Category Archives: Moving Forward with Divorce?

Accounting for Divorce

Accounting and tax issues are usually the last thing on one’s mind during the divorce. However, this is precisely the time to start thinking about tax implications. To touch on this topic, I spoke with Jorge de la Hoz, CPA, principal with the firm accounting firm De La Hoz, Perez & Barbeito, P.A.

TBK:  What are some tax issues not considered during a divorce?

DE LA HOZ:  When the equitable distribution schedule is prepared in order to divide the marital assets, it is important to consider the potential tax liability. The values used for purposes of equitable distribution reflect fair market value at the time of divorce; however, it does not taken into consideration potential tax liability. For example, if the wife keeps the martial home, she will benefit from tax exclusion once the property sells. If the husband keeps a rental property, the property may have a low tax basis, resulting in a significant capital gains tax upon the property’s sale. This can present inequitable results at the time of divorce since the related tax effect of the various assets kept by each party will differ.

TBK:  What are typical tax considerations that people going into a divorce should consider?

DE LA HOZ:  A typical consideration would be what status to file under. The filing status to use depends on the legal marital status as of December 31 of the given year. If you are legally married, your options are married filing joint or married filing separate. It is usually beneficial to file married filing joint. However, it may be best to file married filing separate. Couples filing a joint return are jointly liable for all representations made on the return. It is also very important to consider the income tax implications of maintenance and alimony awards. Generally, alimony is taxable to the recipient and deductible to the payer. This presents important tax implications, which must be considered by each party. Since there is no tax withholding on the alimony payments, the recipient may need to make estimated tax payments during the course of the year. Legal fees should also be considered by the divorcing couples as to the related tax effect. Fees related to the divorce process are not tax-deductible but if some of the fees are related to tax advice or tax considerations those are deductible.

TBK:  Once the divorce is finalized, how does one’s tax position change?

DE LA HOZ:  Once the divorce is final, the status to file the return changes. If you have children or other dependents, you may qualify to file as head of household. With no dependents, the filing status changes to single. Head of household presents an advantageous tax filing status. If you can claim a qualifying dependent and meet certain requirements, taxable income can be significantly reduced by filing head of household. It’s also important to consider how the division of assets, such as your home, will impact your post divorce income tax return. The tax deductibility related to assets, which you may currently not own any longer, can impact the tax results after a divorce.

TBK:  Can one party to an on-going divorce be forced to change their filing status before the divorce?

DE LA HOZ:  If one spouse wants to file a joint return, you don’t have to agree. You can file your tax return under filing status “married filing separate”. If your former spouse files a joint tax return discovered to be fraudulent, you can apply for innocent spouse relief on the grounds that you did not know about or encourage these actions. You can also apply for innocent spouse relief if your former spouse has created a large tax bill, which you did not contribute to.

You’re Getting Divorced, Now What?

Okay, that’s it. You’ve made up your mind: You want a divorce.  Now
what?

It’s obviously one of the hardest decisions you have ever made. But if you think the hard part is over, you’ve got another thing coming.

Divorce is a life change. Divorce is disruptive. Divorce is painful.  Divorce is hard work.

There is nothing you can do about that.  But there are a few, generally easy, things you can do to make the process just a little bit smoother or maybe
quicker.

We like to call them the Five Steps to a Simpler Separation. And while the list is not all inclusive and cannot address every situation or snarl, it is a good basic roadmap for a more a less destructive divorce.

