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Archive for the ‘Divorce Financial Planning’ Category

Tax Tips for Handling Real Estate in Divorce

Case Study:  First-Time Buyer Credit & Divorce

In 2008, Chris and Jenny purchased a home that qualified for the $7,500 first-time homebuyer credit.

They were married at the time of purchase and applied for the credit on a joint return.

In 2009, they divorced and Jenny received the house. Chris gave up ownership in 2009 and filed Form 5405 stating that he transferred the house to Jenny incident to the divorce [Form 5405, Line 13(e)].

In 2010, Jenny sold the house at a gain of $9,300.

Who repays the credit and how much?

Since Jenny received the home in the divorce, she has to repay the credit. In this example she must repay the entire $7,500 because her gain from the sale was $9,300.

The $9,300 gain was calculated by reducing the basis of the home by the $7,500 credit. If the gain had been less than the $7,500 her repayment would be limited to the amount of the gain.

If she sold it for a loss then none of the credit would have to be repaid.

According to the instructions to Form 5405, Line 13(e), the spouse who owns the residence after the divorce is responsible for the repayment, if any, of the entire first-time homebuyer credit.

Jenny will file the Form 5405 in 2010 and fill out Parts III and IV to repay the credit.

ViewPoint Newsletter for June

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June 2011 ViewPoint Newsletter

The current issue of the ViewPoint Newsletter from Steve Stanganelli, CFP(R) and Clear View Wealth Advisors is available for download from the SlideShare.net website.  A copy can also be found at the Clear View website newsletter archive.

In this issue, I focus on the key themes of the newsletter:  Retirement, College, Investing Strategy and Taxes.

  1. Retirement:  Using an “endowment” strategy to sustain withdrawals in retirement
  2. Investing: The value of dividend investing strategies for a total return investor and a discussion of how dividend payouts may predict future stock prices
  3. Taxes:  Real estate owners and especially those going through divorce may find these tips useful.
  4. College Planning:  On Thursday, June 9 there will be another free webinar with this one focused on Paying for College – Debunking Financial Aid Myths.

CLICK BELOW to VIEW the NEWSLETTER

Make Sense of Your Money with the ViewPoint Newsletter

Click Here to Download June 2011 ViewPoint Newsletter

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Divorce is emotionally traumatic on everyone involved especially if there are children.  While it may seem mundane, dealing with the money and tax issues that arise from the unwinding of a life together is as important for both psychic and fiscal sanity.

In the big scheme of things, there are more important things than money.  And many who are faced with this kind of life-changing event will cope by simply ignoring the details, shutting down trying to avoid confrontation and more emotional pain. The personalities of each person involved (including family, friends and lawyers) will come out to wreak havoc.  And if someone was a submissive person, then they may become more withdrawn from the process.  Someone who was more dominant in the relationship will likely be more so.

If I’ve learned anything from years of working with people and their money, it is that money is emotionally charged.  And while it may seem satisfying to try to extract some sort of revenge for the pain by attaching a price tag to impose on the other spouse, it is more important to get to closure and strike a deal which best positions each person for moving ahead.

I’ve often said that life is a journey.  And along this journey we’ll each encounter all sorts of things.  A divorce, like any other sudden, life-changing event, is just another part of the journey.  And while we cannot plan perfectly for this or anything else, we can prepare.

So it is with divorce.

I’ve written in the past about the critical mistakes that divorcing couples will make that can set them up for financial failure now and as they start the next stage of their new life.

Dealing with the Family Home in Divorce

For many the key to the settlement is the home.  While each may want to keep the home, it may be wiser to consider other options. For some, there may be sentimental reasons for keeping the home or emotional reasons and bad memories prompting one to put physical and emotional distance between themselves and the home.

For many, the main reason to keep the home is to avoid further disruption especially if there are kids involved which might entail changing schools or at the very least dealing with a move while school is in session.

Financial Triage

Despite the pain, you will need to step up and deal with these issues.  Otherwise, there is a greater risk that the financial foundation put in place for your post-divorce journey will simply not stand up.

