same, 15% to 12%, 25% to 22%, 28% to 24%, 33% to 32%, 35% remains same, 39.6% to 37%. As always, we will need to continue to reference a client’s new tax bracket and rate according to their future filing status, Single or Head of Household (HOH), rendering previous Married File Joint bracket, rate and withholding meaningless. This rate structure sunsets at year end 2025.
The Standard Deduction, taken in lieu of itemized deductions, will increase from $6,350 to $12,000 for a Single filer, and from $$9,350 to $18,000 for HOH. (Additional for over age 65.) This is significant when taken in full context with all the itemized deductions that have been eliminated. Depending on the circumstances, it could also make the HOH filing status more valuable. Increased standard deduction sunsets after 2025.
Personal Exemption suspended. This is the $4,050 reduction in taxable income for each child, claimed as a dependent, that clients find so desirable. Although this exemption phased out for Single and HOH filers with income above $261,500 and $287,650, respectively, they still tried to convince us it was “worth more” to them in the higher tax brackets. Focus will now need to shift to other child-related tax issues in negotiating which parent claims the child(ren) for greater overall tax advantages. However, this suspension sunsets at year end 2025.
Child Tax Credit increases until year end 2025. Up from $1,000, $2,000 credit per qualifying dependent child, under age 17, available to Single filers and HOH with Adjusted Gross Income (AGI) less than $200,000, with phaseout thereafter. Credit is refundable (payable if tax liability is less than credit) to a limit of $1,400 per child.
The Primary Residential Parent can still file as HOH, claim the Child Care Expense Credit up to $5,000, Dependent Care Exclusion up to $5,000, and Earned Income Credit up to $6,444, qualifications apply.
Other Child Tax Issues The American Opportunity (formerly Hope) credit, up to $2,500 per eligible student per year for parent with modified AGI under $80,000 (other conditions apply) remains unchanged. Lifetime Learning credit, up to $2,000 per taxpayer having modified AGI under $56,000, for dependent students (other conditions apply) remains unchanged. Both available to parent who claims child as dependent.
Funds in 529 plans may now be used for qualified primary and/or secondary school expenses, limitations apply. No new contributions may be made to Coverdell accounts. Coverdell funds may be rolled to 529s to extend their use through college.
College Student Aid qualifications will potentially be more sensitive to the shift in taxable income because of the alimony change and other terms of the Parenting Plan.
Mortgage Interest deduction has new limitations, whereby only interest on acquisition indebtedness (reduced from $1M to $750k) will be deductible, thereby suspending the deduction of interest on subsequently incurred HELOC debt. The suspension expires after 2025.
Divorce Legal Expenses deduction for those identifiable as directly related to procurement of alimony is eliminated since alimony is no longer taxable income to recipient.
Overall, this tax reform was extensive and many other elements of it may impact individual divorce situations, depending upon the circumstances. This serves as an overview of those changes likely to affect most clients. Also, questions have already emerged which will require further clarifications as the new tax rules are implemented.
Content of the Tax Cuts and Jobs Act (TCJA) was revealed last week and, as it now stands, alimony discussions will change dramatically. If approved in its current state, on this issue, going forward as of January 1, 2018, no alimony will be tax deductible for the payer, nor taxable to the recipient. This includes all alimony modifications made after January 1. All standing alimony orders will retain their current tax status for payer and recipient.
The TCJA is the most sweeping tax reform proposed in over thirty years and will impact a number of other areas that are relevant to divorce. I will be reporting on them after the changes are approved and finalized. In the meantime, however, the alimony issue is major and may impact how cases are handled and/or settled during the coming weeks. Every effort is being made to pass this legislation within the next thirty days. It remains to be seen how much it will be altered in the interim, but suffice it to say that we need to be paying attention.
Overall, this change is not, by definition, a “tax cut.” Quite the contrary. By continuing to tax the alimony payer at their higher rate, rather than transfer tax responsibility to the lower income ex-spouse, the parties’ joint pool of funds is drained of more, not fewer, dollars. Less is available for support purposes of one’s self, as well as a former spouse. Overall taxes on these dollars have effectively increased.
The change has been prompted by data which reveals that more than $10 billion was reported as alimony tax deductions in 2010, the last year for which data is available, but recipients reported $2.3 billion less as alimony income. Rather than reconcile the discrepancies and pursue any taxes due from the responsible party, the problem will prospectively be eliminated, requiring no additional effort on the part of tax collectors, and with a net increase in taxes levied.
I am often asked for attorney referrals by potential clients embarking on the divorce process. My usual response is that I am better able to make referrals after meeting with you, understanding something about your situation, what you prefer in the way an attorney will represent you, and getting to know you is a limited way. Even after all that, I will provide at least three names of attorneys for you to interview, assess and make your own best decision.
An attorney is not a commodity. This is a person with whom you must feel comfortable and about whom you must feel confident. You will need to have some of the most personal conversations of your life with this person and subsequently trust them to literally represent your best interests in a way that you wish to be represented. An unreasonably pugnacious attorney will make you seem unreasonable and pugnacious. Is that really how you want to appear to a judge? Even if you do not go to full trial, there will be brief court hearings during the divorce process that will impact the course of your case. It is your attorney who will speak for you in each of those instances.
It is often the case that your choice of attorney speaks volumes about how you want to proceed, based upon their reputation. I have seen people who were regretful about their choice of attorney because they were feeling combative at the time, but now just want to settle and get it over with. Unfortunately, the attorney was still in “fight mode” and would continue on this path because that is how they practice. Conversely, others may have hired a rather passive attorney, with strong leanings toward compromise and resolution to avoid trials, and ultimately they felt under-represented and outmatched by their spouse’s counsel.
Ideally, you will want an attorney who is willing and able to negotiate strategically with the intent to settle as equitably as possible, yet be capable of strong trial skills if, and when, needed. Family law is a specialty area of the law, so choose a specialist. Someone whose practice is at least 75% family law is recommended. There will be generalists who will be willing to take your case, thinking it is “just a divorce,” but that is not what you need.
Expect to pay for the initial consult. Professionals make their living by providing information, and you are there for information. You need to wonder why someone would not charge for their valuable time. Add to that, the age-old divorce game of “eliminate the attorney.” That is where a spouse interviews all the choice attorneys in their area so that each of them must recuse themselves from any contact with the other spouse due to conflict of interest. We call this “conflicted out.” So do you really believe that attorneys, and professionals like myself, should give free initial consults to people who have no intention of hiring them, only so that their spouse will be unable to hire them?
Prepare for your attorney interviews. Yes, you are interviewing them for a job that they may or may not get. Bring some documentation that summarizes the timeline and key events in your marriage, including children, as well as assets, debts and current income levels. Check everything you can about them on the internet: website, Martindale-Hubble ratings, FindLaw ratings, AVVO ratings, key word search, social media, etc. Read articles on a variety of websites that provide insight to selecting an attorney.
After you search and read findings for “selecting a divorce attorney,” prepare a list of questions that are important to you. There are many suggestions in those articles that I will not repeat here. But I will say that you should cover several key areas with your questions: their experience and specialization in family law; their availability in terms of current case load, responsiveness to email and phone calls, and how much of the work for your case will they actually do, versus handing it off to a paralegal; the divorce process and what is to be expected to happen; and financial arrangements like amount of retainer, refundable or not, replenishment requirements, billing, and payment terms.
Additional questions that are unable to be answered but can be revealing in terms of how they are handled are: How long will the divorce take? (It depends.); How much will this cost? (It depends.); Can you work for both of us to save money? (No. Never.).
It is also revealing to observe the tempo and mood around to office. Are people pleasant and respectful? Or tense and condescending? This is how you will be treated as well.
As you prepare for your meetings, begin to compile a list of what factors will be most important to you in evaluating attorneys. It is best to do this beforehand, rather than after you are influenced by an interview experience and you downgrade the importance of a factor because he/she “was so nice” even though they lacked what would have been your most important factor. Then evaluate each attorney immediately following your interview and rate them on the things that are important to you.
The divorce process is difficult at best, but it can become better or worse due to the attorney you select. A final caveat, remember that you are hiring an attorney for their legal expertise. An attorney is not a financial expert, and will most likely have an exclusion in their services contract that relieves them of any responsibility for financial advice. If you need help understanding financial and tax issues, hire a divorce financial consultant. Likewise, an attorney is not a therapist. It can be very expensive to pour your heart out to an attorney. Even if they are a good listener, they cannot provide the help you need and should get from a mental health professional. You need to build a divorce team. While this sounds expensive, doing so may actually be less expensive and more efficient in the long run.
You have decided this divorce needs to happen. Now what do you do? Prepare yourself. The following are some steps to take before you pull the trigger and set things in motion.
Take care of deferred needs like dental work, new eye glasses, replace the tires, fix the roof, etc. Money is going to get tight, real soon, so better to know these things are taken care of.