  1. Gather Paper.  Make sure you have all your joint financial information and documents.  We are not just talking about recent bank statements and pay stubs, but also new and old loan agreements, investment accounts, real estate deeds or mortgage liens, retirement accounts, insurance policies and tax returns.
  2. Start Fresh.  Open a bank account in your own name.  Make sure you keep precise records.  Even in your own, new bank account, your funds may be considered marital assets until the divorce is final.
  3. Close Shop.  You may want to consider closing the joint bank account and splitting the balance if there are not a lot of pending transactions.  It is also wise to close or freeze any joint lines of credit or credit cards and open new lines of credit independently.  Again, make sure to properly maintain records.
  4. Get Help.  Don’t be afraid to reach out to professionals who can provide you with the help or resources you need.  While you might eventually need a family law attorney; first, explore the difference options for divorce besides litigation.  Self-filing, mediation and collaborative are all viable options, depending on your situation.  Confused or worried about money matters?  Get a divorce financial planner.  Having trouble getting over the initial emotional upheaval and crippling grief?  Consider a therapist.
  5. Educate yourself.  Divorce is not only difficult emotionally, it can be complex and that pain can be exacerbated if you do not know what is going on with your own life. Learn the language or terms used in divorce and how the system works. Many states require a two-hour course for parents of small children to educate them on making the process less stressful for them.  Look for information online. Talk to others who have gone through the process to learn from their mistakes – and their successes. Support groups can be helpful.  Having knowledge of what to expect will give you comfort and empower you with the confidence to make better decisions at a very confusing and critical time in your life.

Divorce is difficult enough as it is. But with these basic first steps, you can have more control of the process and the outcome—and that will positively impact how you come out of it and how you feel afterward.

The Role of Mediation in Divorce Cases

Many people mistakenly believe that a divorce automatically means a court trial.  The reality is that a large portion of litigated divorces never make it to court and are settled via mediation.  Needless to say it’s important to understand how mediation works and its role in divorces cases.  With this in mind, I discussed the topic with Luis M. Pardon, a Miami-based marital and family law attorney and mediator.  Luis is also a member of The Big Kaboom Divorce Care Team.

DM: A large percentage of divorce cases settle via mediation, why is mediation so prevalent?

PADRON:  First of all, under the Family Law Rules of Procedure, courts have the power in a divorce case to refer parties to mandatory mediation, and the vast majority of Family Law courts highly prefer and require parties to attend mediation before the Final Hearing in their case.  When it comes to financial issues, such as equitable distribution, most parties realize that there only exists so many assets to go around, and many of those assets will be squandered if the case goes to trial.  Therefore, because mediation is often mandatory, and because parties realize that they often will lose more then they gain by going to trial, most divorce cases settle at mediation.

DM:   When it comes to divorce, what are the different forms of mediation?

PADRON:  Although there are a multitude of divorce mediation types, the most typical form is where each party and their attorney sit in one room and the other party and their attorney in a separate room.  The certified family law mediator goes back and forth between the rooms and discusses the other side’s positions in an attempt to settle the case.  Sometimes, the mediator will have the parties and their representatives all in the same room; however, this usually only works where the parties are not particularly contentious with each other.  Other types of meditations exist, such as where parties work collaboratively with joint accountants and therapists over a series of meetings in attempt to resolve the issues.

DM:   When is mediation a good alternative for divorcing couples?

PADRON:  Mediation is always a good alternative for divorcing couples, unless there are domestic violence issues (between the parties themselves or perhaps between a party and a child), or when one party takes such an extreme and stoic position that makes mediation essentially pointless.

DM:   What are the pros and cons of mediation when compared to a trial?

PADRON:  The pros of mediation are that the parties can reach an agreement right away where both sides are relatively satisfied (although rarely is either side completely satisfied) and the substantive litigation essentially ends.  The cons of mediation are, as indicated, that either side may feel they could have obtained a better result at trial.  When the case does not settle at mediation and proceeds to trial, lawyers often say that the parties are “rolling the dice.”  Trial is always a gamble, and no one really knows what the final outcome will be.

DM:   What are some helpful mediation preparation tips?

PADRON:  I recommend preparing as though you are going to trial.  Many family law attorneys do not adequately prepare for mediation and end up forgoing their client’s rights to valuable assets or terms to which they would have been entitled.  Lawyers must thoroughly review all discovery produced by the other side well in advance and determine what other information is needed to settle.  It is often helpful to value all the material assets (such as by obtaining appraisals of real property, valuing businesses, etc.) prior to the mediation.

What’s Mine is Yours and What’s Yours is Mine

What is obtained during the marriage belongs equally to both spouses—it’s marital property.  So, it’s only natural that when a couple gets divorced these “things” need to be equally split between them.  This is equitable distribution.  And aside from alimony and child support, no other divorce matter causes more anxiety and confusion.