At the very least it is important to make sure that all legal documents properly reflect who is responsible for the debts and bills associated with the property going forward.  This means contacting the utilities to change the name on the account.  In the event that the marital home was a rental, then make sure that the landlord changes the name on the lease. Get confirmation in writing.  Otherwise, there is the risk that an unpaid bill may end up in collection and lead to a black mark on your credit report.

The same can be said for credit cards.  It’s in everyone’s best interests to contact the credit card issuer to freeze the account to any new charges.  Don’t forget about old credit cards that you may not use or can’t find the actual plastic card.  To help with this get a copy of your credit report and make contact with each listed creditor appearing on it.

For property that is owned or mortgaged, this becomes a little more tricky.  The mortgage company won’t simply release someone from the debt not even with a valid final divorce decree.

In this case the only way to get this liability off your back is to sell the property or through a cash-out refinance by a spouse who will then assume the ownership and debt solely.

And as long as you are both on the deed, then the property tax liability and even water, sewer or other municipal charges will be the responsibility of each of you.  Only when the property is sold or refinanced will these liabilities be behind you.

Keeping the Home: Will It Make Sense?

A lot of my divorce financial planning practice centers on this very question.  Now if someone insists on keeping the home, I’ll spend a lot of time modeling the impact on near-term cash flow and long-term financial security.  It is not a guarantee that keeping the property is the best option.

It may not make sense at all.  There are the costs of running a home now on one source of income.  Even if one is receiving alimony to supplement this, it may not last long.  There are the added costs for maintenance that may need to be done by outside vendors that were once done by the spouse “for free” before such as snow removal, lawn care, repairs or house cleaning.

And while there may be support payments expected as a source of cash flow to cover these costs, what happens when or if your ex-spouse is unable to pay or simply decides to stop paying? Sure, there are legal remedies.  But these take time and cost money.  In the meantime, the bills may pile up and risk not only your credit.

In some cases, an ex-spouse may continue to provide help in these areas.  But they may want to negotiate the classic side deal: Do the repair and deduct it from the support owed.  This isn’t proper and will not help your long-term cash flow. In some cases, the ex-spouse will try to claim the funds used for these repairs as part of alimony so that it can be a tax-deductible expense.  This is also flat-out wrong and distortion of the tax and divorce rules.

Selling the Home May Make the Most Sense

It may be easier and wiser to simply sell the home, split the proceeds, pay off outstanding debts, fund the emergency reserves and start off fresh without the added burden of running a home.

And while not seeming to be critical in a time of depressed real estate values, by keeping the home you risk losing out on a very valuable capital gains exclusion on the sale of property.  As long as you’re married when you sell your home, the first $500,000 in gain above the original purchase price and subsequent costs of improvements will be exempt from any capital gains taxes.

Once you are divorced this exclusion drops to only $250,000.  For those couples who bought homes several years ago before the huge run up in values, this may be a critically important consideration.

Seek Professional Guidance

Dealing with the many tax, financial and real estate issues related to a divorce can be complicated.  You may want to seek advice from someone specifically trained to handle such issues.  Not all CPAs, attorneys and financial planners are qualified or set up to help clients through this type of life-changing event.

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All your ex-es may live in Texas as the country song says but do you really want your hard-earned money to follow?  And you may be a generous sort but would you rather have your wealth pass on to your family or Uncle Sam?  More examples of smart people doing dumb things when it comes to estate and legacy planning.

What do you think of when someone says “estate plan?”

If you think that it’s only for “old” people or those with lots of money, then think again.  If you have someone or something you care about, then you need a plan regardless of age or the amount of money involved.

Honey, I forgot the kids …

Think of Ana Nicole Smith and her infant daughter.  Think about the King of Pop, Michael Jackson. Take away the money and there is still the drama about custody and guardianship for the children that could have been avoided with a proper plan.  And this sort of thing happens daily with families of much lesser means but the same need for care of a loved one.

There is an old saying:  Those who fail to plan, plan to fail.

What Estate Planning Really Means to You and Your Family

The easiest definition of estate planning is controlling how and who gets what you have when you pass away or become disabled.

As estate attorneys in the Esperti Petersen Model define it:

Estate planning provides the ability to:

  • Give what I have
  • To whom I want
  • When I want
  • The way I want.