On the other hand, you will need to save some cash for the expenses of the divorce process: hiring professionals like a financial advisor, attorney, and therapist to help you get through this painful and complex process; possible moving expenses; replacing household furnishings, etc.
Copy all financial documents of any kind that you can access safely. Put copies in a secure place, preferably under lock and key, maybe at work or with a friend. This includes bank statements, credit card statements, credit reports, retirement accounts, pensions, investment accounts, tax returns and all accompanying documents required to prepare the returns.
Open a new bank account for yourself at a bank not previously used by you or your spouse. You will need a place to safely deposit money without having it be accessible to your soon-to-be-ex-spouse. This is only to assure that funds are available when you need them, not to conceal funds. Expect to properly disclose this account during the divorce process.
Check your credit report and assure that you have at least two credit cards registered individually to you in your own name. If that is not the case, apply for what you need now and provide total household income information on the application.
Begin to see a therapist, if you are not already doing so, to help you through the decision-making process, as well as the divorce itself, and ultimately recovery. There is no such thing as “tough it out” when life gets downright painful. Remember, therapy is private and confidential. The only one who will tell anyone else is you.
Schedule an initial consult with a divorce financial advisor to share specifics of your financial concerns and get some preliminary indications of what you should be considering.
Interview attorneys for legal perspective as well as identify what will matter most to you regarding the qualifications and personalities of an attorney with whom you can feel confident and comfortable. This will become a very personal relationship and you may require some specialized legal expertise, like military benefits, domestic violence experience, children with special needs, etc.
Research all professionals whom you are considering hiring for your divorce with particular attention to whether they have proper licensing, have they ever been subject to professional disciplinary action, and practice reputations. For instance, if your desire is to have an amicable divorce, you do not want to hire a pit bull attorney. If you want to have solid financial advice, do not hire someone who does divorce math as a hobby because they themselves had such a painful divorce.
Read all you can to prepare, but remember, there are just as many poor writings out there as there are good. And very difficult to tell the difference. Choose only reputable publications or websites to read, attend any live workshops in your area where presenters are willing to expose themselves to scrutiny, rather than hide behind an anonymous webpage.
This should get you off to a good start for what will not really be a good experience. However, commend yourself on seeing that where you are now is not good either, and a divorce will lead you to a better situation.
What assistance can you expect from your current financial planner or advisor during your divorce? The short answer is "None." Your divorce presents a clear ethical dilemma and/or conflict of interest for your current financial professional. They must simply "sit it out," wait for the divorce to be finalized, then resume services, if you wish them to do so. Whether they realize this, or acknowledge as much, is up to them. However, this message is to help you make more informed decisions regarding whose advice you seek during divorce.
The best thing you can do for yourself is to hire an objective Divorce Financial Planner, who is a licensed financial and investment professional, as well as a divorce specialist. Verify their credentials: check their public record on BrokerCheck.FINRA.org and/or AdviserInfo.SEC.gov websites; confirm their divorce financial qualifications. As an investment professional, your Divorce Financial Planner will be familiar with the characteristics and nuances of most any financial account or investment instrument you and your spouse have in your marital estate. As a divorce financial specialist they will know the particular tax issues that are specific to divorce, or exceptions applicable in divorce, as well as the basic concepts of family law and the statute for your State. For more on how to evaluate a potential consultant and what questions to ask, go to DollarsOfDivorce.com/Articles/Choosing_Your_Professional/
An additional note when considering who to hire as your Divorce Financial Planner beware of anyone who offers these services at no charge to you. Question their motivation, objectivity, and level of expertise. It is my opinion that anyone working for nothing is actually working for themselves, not you. They will pass some time with you, and seem to give you a few "pointers," while their motivation is to be recruiting your assets for future management. This is their sales process. Objectivity is lacking because they may guide you to seek assets they can manage post-divorce, rather than what might be best for you if that includes illiquid assets or some financial instruments that are not in their business model and/or for which commission revenue has been exhausted. Their level of expertise is likely to be wanting because they simply cannot afford to spend the time required to provide in depth services, to anyone for free, and develop a comprehensive skillset.
Upon initiation of divorce proceedings, one of the first effects is that both you and your spouse will be ordered to not make any significant adjustments in your finances. You will simply maintain the current status of all accounts, and meet regular reoccurring expenses in the normal manner. Therefore, there is no need to discuss any changes in current investment strategies, nor should your advisor be making any. There is literally nothing for them to do until the divorce is over. If, perchance, you have signed a third party agreement with a portfolio manager, with whom you have no direct contact, to actively manage your accounts, that active management may continue, with no change in investment strategy or other investment instructions provided by you or your advisor.
The reasons why your advisor ought not involve themselves in the issues of divorce are varied according to the circumstances:
If both you and your spouse have accounts with the same advisor, that advisor has a fiduciary responsibility to each of you to act in your best interest. Now that you are engaged in the lawsuit that divorce is, your respective interests are at odds with one another. It is impossible to act in the best interest of one of you without damaging the other, thereby failing in their fiduciary responsibility to the other.
Only you have accounts with the advisor, and they may or may not be certified in the specialty of divorce finance. Either way, they still have an ethical conflict between what is in your best interest and their own best interest. Anticipating that the marital estate will be divided in such a way that you will have less to invest with them, investible assets will seem more desirable for them, but not necessarily for you. In addition, if they have no specialty in the finances of divorce, you will likely get flawed advice on the finances of divorce. If they are certified in divorce finance, they should have learned that this situation is a clear ethical conflict.
This is your divorce and you must become the expert regarding who is best to guide you through it. You cannot assume that an advisor will always act appropriately. Two cases come to mind in which I was involved that illustrate this point. In the first, the advisor had both joint and individual accounts for both spouses. The wife, as my client, told me that she felt she had the better relationship with the advisor. During the divorce she and her two children even went on vacation with the advisor and his family. Later, in the divorce process, we discovered that for many years the husband, with the advisor's assistance, had withdrawn hundreds of thousands of dollars, multiple times, from their accounts to use in high risk investments, most of which failed, without her knowledge. When asked, the advisor said that the husband made him agree not to tell the wife.
In the second case, both husband and wife had accounts with the advisor, who had a previous friendship with the husband. She knew where his allegiances may lie, but still insisted the advisor "was a really nice guy." She confided in him during the divorce. The case remained unresolved and was scheduled for a three-day trial. The issues were many and complex. The advisor was on the witness list to testify for the husband, and against the wife. Clearly, this advisor was clueless regarding his appropriate role in the matter. Fortunately, instead of going into the courtroom that morning, we (two attorneys and a paralegal with the husband, two attorneys and myself with the wife) went into a conference room and spent the next fourteen hours working out a settlement.
Even the "simplest" marital estate is bound to have financial issues. In fact, when the total estate is less, the importance of each dollar is more. Hopefully, you will be better able to select the professional financial help you need because you really have only one chance to get this right. There are no "do-overs" in divorce.
It is insidious, cloaked in false "protectiveness," a form of bullying, and a precursor to domestic violence. It leaves no bruises, but it hurts, really hurts. It will erode one's self-esteem, enslave them to the one who is supposed to love them, and destroy the victim's spirit, sense of self-worth, the very essence of their individuality. It makes them hopeless and helpless so that they never leave.
Financial abuse is more readily recognized in the mental health community as it relates to elder abuse, rather than spousal abuse. Elder financial abuse is usually about theft. Spousal financial abuse is about control and domination. Control of the money translates to control of the relationship and the other person, in every way. Financial abuse, according to the National Network to End Domestic Violence, is reported to be present in 98% of all domestic violence situations. In the vast majority of situations, women are the victims of the abuse. These comments will be framed accordingly.
I often observe women whose thinking has been so strongly influenced and twisted that they are not even aware of the abuse and continue to give their power away. They fail to show up for financial planning meetings with their husbands. When they do, they spend the entire meeting motioning for me to "talk to him," and not even listening "because he makes all the decisions." They sign things without even knowing what it is and don't ask. Or, if they do ask, are told to "don't worry about it, just sign it." Then challenged with the all-time follow-up of "Don't you trust me?" The ultimate put-down and shut-up retort that has only one unspoken response.
At some point she may somehow find her strength and seek separation and divorce from the abuser. That is when we usually discover the third mortgage on the house, outstanding personal loans, questionable income tax returns, business interests (and liabilities) in her name, etc., all of which she signed. We discover what may, or may not, be there in the way of savings, investments, retirement accounts, pensions, etc. All of which she now realizes she needs, but knows nothing about.
How does this happen? Here are some signs, in a somewhat progressive order:
- He says he will pay all the bills.
- She is expected to turn her paycheck over to him.
- He manages all accounts, checking, savings, retirement, investment, etc.
- He makes all financial decisions without discussing with her.
- She gets an allowance.