Florida statute provides that once an asset or liability is determined to be marital and valued as of a certain date, it is then fairly divided between the parties.  Distribution of marital assets and liabilities is made without regard to alimony and support need of either party.

Equitable distribution does not mean that everything little thing needs to be split equally  on an individual item basis.  It does mean that when all the “splitting” is done, the distribution of assets and liabilities should “balance” or be equal between the parties.  To look at how this works, let’s see what happened in the divorce of Joan and Tom.

The couple was married for 20 years.  They owned marital and vacation homes.  Each one also had a primary vehicle.  The couple jointly owned a family business, which was started about 15 years ago.   Via this business, Tom was able to contribute to an IRA.  Through the years, the couple managed to save some money and acquire stock in some publicly traded companies.  Being prudent, the couple kept credit card debt to a minimum.

When it was all said and done and in order to reach a 50/50 distribution of all marital assets and liabilities, Tom owed Joan $37,750.  This was the amount needed to “balance” the distribution between the couple.  The couple agreed that Tom would pay Joan this amount over a four year period at an interest rate of 5%.

Click Here to see the sample equitable distribution between Joan and Tom.  It’s important to note that not every couple or judge would distribute the assets and liabilities in the same way.  There are many options for the distribution of assets and liabilities in order to arrive at an equitable distribution.

Equitable distribution is one of those areas where parties to a divorce need to be prepared beforehand.  Clearly understanding what the real assets and liabilities are is fundamental to negotiating what you want to keep or give away.

Should I Stay or Should I Go?

That’s the question posed by punk rockers Joe Strummer and Mick Jones, of The Clash, in their 1981 song by the same title. While the song’s lyrics question the intensions of a lover, at The Big Kaboom we are often asked the same question, although for very different reasons.

Janet decides to leave Jack—that is, she tells him she wants a divorce. Now the couple is at the start of the limbo state known as “separation”. And with the average divorce in the U.S. lasting about a year, this limbo could go on for a while. By the way, in Florida, separation is not even legally recognized.

With an uncomfortable situation at the home they jointly own, Janet wants Jack to leave. But Jack has a different idea. He’s not leaving until the divorce is final. In his mind, it’s equally his house, and he does not want the expense of maintaining a second place to live.

Janet can’t take it anymore. Not sure of what to do, she is thinking about being the one to leave. But she is concerned about “abandoning” the house before the divorce is done.

So, can Janet force Jack to leave? If Janet leaves the house, will she lose any claim to the property? Janet and Jack have two minor kids. What are the implications for custody, if either leaves?

The misconception repeated over and over is that leaving the house is a “bad thing” to do. But is it? While there are other factors to consider and assuming there is no issue of abuse, in general, the simple answers are:

  • No one must leave the house, and
  • No one loses their claim to the property, if they do leave

For the purposes of equitable distribution, the house is just another asset to be split between the couple. It’s no different than a car or bank account that is jointly owned. The fact that one or the other is not living in the house when the divorce is finalized is not material.

Ah, but then there are the kids. Property rights and child custody are not the same. If either leaves the house for an extended period of time without the kids, it could have an impact on custody.

As always, you should consult a legal professional to discuss your options.

Should I Keep the House?

Iris loved her house.  Purchased over 15 years ago, it was her “baby”.  Everything about the house had her touch.  She could never imagine living anywhere else.

Iris decided to divorce.  Her spouse wanted to sell the house, but Iris wanted to keep it.  It was something Iris just had to have in the negotiation, and so she did.

Now, years after the divorce, Iris regrets her decision.  Unfortunately, this type of regret is not uncommon for people like Iris.  “I tell people all the time that you have twice the expenses and the same pot of income to go around,” says Jennifer Failla, principal and founder of Planning Through Divorce.  “You might not want to hear the reality, but trained professionals are your advocates and your agents of reality.  Understanding your costs, options and potential outcomes, all of them, can help the client make informed financial decisions not just during the divorce but afterwards as well.”