Legacy planning takes it a step further and provides for the transfer of wisdom, memories and experiences along with the material wealth.

Most estate attorneys and financial advisers start from the point of view about the money and taxes.  Most clients are categorized into three groups:

  1. Individuals
  2. Married with assets above the federal estate tax exemption (now through December 31, 2010 at $3.5M)
  3. Married with assets below the federal estate tax exemption.

But a more client-focused and value-oriented planning approach to estate and financial planning begins with conversations about what is important to the client.  Only then will a client understand the context of a plan as well as why there may be need for changes to keep it current and aligned with the goals expressed by the client.

Too often, I hear that “I’m all set” because “I took care of it” or drafted a will when their college senior was about 2 years old.

In an increasingly complex world with changing state and federal tax codes, fluctuating asset values and a litigious culture, it is even more important to create a plan and routinely review it.  (If you were traveling on a highway cross-country, you wouldn’t simply turn on cruise control and take a nap, would you? I hope not. Even if you have good insurance, are you sure who’s going to get the proceeds?)

17 Major Mistakes

There are more than 17 significant common  mistakes that people make regarding estate planning.  These include failing to coordinate the financial plan, improperly structuring life insurance policies, choosing the wrong executor, improperly gifting assets, failure to properly create and fund trusts and the list goes on.

We could talk about Qualified Personal Residence Trusts, Installment Sales to Defective Grantor Trusts, Family Limited Partnerships and Credit Shelter Trusts.

But that’s all legalese.  It’s sort of like asking someone for the time and they tell you how to build a watch.  That doesn’t matter to you as much as knowing the time.  There are lots of tools in the tool kit of a qualified estate and financial planner.  You probably don’t care about which tool to use as long as the right tool recommended by a professional does the job.

What happens when you deal with real people? (1)

Jack and Jill and a Boy Named Dale

Jack recently turned 32.  He and Jill have been married for nearly three years. Dale was born nearly 13 months ago.  When not at work as UPS delivery driver, he enjoyed getting his heart pumping by cycling with a local riding club.  During a weekend ride as the group of cyclists were descending a hill quickly, a car being driven by a dentist who was late for a client appointment overtook the riders thinking that he had enough time and distance to safely clear the group.  He abruptly turned right onto the street where his office is located.

Unfortunately, the other car coming from the opposite direction to the stop sign on the street the dentist was driving onto was being driven by a young driver who was distracted by her incoming text message which lead her to cross over her lane.  When the dentist’s car hit her at the corner, it caused the cyclists to swerve in confusion.

In the resulting melee, Jack went down hard breaking his collarbone and vertebrae in his lower back leaving him without the ability to walk more than a short distance and unable to lift more than a couple of pounds.

Richard and Anne and the Day that Changed Everything

Richard and Anne lived in an old colonial overlooking the river in a quaint New England town.  Richard had a successful position with Cantor Fitzgerald, one of the world’s premier bond trading shops located in the World Trade Center of New York City.  While Anne managed the home front and their two rambunctious boys age 7 and 4, Richard would commute by plane to meet clients or for meetings at the corporate offices in New York.

By all accounts, they had an ideal life.  They had family and close ties to the community.  Their weekends were filled with home improvement projects on their home or one of the three investment properties they rented out.

Their world was turned upside down a little after 9 AM on September 11, 2001 when Richard’s plane was flown into one of the World Trade Center towers.

Paul and His Long Lost Love

Paul had been married to Bertie for more than 5 years when Bertie asked for a divorce in 1967 fed up by Paul’s late night carousing. After a couple of years of the single life, Paul found Carol, a long lost love from high school days.

Flirtations became something more and Paul and Carol got married and lived a nice life together.

After more than 30 years of working at his job with the state, he decided to retire. But before he turned in his papers, Paul died suddenly from a heart attack.

Although the loss of Paul, her long time love, was devastating, the news that followed was even worse.  It seems that Paul had never quite gotten around to fixing the beneficiary listed on his pension so the estate of his ex-wife Bertie, long since dead, would be going to Bertie’s younger, sole-surviving sister from Texas leaving Carol without an income source for her retirement.