- He checks receipts for everything she buys, even groceries.
- She needs to explain every check or credit card charge.
- He makes all large purchase decisions; she has no input.
- She needs to quit her job.
- She no longer gets an allowance, only funds for designated purchases.
- She may no longer write checks.
- She will not be allowed to return to work.
- She may not open any mail, even utility bills and solicitations.
- He threatens to leave her with nothing if she doesn't behave.
- She needs to wait for him to get home from work to give her money to go buy a headache remedy.
Financial abuse occurs across all social-economic, educational, ethnic and racial groups. It doesn't matter if she is "allowed" to buy hamburger or steak, thrift or designer clothes, fast food or country club dining. If she is financially controlled and monitored while doing it, she is financially abused. Another variation is that of a highly successful career woman, managing millions of dollars of her employer's money, yet does not have control over a single dollar in her personal life.
Reaching a victim of financial abuse requires that she realize that she is a victim and is willing to listen and act on her own behalf, and that she is accessible, given that she is so cut off from many resources and controlled to such a degree. Some ideas for facilitating an escape, while heeding safety concerns:
- Identify a trusted friend or relative who can assist as needed.
- If possible, skim small amounts of money from what is accessible, hide it or have someone hold it for you.
- Get cash back on credit card purchases at supermarket or big box stores, then lose the receipt if necessary.
- Save any monetary gifts, return gifts for cash.
- Ask friends and relatives for donations.
- Sell anything you can, say you donated it if necessary.
- Say you are volunteering and get a part-time job.
- Offer babysitting, dog walking, house sitting, wait for delivery or service people, plant watering, etc. services by word of mouth and for cash.
- Develop a hobby and sell things: printed t-shirts, knit ware, sketches or paintings, jewelry, photography, etc.
- Work an on-line job with flexibility.
- Get a secured credit card, or two, in your own name. keep with friend if necessary.
- Research government assistance services, counseling services, shelters.
- Have a safe place to go when you leave.
Abuse of any type, including financial abuse, is a dangerous element in a marriage. There is no acceptable level of offense. I believe that anyone who is a victim of financial abuse knows, at some basic level, that it is not right, not ok, and they deserve more. They deserve respect, and to be treated as a partner in this relationship. Anything less is not a marriage, in which case, many difficult questions need to be answered.
Since divorce will force you to make the largest financial decisions of your entire life, so far anyway, it is probably a good time to examine your relationship with money. Do you like it? Really? Then why don't you have more of it? These are meaningful questions because, like marriage and divorce, money is something that is highly emotional.
Our relationships with money date back to early childhood and initial experiences with money, be they positive or negative. Think about how money was regarded in your family of origin and how that has impacted you to this day. Maybe money was a taboo topic, maybe it was something there never seemed to be enough of, maybe it seemed to cause all the other problems in your family, maybe there was plenty of it but still caused all the problems in your household.
Let's go back to my original question: "Do you like money?" The likely answer something like, "Of course, everyone likes money!" Then why, when you get some, do you immediately think of what you can buy with it and, thereby, get rid of it? Without promoting miserliness, you will most likely need to learn to embrace money, preserve money, consider money for its future value and usefulness to you, become more responsible with money, and truly manage money. Too often, money manages people, rather than vice versa. Give some thought to your own personal "money story." How might your attitudes towards money have developed or evolved over the years?
As part of a couple, ideally, you may have shared financial responsibilities with your spouse. Maybe that worked, maybe it didn't. In any event, things are changing. In the future, you will be totally responsible for all financial management. Even if you have professional assistance with financial planning and investments, you are still ultimately responsible, and your financial advisor cannot make your decisions for you. A financial advisor cannot invest the money you are spending.
Money is often cited as the number one cause of divorce. Personally, I don't believe it. I think money is used as a weapon of choice for acting out other problems in the marriage. Money is used to control, punish, spite, deny, overpower, deceive, and even falsely reward, or insincerely apologize for all other misdeeds. Think about your own situation. If this describes your experience with money, understand it, own it, and figure out how to change it. This will likely involve some work with your therapist. However, it is necessary that you address these issues if you will be able to change your relationship with money and become financially stable post-divorce.
Your future financial well-being is equally dependent upon your relationship with money as it is upon the settlement terms of your divorce. Your attorney and divorce financial professional are trying to doing their best for you, but it will be up to you to make the settlement work into the future. It is not unusual for recent divorcees to spend irrationally and be impoverished in a few years. This is similar to what we hear is the experience of so many lottery winners. A mature relationship with money is something that must be learned. If you are a person who has been told their entire life that discussions and/or concerns about money should not concern you, then you need to start developing that maturity now and do it consciously.
Several recent examples of money immaturity come to mind. One is a client whose divorce attorney had previously referred to her as "very frugal." I came to understand her money maturity. She was highly responsible with money and had managed to build a sizable marital estate in spite of her husband's lavish spending on himself as well as several paramours throughout the years. She drove a sixteen-year-old car, while husband drove a one-year-old luxury vehicle; she bought her shoes online, while husband had custom made suits, cut to measure, annually. Following her divorce, she did purchase a two-year-old dependable vehicle in spite of friends and family urging her to purchase a new luxury sedan. The wife had money maturity. The husband and friends and family did not.
Sometimes having money does not translate to having money maturity. It is not unusual, and happens often, that persons having, or being beneficiaries of, trust funds really understand very little about what actually belongs to them or may be taken away with a bit of restructuring, if someone else decided to do so. A fellow I recently met with had lived off of a trust fund his entire life, had no idea how much was in it, whether he was living off of earnings or eating his way through principle, and no idea how much longer it might last. His older brother controlled everything. In that family, money was a secret.
Women, in particular, are often excluded from really sharing in the financial management of the family. Our society seems to indicate that such is acceptable. I beg to differ. Some women think they are "sharing" financial responsibility if they are responsible for bill paying, but know nothing about savings, retirement accounts, investments, etc. That means they know all about the money they no longer have (which was used to pay bills), but nothing about the money they do have. They might just as well be in total ignorance and not have been a bill-paying clerk.
At the far lower end of the spectrum are women who are "not allowed" to write a check, appear at the bank, open a utility bill, or even know how much their husband earns. Thankfully, I come to know them because they are in the process of divorcing. I praise their courage and wakefulness, as well as their desire to assume adult responsibilities for their financial well-being.
Wherever you are the divorce process, know that your financial situation is changing, you will be totally responsible for all things financial in your life, you need financial skills to be financially successful, and future financial stability is available to you at any economic level. This is not about being wealthy. This is about being responsible with what you have.
Maybe. Divorce is a time of great distrust between spouses. Such distrust is most likely at the root of the many possible reasons for the divorce. If money seems to be disappearing, either during the marriage or since the initiation of the divorce, it is possible that there is spending that qualifies as dissipation.
Simply put, dissipation is the spending of marital funds, or use of any marital asset, for some purpose that does not benefit the marriage. Dissipation is money that is leaving the marital estate, thereby reducing what remains to be divided in the settlement of the marital estate. Examples may include gambling, alcohol, illegal drugs, expenditures on any activity related to a paramour, and unusual or excessive purchases not characteristic during the marriage, by one spouse.
Dissipation is one of those things that the offended spouse knows is happening, but providing evidence of same could become a challenge. Extensive forensic analysis of household finances may be required to identify specific instances of dissipated funds by dates, use, and dollar amounts of such expenditures. The more efforts that have been made by the aberrant spouse to hide the dissipation, the more forensic work will be required. Sometimes this literally becomes a "shell game" of moving money among different accounts, to make the use of funds seem authentic to the marriage, before they are finally redirected and dissipated.
Overall, the forensic process will examine all sources and timing of funds flowing into the marriage, all movement of funds among various accounts held by the parties, and all ultimate uses and timing of funds for expenditures. The forensic expert will then need to confer with their client to identify all known payees on documented transactions as being known or otherwise. All unknown payees will then need to be researched and identified. For instance, I learned by way of one case I worked on, that strip clubs consistently avoid processing credit card charges under the business name on the sign out front. They usually have generic "food and beverage" names that sound like a family diner.
Even when an expenditure seems to be marital, it is possible that a "mirror" expenditure was dissipation. For instance, payment to a florist on Valentine's Day. Fortunately, or unfortunately, the client can estimate that her bouquet of daisies did not match the charge that included red roses for the paramour as well. A somewhat more astute spouse might order exact duplicates of red roses, lingerie, jewelry, etc., and claim accidental double billing, but all that can be verified as well.