To keep the marital home or not is never an easy choice.

The first thing to consider is if you should even want it.  Ask yourself, “I’m I doing this for me or the kids?”  Well, time passes and things change.  Kids grow up and move away.  Think into the future.  Is this the home where you want to live 10, or 20 years from now?  Although you may want to keep the house now that the kids are young, be assured that kids are resilient.  They can weather a move to a new place.  Regardless if you keep it or not, the kids’ lives will change.  And there will be a new home anyway; that of your ex-spouse.

Then there is the affordability factor.  Even if the house is paid for, there are utilities, regular maintenance, taxes and insurance.  Depending on the size and location of the house, this could run into thousands of dollars per year.  And of course there are the unexpected repairs that always seem to come at the worst time.  Another thing to consider is the amount of work needed on the property. Do an honest budget.  Can you even afford to keep the house and still retain a reasonable standard of living?

You’ve decided you want the house.  Does it have value or is the property “upside down”.  If you owe more than it’s worth, be very careful.  If you anticipate an increase in value then it might be worth keeping.  If the house has a positive value or equity, think about what you would do with your portion of the equity, if the house were sold.  Would you be better using this money for investing or buying a smaller place to live?  Remember that if you keep the property, you will have to forfeit other assets, to your spouse, in equal value to the equity in the home.

Many people mistakenly believe that the property’s title and mortgage note are the same thing.  They are not.  No matter whose name appears on the property deed or the mortgage, the property is a joint, marital asset.  But if you decide to keep it, only your name should be on the deed and the note.  Transferring the deed is as simple as executing a Quit Claim Deed. But this is only one side of the equation.  The thorny issue is that of a new mortgage should there be an outstanding note on the property.

If both you and your spouse signed the mortgage, the bank does not care about the divorce or who now owns the deed.  The bank wants its money back.  So if you are keeping the house, you will need to re-finance the existing mortgage.  And this usually represents a major problem.  As an individual will you be able to qualify for a new mortgage?  If not, can you get a co-signer or will your spouse be willing to remain on the hook for the mortgage.  You will both be responsible for paying the bank, either via a re-finance or the sale of the house.

Future taxes are not something most of us worry about, but it’s something to consider in this case.  Let’s say you owe nothing on the house.  And at the time of the divorce, the house is appraised at $200,000.  If you keep the house, your spouse gets a $100,000 in other marital assets.  This also means that your spouse pays no tax on the “proceeds” from his or her “half” of the house.  But if in the future you decide to sell the house, you will carry the full tax burden for the $200,000, plus any appreciation in the house’s value.  You can address this situation with an agreement in the MSA that accounts for future long-term capital gains on the marital home.

There are many emotional reasons and attachments wanting to keep your home.  Also, going through the divorce, your home may be your only refuge.  The one place you feel at peace.  Just keep in mind that emotions fade over time and then you are you left with the financial reality of your decision.

11 Tips for Avoiding a Disastrous and Damaging Divorce

If you are there already, and you know that your marriage has to end, there are things you can do to make a divorce less disastrous.  They range from the simplest of things to aspects you may not have even considered.

Here are 11 tips for avoiding a disastrous and damaging divorce from our experts in the fields of matrimonial law, family counseling and financial planning:

  1. Don’t Rush.  Fools rush in. Whether you fell in love quickly—and look how well that turned out for you—or not, there is usually no rational reason to rush the end of a marriage.  Taking your time to weigh all your options and make the right decisions could impact not just your well-being now, but also for years to come.
  2. Make Sure You Fully Understand the Consequences.  You are going to have to live with this decision, make sure you know what the ramifications are through each step.  Ask questions.  Get informed.
  3. Agree on the Type of Divorce.  There is more than one way to get divorced.  Litigated—where each of you gets an attorney—is the most often thought of, but not the only alternative.  Self-filing, mediated and collaborative are each alternatives.  And these alternatives could save you money, time and your relationship post-divorce.  If at all possible, you and your spouse should talk about the options and agree on the best one for situation.
  4. Choose an Attorney Wisely.  If you need or want an attorney, don’t pick the wrong one. It is not enough to just open the Yellow Pages, close your eyes and point to a name.  It is not enough to call that number from the billboard or the radio commercial.  Not all attorneys are created equal and some might be brilliant litigators, but that may not be what you need.  The best thing to do interview a couple before you pay that retainer and get a feel for how they fit your specific needs.
  5. Get a Team.  Your attorney might not be the best person to give you advice on the sale of your home or splitting your retirement assets.  In many divorce cases, it is good to also get the advice of a real estate agent and a financial planner so that the best settlement can be reached for everyone.
  6. Don’t settle.  Neither more than you can pay nor less than you deserve is good. Most divorces are not litigated for everything, but rather end in a settlement outside the courtroom.  Make sure that you can afford what you are paying or, conversely, that you can live with what you are getting.  This is the number one thing that lands divorced couples back in court.
  7. Don’t Act Out of Anger.  It is easy to slip into the mindset of punishing the soon-to-be ex-spouse.  But rash, kneejerk decisions made to exact revenge never turn out right for the long-term future.
  8. Don’t Take Advice From Your Plumber or Mechanic.  Everybody’s got an opinion, right?  Once you start talking about your settlement details with friends and others, people will undoubtedly say “you should have done this” or “so and so got more.”  Don’t listen.  Not every divorce is the same and you need to trust the professionals who are helping you with yours.
  9. Pick Your Battles.  You may not want to fight over everything.  Have a list of priorities and remember that it is more important to keep your principles than it is to keep “stuff”.
  10. Avoid a Trial.  While you may think it is best for a judge to make all the decisions after he or she has heard both cases, that decision is binding.  It is a better option in most cases to reach a settlement without the necessity of a judge.  This also gives you and your spouse more control over the details.
  11. Get Out of Your Head.  Divorce is one of the most emotionally and mentally stressful things you will ever do.  If you can, get professional counseling to deal with those feelings and you will likely have a less chaotic aftermath.

Divorce is too often hard and painful.  But it doesn’t have to be a disaster.  With these 11 easy tips, you can lessen the most damaging effects of divorce—and move on with your life faster and healthier.

Who Pays for College?

When Elena and Joe divorced almost 12 years ago, they wanted to get it over quickly and as amicably as possible.  But because their daughter was 4, it never occurred to them to discuss how they would share the financing of her college education.

Now, Sofia is 16 and excitedly looking at university applications.  Elena is stressed out and feels guilty because she doesn’t know how she will be able to pay for it.  She is even afraid to talk about it with Joe, especially because he remarried and has two more children bound for college in a few years.  Heck, he constantly “jokes” about how happy he’ll be in two years when he doesn’t have to pay any more child support.

The hard truth is this:  if there is nothing written in the divorce agreement, and except for a few atypical cases where it is ordered by the courts, there is no legally-binding financial obligation on the part of the non-custodial parent to pay for college tuition or other educational expenses.

“I can’t put enough stress on the fact that this should be negotiated from the get-go in a divorce settlement agreement.  In fact, I advise my clients to include a separate written college support agreement in addition to any other child support terms”, says family law attorney Carolann Mazza.

Such agreements typically are broken down to percentages of college expenses – which include rent, meals and other items, in addition to tuition — that each parent is responsible for, a cap or annual maximum and restrictions on what kind of college their children may choose.  Many parents who will agree to pay half of the expenses at state universities may not feel as generous with Ivy League schools.

“Every family is different”, notes Mazza.  “And It’s best to have all the details and issues discussed and resolved in advance.  That way, the college application process can be just positive and happy, as it should be.”

There are many ways to secure college financing in a divorce agreement.  For example, one is to have the funds put in an escrow account for future withdrawal and another is to get a lump sum that can be managed to make the college funds available when needed.

The best thing to do is consult with a divorce financial planner who has the skills and expertise to recommend the best path for you, based on your financial situation and complex projections of future college costs and its present value today.

College may be the last thing on your mind during the difficult divorce process, but it will weigh on your conscience later if you don’t think about it now.

Just ask Elena and Joe.