Sal and Pauline

The romance that would result in seven children, thirteen grandchildren and 4 great-grandchildren began when Sal and Pauline met at a USO dance at Fort Devens in 1943. Before shipping overseas with his Army unit, they got married.  More than sixty years later, they enjoyed the retirement years shuttling between family visits and weekly dances at the local senior center.

Then Sal noticed that Pauline started forgetting things.  With that many kids and grand kids, it wasn’t hard to imagine forgetting all their birthdays but soon she started forgetting to eat and dress.

Eventually, her doctor gave Sal the hard news that Pauline had Alzheimer’s and despite his best efforts she would need professional care.

After Sal and his sons brought Pauline to the nursing home, the reality hit home.  Despite their frugal lifestyle, Sal and Pauline had a sizeable nest egg and home.  After the first 120 days in the nursing home, Sal would need to start writing checks in the amount of $7,500 each month for Pauline’s care.  A lifetime of hard work and saving was being threatened.  What could he do?  Was there any other way?

Lots of Things Can Happen

Divorce.  Disability. Law Suits. Remarriage. Car Accidents. Business Partners.

If you think that these things can’t happen to you, think again.  Seek out the help of a good planning team that can coordinate these pieces.  While no one can predict what may happen, putting together a proper plan will help you and those you love with picking up the pieces after a personal loss or tragedy.  

Value-Oriented Estate Plan Foundation

(1) Note:  All names have been changed and situations presented are a compilation of various facts.

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10 Year Rule. Benefits are calculated based on the monthly average earnings of the covered person. A spouse can receive benefits based on his or her own work record or that of a spouse.  For a spouse who has not worked or had low wages, then the lower-earning spouse is entitled to as much as one-half of the retired worker’s full benefit referred to as the Primary Insurance Amount (PIA).  Eligible workers who are fully insured participants in the Social Security system will receive the greater of their own PIA or 50% of the benefit of the spouse if it is higher.

Example:  If a Sally has a PIA calculated at $250 per month and her spouse Jack has a PIA of $1,000 per month, then Sally is eligible for a benefit of $500 per month (or 50% of Jack’s higher PIA).

Divorced spouses who have been married for at least ten years are eligible for benefits based on the PIA of the other spouse.

To begin receiving benefits, one has to be at least age 62 and not remarried. If the ex-spouse remarries, then benefits will be calculated and compared to the PIA of the new spouse. If that marriage ends by death or divorce, the ex-spouse may be eligible to PIA based on the prior marriage.

The amount of benefits that an ex-spouse receives does not impact the benefit available to the other spouse.

Either spouse who is at least age 62 and been divorced for at least two years may begin to collect benefits even if not yet retired.

Example:

Which of the following persons is eligible for retirement benefits under her first husband’s retirement benefits provision of Social Security?

A.) Helen, age 62, married from 1966 to 1980 whose ex-husband was employed from 1963 through 1998.  Helen got divorced in 1995, never remarried and her ex-husband has died.

B.) Jane, age 62, was married from 1969 to 1983.  Her first husband was employed from 1963 to 2000.  Jane has remarried, divorced and remarried again.

C.) Judy, age 63, was married from 1961 to 1990 to her first husband who was employed from 1968 to 2003.  After the divorce she remarried in 1993 to her second husband who eventually died in 2004.

D.) Emily, age 60, was married to her first husband from 1963 to 1988. She remarried in 1994. Her husband had worked from 1968 to 1998.

E.) Susan, age 68, was married from 1980 to 1988 to her first husband who had been employed from 1963 to 2003. She remarried and divorced her second husband after 6 years.

Based on these examples, only Helen (example A) is eligible to collect a benefit based on her first husband’s work record.  They had been married for more than 10 years, divorced for at least 2 years and is eligible based on age (over 62).

Jane (example B) is not eligible to collect based on the first husband because she is remarried.

Judy (example C) can collect under her second husband.

Emily (example D) is not yet eligible to collect because she is under age 62.

Susan (example E) is not eligible because she has been married for fewer than 10 years to both husbands.  She would have to rely on her own work record for calculating her PIA.