Once the dissipation has been identified and documented, recovery by the offended spouse is customary by way of how other assets are distributed. For instance, if the marital assets identified for division are valued at a total of $600,000 and $100,000 of dissipation has been documented, the $600,000 will be divided in some unequal way to compensate the spouse who suffered due to the dissipation by the other. Remember, the $100,000 is gone, so there is only $600,000 left to divide. Assume the goal is an overall 50/50 division of the marital estate. What I usually hear from attorneys goes something like this: "Well half of the $100,000 was his/hers to dissipate, so we will give the other spouse $50,000 more, and that will be their share of the $100,000." The result being a division of the $600,000 to be $325,000 to the injured spouse and $275,000 to the dissipating spouse, for a $50,000 difference.
But wait. Half of the "extra" $50,000 already belonged to the injured spouse. It is marital. The injured spouse just got half-paid with their own money. You could try to fix that by giving them another $25,000, but half of that is already their own moneyâ€¦â€¦ The exponential math indicates that you need to keep repeating this cycle until the injured spouse is given a difference of $100,000 before they are fully restored.
Because this may be difficult to understand, let's look at it another way. Had there been no dissipation, there would be $700,000 in the marital estate to be divided 50/50. Think of the dissipating spouse as having taken $100,000 of their share early. Now give the injured spouse $100,000 off the top. That leaves $500,000 to be divided 50/50, or $250,000 each, for an overall division of the marital estate of 50/50. That means that from the $600,000, the injured spouse gets $350,000 and the dissipating spouse gets $250,000. That is a very different outcome.
Demonstrating and proving dissipation might be a bit difficult, but when you understand the potential impact it can make on the overall division of the remaining martial estate, it can be well worth the effort. Properly applied, forensic documentation of dissipation can literally result in assets to the injured spouse equal to the dissipation, before the remaining marital estate is further divided.
In addition to your marriage being an emotional relationship, it has also been a financial partnership. Now that you are divorcing, be sure you get a financial divorce as well. To complete the process, all three credit reporting agencies must reflect your new individual financial status.
Early in the divorce process, pull up to date credit reports from each of the three credit reporting agencies: Equifax, Experian, and Transunion. All three are necessary because they likely will have differences in their reported content and you want to be sure to cover everything. It would not serve you well to have two accurate credit reports and encounter a prospective lender in the future who depends upon the third for their determinations of your credit worthiness.
Your purpose should be two-fold, identify those accounts that need to be "divorced" and assure that you will have at least two individual credit cards, of your own, post-divorce. You may have developed habits during the marriage of thinking of one card or another as "yours" and others as "his/hers." Or you might rationalize that only you have ever used a particular card. That doesn't matter. What matters is how the cards are registered with the card issuer.
There are three possible ways a personal credit card might have been issued:
- Individually, to one person, and that person is the only user of the card. If you have at least two of these, continue to protect the good status of those cards and plan on retaining them post-divorce for your continued use. I recommend at least two because it is not unusual to have a card become compromised, through no fault of your own, but it will then be closed by the issuer and you will be without access to credit until they are able to issue you a new card, usually about ten days. Having two or more cards also provides you with more flexibility if a merchant places a "hold" against your card for more than the anticipated amount of a large charge. Hotels usually do this prior to the actual time of the charge.
- Individually, to one person, with one or more additional "authorized users." If you are the individual to whom the card was issued, consider this as one of your individual cards to continue with post-divorce. However, be sure to remove your ex-spouse who may have been an authorized user. This is also a good time to reconsider any other authorized users, adult children, siblings, etc. and determine if it continues to be in your best interest to have these responsibilities. If you are the spouse who has been the authorized user on a card, anticipate being removed and left without the use of this card.
- Jointly to both spouses. I recommend that any joint cards be closed so as to assure that you completely end any joint responsibilities and/or vulnerabilities subject to your ex-spouse's future financial risks. It is not enough to request that the title on the card be modified to one or the other of you. The fact remains that the line of credit was issued jointly and the standing contract, to that effect, remains in place regardless of any subsequent requests for changes. It is likely that the requested change will not be completed and you will remain financially attached to your ex-spouse.
Where possible, all joint credit card balances should be paid in full with marital funds. If funds are not available to pay off these debts, they will be assigned to one or both of you in the division of the marital estate. However, the assignment of joint debt to one of you does not relieve the other of joint responsibility in the eyes of the creditor. Your original contract with them assigned equal responsibility to each of you. Therefore, if your ex-spouse fails to make payments on debts assigned to them in the divorce decree, the creditor may still pursue you for payment. Your creditor is not a party to your divorce decree, and they are not bound by it. You still remain at risk until the balance is paid in full. You can "close" the credit card account while the balance is being paid off so that no new charges occur and it is completely closed, with no further action, upon payment in full.
If you have a number of merchant-specific credit cards that seemed like a good idea at the time, due to an immediate promotional discount on purchases, reconsider the role they play in your financial profile. If the same merchant accepts the major credit cards, consider closing the merchant cards. Such merchant cards can dilute your credit worthiness and reflect negatively upon your financial responsibility because they were applied for on impulse.
After the disposition of all credit cards has been determined, and acted upon accordingly, be sure to monitor your three credit reports until all changes are correctly recorded on each of them. The extra effort is worth it to assure that you effectively have a "financial divorce" in addition to your legal divorce.
Financial issues will dominate the discussion of your divorce settlement. Therefore, it makes sense to prepare financially for divorce. You are preparing not only for the actual expenses related to the divorce process, but also for the major financial adjustments that will follow. (For those of you who were looking for ways to hide assets, this is not where you will find it.)
Taking the following financial steps will help you be better prepared, financially, for the divorce process, as well as the outcome. But remember, in spite of all your preparation, there will still be difficult times ahead.
- Save money. Forego as many unnecessary expenditures as possible and save funds to pay for your divorce team of professionals: therapist, financial advisor, and attorney. You will need the assistance of these experts, who help people like you through divorce on a daily basis, just to understand what is happening to you and what to do about it. Divorce is like no other life experience and to try to do without professional help is like trying to take out your own appendix.
- Take care of delayed needs. This is going to seem in direct conflict with number 1, and it may be. However, if you have been putting off some non-urgent medical or dental care, I suggest that you get it done before embarking on a process that will likely sap your strength and negatively effect your overall health. In addition, ask yourself why you may have been delaying taking care of yourself. If you have delayed things like home repairs or necessary replacement of a vehicle, better to do it before the divorce while the current household income is fully available. Remember, you and your spouse "wore out" these items during the marriage, so it is appropriate that marital funds are used to restore or replace that value.
- Know your finances. However much you think you understand about your household finances, focus on knowing more. You will never know too much. The more you know, the better decisions you will be able to make regarding settlement. Collect all the documents you can: tax returns, payroll vouchers, bank and investment account statements, retirement plan and account statements, pension information, credit reports, mortgage statements, etc. Think about every dollar that flows into and/or out of your household and get some documentation to substantiate that. This seems ambitious, and it is, but just do the best you can. Your attorney and divorce financial advisor will help you with whatever may be difficult to obtain and/or understand.
- Career preparation. Plan on ramping up your career or replacing your current "j.o.b." with a career. Whatever your circumstances, your household income is about to be reduced and you will need to enhance your earning potential. If you require additional education or training, plan on determining the funds needed for that and make it part of your divorce settlement negotiations. Your future financial well-being will depend upon your ability to be financially self-sufficient. A career, with long-term growth potential is clearly different from a job, which may fill a short-term need for limited income.
- Pay down debt. Seriously consider paying down any unnecessary credit card debt. If you have the funds in a checking account, or in an easily liquidated reserve, eliminate debt that is considered joint by a creditor because there will be no way to modify the ultimate responsibility for that obligation. It will remain shared in spite of who is assigned responsibility for payment as part of your divorce decree. Know that joint mortgages and vehicle loans will need to be refinanced individually. Determine if it might be easier to pay off the debt completely. In anticipation of closing all jointly held credit cards, prepare by assuring that you have at least two cards in your individual name that will survive the divorce.
Basic preparation for the impact of divorce will ease the financial shock of it all. By following these few simple steps, you will find yourself better able to cope with other unanticipated issues as well as be in a better condition to transition to your new life as a single individual.
Just when you think the agony of a divorce is over, there is another list of financial matters to take care of. Start by making a lot of copies of your divorce decree because they will be needed to show you are really divorced and the changes you are making are appropriate.
The key information you may need to change, in many places which we will get to, are name, address, email, phone number and marital status (where appropriate). Overall, you will want to list all people and organizations with whom you interact and start working through it, from employer to magazine subscriptions.
- Basic identifications: Better if you get this done first so subsequent changes will go more smoothly. This includes driver's license, vehicle registrations, voter registration, Social Security, military (records, reserves and benefits), Medicare, Passport and any Foreign Citizenship.
- Child related: school records, day care, organizations and activities they participate in, emergency contacts, designate new alternate guardians, their insurances and/or accounts. Also consider software like Family Wizard for coordinating co-parenting arrangements and facilitating clear communication among all parties.
Those "other children" also known as pets: veterinarian, day care, kennel, and emergency contacts.