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After a marriage breaks up, about the last thing most people want to do is sit down with one more attorney. But no matter how old you are or whether you have kids, it’s important to consult both financial and legal experts to make sure you have an updated estate and financial plan for your new life once the divorce decree is final.

It’s also best to blend estate planning with financial planning post-divorce. If you weren’t working with a financial or estate planner during the divorce process, it’s time to do so now. The immediate months after a divorce can be disorienting – even if you don’t move, you are literally starting a new household that you will have to direct yourself, and that means new money issues to face.

This is why the weeks immediately after a divorce are a good time to revisit short- and long-term spending and planning goals. Here’s a general road map to that process:

Start with a financial planner: Whether you plan to stay single, remarry or move in with a new partner, it’s good to get a baseline look at your finances as early as possible after the divorce is final.  Expenses for the newly single can pile up quickly and unexpectedly, and a financial planning professional can help you review your new current spending and savings needs, compare strategies to achieve long-term goals like college and retirement and give you critical tools to protect your assets and loved ones if you die suddenly. Even if you have a good relationship with an ex-spouse and you addressed key issues for your children as part of the divorce proceedings, you need to revisit all these issues as a single individual before you move on to the next stage.

Talk with a trained estate planning attorney about wills and other critical documents: True, there are software programs and other kit solutions available to write basic wills, powers of attorney and certain simple trust agreements. But it makes sense to coordinate the activities of a financial planner with an estate planning attorney who can tailor an overall estate plan specific to your needs no matter how basic they might be right now. Even if you are very young with few assets, it makes sense to get some solid advice in this area so you’ll be able to manage such planning as you age and your finances get more complex.

Particularly if you have kids, such planning is important if you plan to remarry and if you want to guarantee that specific assets are guaranteed for them when you die.  In some cases where a spouse dies unmarried with minor children, an ex-spouse might automatically gain control of assets that were supposed to be earmarked for the kids. If you don’t want that to happen, you need to plan for that legally.

Make a guardianship game plan for your kids: It’s not enough to plan how money and assets will go to your children if you or your ex-spouse die suddenly or are incapacitated.  If your children are minors, it’s particularly important to make sure you and your ex-spouse have a guardianship plan for their upbringing as well as any assets they may inherit. You might completely trust your ex-spouse’s new husband, wife or partner to raise your kids if your ex-spouse dies before you, but there may be others better-equipped to do so – spell that out now.  Also, if there are any trust or wealth issues that will become effective for your children once they reach adulthood, it’s also important to establish an efficient legal structure for distributing those assets as well as appointing a trustee in a will to train and guide your kids through that financial transition.

Plan for special needs kids: If one of your children is disabled and is expected to need lifetime assistance of some type, then you should consult a qualified attorney to help you create a special needs trust. It will help protect your child from having to give up any public or social financial assistance as well as access to special doctors, medical help, special prescriptions or treatments that could be taken away if they were to personally inherit assets that would disqualify them for these programs. When such assets are held in trust, they are not counted as the child’s assets. The advantage is that those inherited assets may still be used to support their housing or other personal living needs without adversely impacting qualifying for government aid programs.

Get solid protection in place:  Most people focus on what may happen to their health insurance if they get divorced, but insurance issues like life, property/casualty and disability insurance are sometimes put on the back burner.  If you’re newly single, you definitely need the best health coverage you can afford for yourself and your kids, but life, property, liability and disability insurance becomes doubly important, particularly if you failed to address those needs during the divorce.  Even if your ex-spouse is cooperative with financial support, it’s wise to insure yourself as if they weren’t. A financial planner should be able to go through those options in detail.

Review all your investments for primary ownership and beneficiary information: Even if you were advised correctly to change the names on assets you and your spouse were dividing between yourselves, it still makes sense post-divorce to review that the names are indeed correct on those assets, and most important, to make sure all beneficiary information is correct.

Manage Your “Windfall”:  People may mistakenly believe that that as smart as they are in other areas in life that they can make investing decisions after going through an emotionally-trying event like divorce.  It’s important to not be blinded by the suddend windfall one might receive.  There are long-term issues to consider.  And as tempting as it may be to blow off some steam with a vacation, a new car or truck or even a wardrobe, people have to think about the day after tomorrow.

That’s why it’s important not to go overboard with a little needed R&R but stash the majority of what may be received into cash to help supplement the emergency fund, cover debt service and any future moves in career or home. By meeting with a financial planner professional soon after the divorce, one can outline short- and longer-term goals to get prepared. Save any drastic changes to investment allocations or decisions to when things get settled down (maybe 3 or 6 months after the divorce is final).

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With Valentine’s Day just around the corner and the celebration of love and fidelity, it is somewhat incongruous to think about divorce.  But every ‘good-bye’ leads to a new ‘hello.’  And it is all the more important for smart individuals to prepare correctly with proper advice ahead of time so that each party can have a fresh start.

When love goes wrong, there are a host of money pitfalls and potholes on the road to and from the courthouse. 

Soon-to-be singles will benefit greatly by adding a financial planning professional to the team, especially one with special training in the area of divorce planning.

Too often individuals are caught up in the emotions of a love gone wrong and are too distracted by grievances to see the bigger picture.

Regardless of who gets the house, there are issues that neither the court nor your attorney may be skilled enough to address with you.

Consider how poor credit decisions, a job loss of an ex-spouse or medical problems during or after the divorce might impact you.  Otherwise smart people can make big mistakes that will haunt them as they try to start over.

Key points for you to consider:

  1. Get your own financial advice:  Just as you should not rely upon your spouse’s attorney, you should not rely upon his or her financial advisor.  Saving a little money on advice now may hurt you later.  In most cases, attorneys and courts are not skilled enough in the area of financial planning to adequately evaluate settlement offers to determine if they are equitable and in the long-run best interests of each party.  This is where an experienced planner will pay off in spades. Good planners experienced in this area will be able to identify financial issues unique to the situation and help evaluate the financial impact of settlement offers as well as outline the action steps to take to make sure your credit is preserved so that you are not adversely impacted later.
  2. Review each other’s Reports: While credit issues may be the least of one’s concerns when dealing with a risk of physical danger, it’s important to not lose sight of its importance in the big scheme of things. Before the divorce is finalized, negotiate to inspect each other’s credit reports for a period prior to and just after the divorce is finalized. Trouble can surface and it’s helpful to identify potential issues ahead of time.  If both sides haven’t already obtained their annual free credit reports from the three major credit agencies (TransUnion, Experian and Equifax), the place to go is www.AnnualCreditReport.com.
  3. Remove your ex-spouse from your accounts immediately: Call all lenders on joint credit accounts to arrange to remove the ex-spouse’s name as an authorized party. Terminate joint asset accounts as well. This will need to be coordinated with the ex-spouse or his/her attorney to make sure that there is a proper division of liabilities.
  4. Consider refinancing joint debts you keep after the divorce: Whether it is for a mortgage, equity loan or auto, it is a good practice to arrange to refinance these debts to remove the ex-spouse. This might be easier said than done given the realities of each household’s new cash flow situation, but it will make things easier if possible.  If it’s not possible to do so immediately, it is important to arrange for a credit-monitoring service to alert you about negatives impacting your credit report and consumer credit score. This will lessen the likelihood that erratic or even fraudulent credit activity by a former spouse will go unchecked and severely impact your own good standing.
  5. Update your beneficiaries and estate plan documents:  In the daily rush of life, it is all too common to forget to update beneficiary designations on asset accounts, retirement accounts or life insurance.  Contact your employer to arrange changes to delete your ex-spouse from benefits if permitted by the divorce decree. Nothing can be more painful than to have an unfortunate or untimely death result in your ex-spouse receiving your assets or insurance.  It happens all too often and is far from amusing to the loved ones who depend on you. Ideally, you should also consult with an attorney when your divorce is final to update estate planning documents like your Will, Power of Attorney and Health Care Proxy as well. Those who own a business or investment property interests have other special considerations.

 

A divorce is far more involved than simply signing a final divorce decree.  As I’ve tried to highlight here there are a range of financial issues that will impact each party and their children.

For a more complete checklist of the types of issues you may need to be aware of if planning a divorce, please call me directly for a complimentary copy of the Divorce Planning NewStart Checklist.

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