- Banking and investments: Review all accounts and complete transfers as per your divorce decree. Be sure all personal information is up to date and confirm it after the fact. Don't forget the safe deposit box. Change all online passwords to these accounts. You will need to develop new favorite protocols that cannot be guessed by someone who knew you well.
- Real estate: If you retained any jointly owned real estate you will need to resolve the ownership status with a quit claim deed. Then, separate and apart from that, any mortgages will need t be refinanced in your name only. You do not want to remain linked financially in any way to your former spouse. Unfortunately, the refinance is an often overlooked item and the existing mortgage can continue to bind you to your ex-spouse financially. Not a good thing.
- Utilities: Be sure everything is in your own name. It may cost you some in new security deposits and lost cell phone family plans, but so be it. This is just another unavoidable cost of this divorce. You really do not want providers writing and calling your ex-spouse to conduct business, or requiring their signature at some point. Now is the time to head that off and present yourself as a single person and totally responsible for your finances.
- Beneficiaries: Update your beneficiaries identified on life insurance, annuities and all retirement plans and IRAs. Sometimes attorneys and judges try to be helpful and include a statement in your decree to the effect that these changes are made in that document, or that at least the existing identification of your former spouse is rescinded. Unfortunately, there are laws at the federal level that say insurance providers and custodians of retirement funds must honor the beneficiaries identified in their documentation, which you previously signed. With all due respect, your decree issued in a state jurisdiction cannot override the federal jurisdiction. You must change each and every beneficiary. To not do so may result in your ex-spouse inheriting your money. Even if you have a new will prepared, which you will do, these items having specifically named beneficiaries, are not covered by contrary terms in your will.
- Credit cards and debts: This is a tough one. The only way to really sever any joint responsibility on credit cards or other debt is to pay it off and close the account. You need to remember that the card issuer or lender had a contract with both you and your spouse. Just because you get divorced, does not change that. They still will hold both of you responsible for repayment regardless of whatever agreement you may subsequently have between you, like a divorce decree assigning the debt to one or the other of you. You are simply both on the hook until it is paid off. The best thing to do is close all joint credit cards and start over with individually issued ones of your own.
- Employer and Professional Contacts: This can be multi-faceted. Telling one person in Human Resources is not enough. The may make one change in one place and simply not cover everything; then it will come back to bite you. Follow-through and be sure any necessary changes are made on your employer-provided retirement plan, life insurances, phone plan, vehicle, credit card, health insurances, Health Savings Account, and complete a new W-4. Change your direct deposit to your new individual bank account.
If you belong to professional groups, change your contact information as appropriate with each one. If you deal with persons and organizations outside of your employer for any reason and they need to know your new name perhaps, or how to contact you directly, try to create an effective, memorable, but professional message that you can easily broadcast to them and reissue as necessary as a reminder.
- General Access: Examine all the ways people access you or you access them and change it. This includes all website IDs and passwords, ATM codes, all locks and security codes. And after you change the locks on the house, or even if you are at a new home, come up with a new idea of where to hide the spare key.
- Everything Else: As thorough as you try to be, there will always be more to do. Seldom seen friends, the annual Holiday card senders, community groups, charities, merchant discounts, shopping clubs, subscriptions, even the junk mail you actually like to receive. One by one, take a moment to correct any obsolete information they are using to identify and/or contact you. Soon it will stop happening.
As tedious as this all seems, it is actually a bit of a refreshing exercise. Instead of being dragged down in spirit by continued mistaken contacts and reminders of what no longer is, your will become buoyed by the autonomy and independence that comes with your new proper identification. Your immediate response will become, "Yes, that's me!" instead of "No, he/she isn't here anymore."
Put your divorce in the rear view mirror in every respect and move on as a fully sel-sufficient individual. Wishing you all the best.
If you are going through a divorce and reading all you can to learn what you need to do, you have no doubt read much about the need for a financial professional on your divorce team. Heed that advice. Your divorce is most likely the largest personal financial negotiation you will ever be involved in. Think about it. This is something you have never done before. The emotions of the situation have made you not your best, most clear thinking self. And, how well versed are you in the subtleties and tax issues of your investments, retirement accounts, and debts?
So, you're beginning to believe that you need financial help. However, you're just not making it happen for yourself. Let's look at some of the excuses why.
Excuse #1: It will cost too much
It could cost you more to NOT have a financial professional on your case. The original reason why I do divorce financial work is because of what I would see, as a financial advisor, after the fact, when a divorce settlement was the source of people's future financial ruin. There are many reasons why this may be the case. However, it is not unusual. When persons in finance related professions, like banking, insurance, or mortgage lending, learn what I do, they all want to tell me about the devastating things they see in their clients' situations post-divorce. The fallout they see usually manifests itself years later and is not so obvious to the novice or financial generalist at the time of the divorce.
Excuse #2: I don't have all that financial information
Lack of information, documentation, and access to your accounts, means you have even bigger problems. A divorce financial consultant will provide education for you during the process so you understand much more than prior to the divorce. If you cannot provide the required documentation, your attorney can obtain it from your spouse through his/her attorney. This is part of the "discovery" phase of your divorce.
Excuse #3: I don't have the time to deal with another professional
Just a poor excuse. You won't get much sympathy from me. This divorce will require your ultimate effort. It is about the rest of your life and your future financial well-being. If you have a work situation, where time away for appointments is an issue, talk to your financial consultant about after hour's appointments or how effectively you can work with them by phone and email.
Excuse #4: My attorney said I don't need one
This is a red flag. I believe your attorney should accommodate your wishes regarding how your case will be managed and with what kinds of expertise. They are your authority on the law. You are the decision maker regarding your case. Ask your attorney some hard questions regarding their financial expertise. Review their services agreement that you signed, for the degree of responsibility they are willing to accept for the financial issues in your case, and you may be surprised.
If they tell you they "have been doing this for 20â€¦30â€¦ years and can handle everything," go back to what I said regarding the kinds of outcomes I, and others, have seen over those years. Also, we have never had such complex family finances and divorce tax issues as we now have. The days of working 40 years for a gold watch and pension are gone. Families have been forced into having financial tools and products that neither they, nor most attorneys, thoroughly understand. Slicing and dicing these assets is even more complex than managing them intact.
Excuse #5: I already have a financial advisor or CPA
Your current financial advisor or CPA is most likely a generalist and not a specialist in the financial issues of divorce. The divorce situation triggers the application of many exceptions to customary tax rules, as well as special rules that apply only to divorce. We have also had specific training in the principles of family law with regard to divorce. In fact, your financial advisor or CPA should graciously refer you to a divorce financial consultant and cooperate with them if necessary. If you had a brain tumor, you would want your primary care physician to refer you to a specialist. Divorce finance is the "neurosurgery of financial services."
Further, if your current financial professional has been serving both you and your spouse, such as managing an IRA for each of you, or a joint investment account, or preparing joint tax returns, they cannot feasibly, or ethically, advise both of you in each of your respective best interests. You need someone else to help you with this divorce, then return to them for non-divorce services if you wish.
Excuse #6: I'm not sure how to pick one
I understand. There are good and not-so-good in every profession. Be critical and selective. I suggest you chose someone who is, first and foremost, a licensed and registered Financial Advisor or Financial Planner who has additional specialized credentials in the finances of divorce. Further, you will want to know that they have significant experience in divorce finance case work and may have testified in deposition and/or court a number of times. Question them regarding evidence of their standing among their peers, as well as recognitions or awards they may have received. Finally, be sure this is a person you can feel comfortable with and confident about. They will be an important member of your team.
Hopefully, we have dismissed all the excuses why you may not yet have a divorce financial consultant on your professional divorce team. Remember, this is about the rest of your life. Someone once told me, "I was taught to never try to save money on parachute packers, neurosurgeons, and divorce financial planners." Good advice.
The New Year is a good time to rethink how a recent divorce may still be impacting your daily life. While I respect that your marriage was significant, and ending it was a real lifetime trauma, there is life after divorce. Look around you and see all the happy people, many of whom are divorced, and you wouldn't even know it.
As you contemplate what you want 2016 to mean for you, consider these suggestions for diminishing the role that your divorce will play in your everyday thoughts and activities:
1.Stop talking about your divorce. No one wants to hear about it and it is just not healthy to remain so stuck on something that is done, over, and cannot be changed. Move on. Most of all, do not relive it, play by play, or discuss its implications with your children. They cannot handle it, nor should they be expected to. This includes adult children.
2.Develop at least one new interest. You should have some time now that you did not have before. Think of a sport or hobby that you always wanted to develop but never quite got around to it. Make a commitment to take some initial steps toward doing that. Take some classes, join a relevant group, team up with others who can help make it happen.
3.Love yourself more. Focus on your positive traits rather than perceived shortcomings. Chances are, people who know you do not even see those flaws. Be truly grateful for what you have. Literally make a list, of things for which to be grateful, if you need to and look at it often. Treat yourself to some small luxury, according to your means, once in a while. This is not because you "deserve it," or "earned it," but simply because it is nice to be nice to yourself.
4.Fully assess your financial stability. This is the opportunity to make a fresh new start in many ways. Do so with a strong sense of financial responsibility. Money is the cause of tremendous stress and anxiety, on many levels. Part of your new self-care is to not cause yourself unnecessary harm and pain. Seek the advice of a financial advisor who is familiar with post-divorce issues and can most relate to your situation.
5.Reevaluate your work life. This is a time to start deriving more satisfaction from all that you do, and that includes your work. If it is no longer a source of great satisfaction and pride, then you need to be doing something else. Open your mind to all the interesting things you hear of others doing. You know, those articles that profile the most interesting things you can ever imagine? They are being written for you, so pay attention.
6.Be open to new relationships. Sooner or later, there will be a post-divorce "first date." Give yourself permission to move at your own comfortable pace. Maybe just an impromptu lunch with a colleague or a friend you might like to get to know better. Meeting at a destination, rather than being formally picked-up at your home, may make it more tenable. And easier to get away from if it was a mistake. Like anything else, this may take some practice before you are ready to really "put yourself out there." That's fine. The last thing you want is a rebound doomed for disaster.
The biggest Social Security changes in 30 years are in effect immediately and directly impact all divorcing persons.
Social Security rules for claiming benefits, especially spousal benefits, have been dramatically changed by the Bipartisan Budget Act of 2015, which was signed November 2, 2015. These changes became effective immediately. Everyone is scrambling to understand them.
This was all done with virtually no advance notice and no public government review or congressional hearings. Explanations have been scarce. The changes will directly impact how both spouses in a divorce negotiate for maintenance or alimony and how they anticipate future income from Social Security benefits.
In the past, ex-spouses were able to anticipate making independent decisions regarding when they would file for Social Security benefits. Being divorced, they each had their own individual qualifications to meet for filing a claim: age, marital status, benefit entitlements, etc. If an ex-spouse wanted to file a claim based on a worker's benefit, the ex-spouse could do so without consideration of the worker's filing status. That has changed. Under the new rules, a worker must be actively collecting benefits in order for an ex-spouse to be able to collect a spousal benefit based on the worker's benefit.
This is a significant change. Perhaps it is in the worker's best interest to delay benefits until age 70 so as to maximize their own benefit. That means the ex-spouse must also wait until the worker collects benefits. However, there is no monetary benefit to the spouse to wait, since their benefit will not increase beyond the worker's Full Retirement Age (FRA) benefit which may have been at the worker's age 66. The spousal (or ex-spousal) benefit is equal to 50% of the worker's FRA benefit, adjusted for reductions if the ex-spouse is under their own FRA.
Negotiating trade-offs in Social Security claiming strategies just became part of your divorce negotiations. Such trade-offs have associated costs to each party and will need to be compensated with other assets of the marital estate.
As part of the negotiations, the exact birth dates of each party will need to be taken into consideration and their respective FRAs aligned. This is complicated by the tiered levels of FRAs for persons born between the years 1954 and 1960. FRAs are at two month intervals (66 yrs. and 2 mos., 66 yrs. and 4 mos., etc.) up to age 67.
Determining the FRA of each party is the first step, then each must commit to a time for collecting Social Security benefits. Hence, the negotiation. These terms should then be specified in the Marital Dissolution Agreement (MDA). Future enforcement of these terms will be similar to enforcement of all other terms of the MDA.
Another aspect of the new rules are that an ex-spouse is completely at the mercy of the worker spouse regarding the availability of benefits. The worker spouse can actually block the ex-spouse from receiving much needed benefits by simply not collecting benefits themselves. This is not a favorable situation, given the continued animosities that occur between some ex-spouses.
In all instances, discuss these issues with your attorney during your divorce. If they are not familiar with these new rules, find someone who is. Financial Advisers who have a specialty in the finances of divorce will be the most likely professional who can assist you.
Issues surrounding divorce are difficult enough at any time of the year, and only intensify during the holidays. It's like a cosmic collision of high-stress and ultra-stress, with you in the middle. If your divorce is in process and the holidays won't wait and they won't here are six helpful tips for getting to through the tough spots.
- Trim the gift list. This divorce is undoubtedly costing you money you may not have for an attorney, therapist, financial consultant, appraisers, etc. No one else needs anything more badly than you needing to take care of yourself. Small gifts for those special people, with whom you expect to have good relationships long after this divorce is over, are appropriate. They will understand. Anyone else is simply no longer a priority or an obligation for you.
- Choose who you spend time with. This is as good a time as any to start practicing your new single lifestyle. Do not force yourself to endure unpleasant and stressful situations with people who are no longer even nice to you. I'm not saying "go" or "don't go" to any traditional event. Only go if you really want to and you expect it will be a pleasant experience for you. If not, then create some new traditions for yourself in the spirit of peace and tranquility. One further note, if you do go, plan for a way to leave early if you feel it becomes necessary for your well-being.
- Take a break from the divorce. Not much is likely to get done anyway, so you might as well try to take a break from the constant stress of it all. Put the notes and notebooks away, out of sight, and simply focus on refreshing yourself. Take some time to revitalize positive feelings of a better life to come. Do something special to welcome that new future: consider new career choices, explore new living situations while making no commitments, reconnect with old friends who drifted away because they never liked your spouse. You get the idea.
- Make plans to fill the voids. Even if the plan is to do something alone, that's a plan. There will probably be times that were previously spent doing things you will no longer be a part of like dinner with the in-laws. Select a good book you have long been wanting to get to, a movie or two that will take you someplace else, a creative project that will inspire you along the way as it materializes.
- Get real. Those Norman Rockwell paintings of the perfect family are fantasy. Did you ever really believe June Cleaver cleaned house in heels and pearls? Feel comfortable with your new situation, whatever it is, and create new customs that work for you. Even sleeping late and "doing nothing" can be heavenly. No need to rush off to grandma's with three days' worth of baking, only to hear that there is too much to eat and most of it will eventually end up in the garbage.
- Be fair to the children. If you have young children, or children of any age, understand that this is difficult for them too. They will not know how to act without some help from you. Allow them to spend time with each of their parents and remain guilt-free about it. It's all about expectations. If you and they expect to be ok with new ways to spend your time, then you will be ok. If you exhibit anguish over every minute they are away from you, then anguish and distress will prevail for them as well.
It seems that knowing your lifestyle and estimating future living expenses might be one of the easiest things to do during a divorce. Quite the opposite. It frequently turns out to be one of the most difficult.
Most people simply do not know where all their money goes. Or at least they cannot articulate it when asked. If prompted about what some of their needs and expenses might be, they say something like, "Oh, yeah, that's right."
What I usually see happen is that their attorney will ask them to prepare their "budget." (Now that's a word that induces negative feelings.) At that point you might make notes of the obvious items: mortgage/rent, utilities, food, car payment, car insurance, TV/internet/phone. You know there is something missing, but not sure what, so you don't submit it. Your attorney asks again, and again, then the paralegal asks four more times. Time is passing and the pressure is on. However, you still can't be any more specific.
The process is similar to some being barraged with the same question over and over again in a torture situation. It is a question you cannot answer well. But you finally give them something just so they don't ask again. Big mistake. What you give them will actually be used to determine some of the key financial issues of your divorce. As a divorce financial consultant, what I tell clients is: If you will potentially receive spousal support, and you don't know what you need, you won't know what to ask for, and you surely won't get it. If you will potentially pay spousal support and you don't know what you need for yourself, you won't be able to hang on to it, and it won't be there when you need it.
Working with a divorce financial professional can make this, and other aspects of your divorce easier, more thorough, and more financially sound. This is after all, the largest financial decision of your life. We work with an extensive list of possible expenses which might apply to you and/or help remind you of others that do. Many of us also understand the emotionalism of money, good, bad, and otherwise, and can help you work through this process.
A good statement of expenses, and understanding of how you will use your money, will be the basis of a financially sound future. This is the lynchpin between financial success and failure. The estimates of expenses is not something you do "for the divorce." This is the plan by which you need to live in order for the terms of the divorce to work well for you. If you have made your settlement decisions based on these expenses, your income, and the assets you agreed to in the division of property, and the future projections your divorce financial analyst showed you, then you must live by those conditions in order to get those results.
Ok, let's call this your "budget." This is no longer a negative word. Your budget is your key to financial success. Sticking to your budget will set you free to do other things. Having a budget means you are financially responsible and well on your way to financial independence.
The issues of alimony, child support and taxes frequently confuse and confound people as they are going through the divorce process, and that need not be the case. Each has its own factors to consider and can be taken individually for better understanding.
Alimony, which may also be referred to as spousal support or spousal maintenance, is usually a negotiable issue in divorce. Some states use a formulary approach which may limit the negotiations within prescribed parameters or guidelines. In all cases, this is support provided by one ex-spouse to the other for some period of time to facilitate financial adjustments from marriage to singlehood. When the marriage has been long term, and there is a demonstrated need by one spouse, alimony may be awarded for life, or in futuro.
The award of alimony is based upon the need of one spouse and the ability of the other spouse to help meet that need. The two key elements in determining the "need" and "ability" are financial resources, including income and assets, and living expenses of each party. Income for each party will be documented, as will assets and the proposed division of property. The lynchpin will be their respective living expenses. Determining living expenses seems to frequently be one of the most difficult tasks in the divorce process. Frequently, people are aware of the most obvious reoccurring expenses like mortgage, rent, car payment, utilities, etc. which are essentially documented by someone else when billed. What escapes their grasp is what they spend all their other money on. Yet, if this is not itemized during the divorce, they will not be able to continue their current lifestyle, or anything close to it, post-divorce.
If you are the spouse who may prospectively receive alimony, and your expenses are not complete and accurate, you will not know what you will need, will not be able to ask for it, and surely will not get it. If you are the spouse who may prospectively pay alimony, and your expenses are not complete and accurate, it will appear that you have surplus money to share, you will not be able to hold on to it, and it will not be there when you need it. You must know and document your expenses accurately as if your future depends upon it, because it does.
Alimony is usually taxable to the recipient and tax deductible to the payer. There are, however, instances where it may not be taxable to the recipient, nor deductible to the payer. It is important to understand what you are agreeing to. Assuming the taxable/deductible scenario, if you were to receive $4,000 per month, and you are in the 25% tax bracket, you would owe $1,000 taxes on that alimony and therefore, only have $3,000 available to spend on your needs. That is the reality. If you were the one paying $4,000 per month, and were able to take the tax deduction in the 25% bracket, you would actually save $1,000 in taxes. Therefore, the $4,000 would really only cost you $3,000.
Child support is money paid by one parent to the other for the needs of the child(ren). The payment essentially is an equalization payment based upon the proportionate incomes of each parent, what each parent directly provides for the child(ren), and what is needed to reimburse the parent who is providing more and/or has fewer resources. Each state has clearly defined child support calculation guidelines which must be adhered to. The challenge that sometimes arises is knowing what numbers to enter into the calculations, particularly income. Divorce financial professionals frequently refer to a two-inch manual entitled "The Determination of Income for Child Support" dedicated to this single issue. Such must be used in conjunction with your attorney's interpretation of your state statute.
Child support will be payable until the child(ren) reach the emancipation age and/or emancipation event as per the laws of your state. There is considerable variation on these factors among the states and your attorney will advise you. Child support is not taxable to the recipient, nor tax deductible for the payer. This, as per the Internal Revenue Code, is uniform in all states.
There are, however other tax considerations related to the children. The one that immediately comes to mind for most parents is to agree on who will claim the child(ren) as dependent(s). The value of the personal exemption for each child will vary depending upon each parent's tax bracket. That is usually where everyone stops, but there is much more to consider. And it gets complicated. First issue is that the Parenting Plan will only be applicable for as long as the child(ren) remain unemancipated according your state laws. Your Marital Dissolution Agreement may contain further agreement concerning which parent claims the child(ren) after they are no longer dependents in the eyes of your state, but remain dependents according the IRS. If you can agree on this now, it will may save a lot of grief in the future.
Additional tax considerations related to children are conditional on which parent each child actually spent more time with and/or which parent actually claimed the child as a dependent. The tax dollars involved in various deductions and tax credits which may be available are significant. I recently had a case that involved one toddler child, so there were seventeen years of child related tax issues to consider until emancipation at age 18 in my state. I identified more than $96,000 in potential tax benefits that my client, the mother, may or may not receive, based upon decisions that would be made at this time and written into the parenting plan. That did not even include tax advantages beyond that while the child attends college, nor anything about qualifying for additional student aid, or not.
Other tax benefits to discuss with your divorce financial professional, tax advisor, and attorney each have qualifying requirements where one parent may qualify, but the other does not. The goal should be to make decisions that allow you as co-parents to take advantage of as many tax benefits as possible and preserve dollars in your combined pool of money. There is no sense in unnecessarily giving additional dollars to the government that could have been used to provide for your child(ren), and/or create greater need for increased alimony to the less-moneyed parent.
In summary, the additional tax benefits available to the parent who claims the child are: the child tax credit, American opportunity credit, and lifetime learning credit. Tax benefits available to the parent with whom the child spent the most days/nights during the tax year are: head of household filing status, credit for child care expenses, exclusion for dependent care, earned income credit. All of these have additional qualifications which one parent may meet, but the other does not. The best overall options should be considered. Student aid will be based upon the parent with whom the child spent the most days with during the year preceding each annual application.
Both alimony and child support involve commitments for large sums of money for some number of years. Whenever there is a discussion about financial issues stretching out over numbers of years, that starts sounding a lot like financial planning. It is highly advisable to get some help with this from someone who specializes in the finances of divorce and can work with your attorney as your financial consultant. The decisions you make at this time will have a permanent impact upon your future financial stability.
The collaborative divorce process, an alternative divorce process, is gaining some traction as more professionals are trained and become experienced in the process. With its increased use, the general public is becoming more aware of the process and searching for its benefits.
While I do believe collaborative divorce is a better way for spouses to dissolve their marriage, I have some concerns about the expectations it creates and potential shortcomings. Simply put, it is not for everyone. Only when the parties feel comfortable joining one another with their professional team, and working out the details of their separation and possible issues related to children, can the process be productive and beneficial. If there has been a history of intimidation, excessive control, or abuse in the relationship, not necessarily violent, there is high risk that the "dance" of the marriage will continue and the process will not deliver the intended benefits. In fact, more damage may be inflicted upon one or both of the parties, sometimes like a silent oppressor, that results in poorer decisions made under adverse pressure.
At the heart of the collaborative process is the team approach which is designed to assist and protect the parties. In my opinion, the value that each of the full team professionals, two attorneys, mental health professional and financial professional, bring to the situation is what makes it work. Anything less than a full team is a flirtation with peril to clients. Unfortunately, it has become a rather common practice to utilize the collaborative process with less than full teams, thereby jeopardizing the long-term acceptance of the methodology as effective and appropriate.
Research conducted by the International Academy of Collaborative professionals (IACP) from October, 2006 through July, 2010, the latest available and reported, shows that only 44% of all collaborative cases included a mental health professional on the case and only 48% included a financial professional. Fully 42% of all cases in the survey were conducted by lawyers only, with no other core professionals. The reasons why the full team approach was developed for the collaborative process seem to have been marginalized as not meaningful or necessary. Again, I support the collaborative process, but only in its entirety. As an analogy: Even the best surgeons need teams around them to care for the patient. There are simply other needs to address that require other professionals with different expertise.
Divorce is difficult under any circumstances. Heightened emotions and raw pain clearly indicate the need for a mental health professional at the table at all times. This is not optional. Without this team member, all else will not happen as best as possible and do the collaborative process justice. As a financial professional, I have worked on cases where I was the only neutral and it was difficult. The situation was a disfavor to the clients and I will not do it again. When problematic situations develop, all eyes seem to seek some neutrality from the only neutral in the room and I was not equipped to deal with the situation as a therapist would. While any professional who works in the divorce arena likes to feel that they have some insights into the disciplines served by other professionals, and rightly so, we are not professional substitutes for one another, nor should we be.
As a financial professional, I firmly believe that every divorce requires the input of someone who is qualified in financial issues and, specifically, the financial nuances of divorce. No matter how "simple" or straightforward a case may seem, it is about money. If there are few assets, it may be more about debt which can be just as challenging. If it is so very simple, then brief involvement of a financial professional will be sufficient and prudent. Divorce is about money. Even the parenting issues have financial ramifications associated with them. Money is what the attorneys and clients spend the vast majority of time talking about. Since attorneys usually absolve themselves of responsibility for financial outcomes, it behooves them, for the sake of the client, to provide a professional who can accept that responsibility. In addition, the financial professional relieves the attorney of any related liabilities. The need for a financial professional is intensified in the collaborative process because the formal discovery process is exchanged for voluntary disclosure. Such exposure and vulnerability is, unfortunately, an invitation for abuse of the process by persons who intend to be less than forthcoming. It is altogether too easy to conceal and/or misrepresent assets, select the most desirable investments, and/or indirectly divert excessive tax responsibilities to the other party, etc. if there is no financial professional to explain the short and long term outcomes of such proposals.
I'm often told that it is the client who chooses not to have a full team. That begs a number of questions: Based on what information that they have been given? Who ever said that the "professional team" might not include the full team? On what basis have some of the professional team members become optional? Was this presented as a low-cost alternative and now more professional fees are proposed? Have the roles of each team member been explained in terms of benefits? Have possible consequences been explained when less that a full team is used? Have the options been presented as (a) full-team collaborative or (b) traditional litigationâ€¦Take your pick?
Collaborative divorce is sometimes presented as a more efficient process that will result in a more speedy divorce. Not necessarily. Efficiencies and speed will be determined by the parties themselves and/or by the professionals, not the process. Straight litigation, with productive and compromising proposals can be efficient and lead to speedy settlements. On the other hand, clients can waste a lot of time in collaborative meetings with dialog that they may have had with just one of the professionals or with each other. Likewise, professionals can foster inefficient discussions or allow difficulties to develop that could have been better resolved with a full team. The greatest value of collaborative divorce is the ability of the parties to feel better and more accepting of their agreements due to the process. It is a disservice to clients to oversell other benefits that cannot be assured. On the subject of time and efficiencies, the survey cited above also reported that 42% of all collaborative cases took more than nine months to conclude. Twenty-one percent took more than one year. This is not a convincing argument.
An additional thought about the speed of progress in the collaborative process: faster is not always better. I hear this "benefit" cited frequently because the collaborative process is subject only to the schedule limitations of the parties and the professionals. However, and I leave this ultimately to comment by the mental health professionals, sometimes one or both parties basically needs time to process all that they are experiencing. The party who has not initiated the divorce proceedings, and may have been somewhat "caught unaware" of how emotionally separated the initiating spouse had already become, may actually need to "catch up." To say that the collaborative process itself is going to facilitate a speedy settlement is misleading if one or both of the parties are unable to move through the process, or any process, at some artificially imposed pace.
Client satisfaction with any service is contingent upon managing expectations. In order to further the use and acceptance of collaborative divorce as a preferred process, all professionals will need to create accurate expectations that are consistent with prior experiences. As it stands, some expectations being cited to prospective clients are inconsistent with the research we have available. I would look forward to more updated data when it is available. In the meantime, I think we need to be true to what we know, recommend collaborative divorce on a selective basis, and take care to position ourselves for success with a process that is still referred to as an "Alternative."
For divorcing parties who may be considering the collaborative process, understand the reasons why it may be beneficial for you. The process itself will help you learn how to discuss family issues that may need to be revisited post-divorce, especially if children and future co-parenting are involved. In addition, this participatory and transparent process will be easier to accept, with its compromises, than a litigated contentious dialog where both parties may conclude that they have grudgingly "given in." And as painful as it may become, it will most likely be less painful and anxiety inducing than the more traditional litigation model. Collaborative may also be more efficient and economical if you and your spouse approach the process with more conciliatory postures than you might in litigation and actually enable some speed in the process or minimization of costs.
Just a few months ago, I had a call from a psychotherapist who asked if my Second Saturday divorce workshops were appropriate for someone in a same-sex marriage. Of course, my answer was a resounding "Yes," although I had to add that I had no idea how she would get the necessary divorce in the state of Tennessee. Today, the answer would be ,"Yes, and the information from the workshop will help her make better decisions regarding the divorce process and desired outcomes."
Thinking ahead about several types of insurance that may be required to protect the terms of your settlement will enable you to include discussion of them during the negotiations. You do not want any surprises at the end, whether you are the prospective insured or the beneficiary. Such a surprise could derail the terms you and your spouse have thus far agreed upon.
The most commonly understood need for life insurance involves having a policy on the life of the payer of any stream of post-divorce payments, with the payee as the beneficiary. Consider this: if you, as the payee, have agreed upon a Marital Dissolution Agreement (MDA) which includes child support, alimony, and/or property settlement note payments, which your ex-spouse will make to you for some number of years, you will be depending upon those funds in order to meet your own needs. If your ex-spouse should die, those payments would stop and his or her estate would have no obligation to honor your divorce agreement. Dead people do not write checks. To remedy this situation, the payout of a life insurance policy, to you as the beneficiary, would replace the funds that would have come to you each month, had your ex-spouse lived.
I always recommend that the payee/beneficiary spouse be the owner of the policy on the life of the payer/insured. Yes, the insured and the owner of the policy can be two different persons. Being the owner will enable you communicate with the insurance provider and assure yourself that the policy continues to be in force and provide the agreed upon protection. In fact, as the owner, the insurance company will be required to notify you of any events that occur in relation to the policy. Such events may include a notification of past due premium payment, with the policy having slipped into a grace period and soon will lapse (be cancelled) if no payment is made or a change in beneficiary to someone other than yourself. In any event, you will want to be current on all matters related to this policy and only the owner of the policy has access to information from the insurance provider.
It is often necessary to require that new life insurance policies be obtained to meet this need because the prospective insured has no existing personal policy. Life insurance provided by an employer will not fulfill this need because it is contingent upon the employer and neither you nor your ex-spouse can control it or even assure that it will continue to remain in place. If a new policy is required, a simple term policy will be the most economical and can be provided for the number of years required.
In the event that your ex-spouse has existing life insurance in place, this policy may be designated as providing the needed protection for the post-divorce stream of payments. It is only necessary to assure that the coverage of any policy is sufficient to replace the highest existing balance of unmade payments.
A less understood need for insurance to protect the flow of post-divorce payments is disability insurance for the payer. It is actually about six times more likely that a person may become disabled, and not be able to work to capacity, than they are to die. If a payer is not able to sustain a living, they are likely not able to sustain post-divorce child support, alimony and/or property settlement payments. Although they may have some disability coverage through their employer, that seldom provides sufficient coverage to maintain all current obligations. Most people are unaware that only about one-third of all employees have any kind of disability insurance to protect loss of income. Further, of those who do have coverage, they will only have about 50-60% of their income replaced under such coverage. It is simply not sufficient and payment obligations, incident to divorce, should also be protected by additional disability insurance on the payer. Private disability coverage needs to be part of the settlement negotiations and written into the MDA. Most major life/health insurance companies have private disability policies available at reasonable rates.
Another type of insurance protection applies to situations where a property settlement note allows for the termination of payments to the payee upon the death of the payee. Such would be unfortunate for the payee's heirs. Therefore, a life insurance policy on the payee to protect the interest of his/her heirs may be appropriate.
To understand this better, let's re-examine the circumstances that may require a property settlement note. If there is a marital interest in an illiquid asset, like a closely held business, and the spouse operating the business has no other liquid assets with which to buyout the non-operating spouse, then the operating spouse agrees to buyout the non-operating spouse through a series of future payments, according to a property settlement note. These future payments may be scheduled to terminate upon the death of the payee spouse. This would deprive the payee spouse's heirs of their inheritance. Remember, if the marital estate had the required liquidity at the time of the divorce, the non-operating/payee spouse would have received compensating value for the marital business that was retained by the operating/payer spouse. In turn the payee spouse's heirs would inherit that value upon the payee spouse's death.
To protect the interests of the heirs, a life insurance policy may be taken out on the life of the payee spouse, with the heirs as beneficiaries. This need only be a term policy to coincide with the term of the property settlement payment schedule. Upon completion of the property settlement, there is no longer a need to protect any unpaid balance. Because the need for this insurance is due solely to the inability of the operating spouse to provide an alternate asset at the time of divorce, the cost of this insurance may become a negotiated item in the divorce.
In summary, whenever there is "unfinished" business at the time of the divorce and the settlement involves future payments of any type, such payments are always in jeopardy and need to be protected. Fortunately, we have insurance coverages available that will replace any future anticipated cash flows.
12/28/2017Tax Reform Effects Upon divorce
The most significant tax reform in thirty years was signed into law December 22. With barely a week to understand how it impacts all open and future divorce cases, it became effective January 1, 2018, unless otherwise noted. Many of the provisions have sunset dates, upon which rules will revert to pre-2018, unless extended. Alimony, beginning January 1, 2019, will not be tax deductible for payer, nor taxable to the recipient. Modified orders, after that same effective date, will adhere to the...
11/09/2017Tax Overhaul Targets Alimony
Content of the Tax Cuts and Jobs Act (TCJA) was revealed last week and, as it now stands, alimony discussions will change dramatically. If approved in its current state, on this issue, going forward as of January 1, 2018, no alimony will be tax deductible for the payer, nor taxable to the recipient. This includes all alimony modifications made after January 1. All standing alimony orders will retain their current tax status for payer and recipient. The TCJA is the most sweeping tax reform proposed...
03/24/2017Choosing an Attorney
I am often asked for attorney referrals by potential clients embarking on the divorce process. My usual response is that I am better able to make referrals after meeting with you, understanding something about your situation, what you prefer in the way an attorney will represent you, and getting to know you is a limited way. Even after all that, I will provide at least three names of attorneys for you to interview, assess and make your own best decision. An attorney is not a commodity. This is...