Ch10 - Divorce And Blended Families I

Question 1

Paying for divorce is no easy task. Everyday life expenses include ______ expenses as well as ______ expenses.

Answer 1

a) fixed
b) discretionary

Question 2

Spousal support payments used to be tax deductible. What changed?

Answer 2

Under the Tax Cuts and Jobs Act, the payer CANNOT deduct spousal support payments and the payee CANNOT claim spousal support payments as taxable income.

Question 3

What are the THREE methods for dividing retirement accounts?

Answer 3

buyout method or aka immediate offset method (Best Method: purchase interest of nonparticipant using comparable assets)

wait-and-see method (split at the date of retirement)

reserved jurisdiction method (Rare Method: value and divide in the future)

Question 4

How long is spousal support paid?

Answer 4

Stops at remarriage or death (no estate inclusion).

Question 5

Once a property is community property, it MUST remain community property. How is community property handled at the death of a spouse?

Answer 5

There are NO automatic survivorship rights and the decedent’s share of the community property will pass through probate.

Question 6

The purpose of IRC Section 1041 is to allow spouses to transfer property during a property settlement WITHOUT…

Answer 6

income tax consequences, recognized gain on the property, and NO step-up in basis.

(once the property is considered IRC Section 1041 settlement property there is no time frame this has to be completed. Just make sure the time frame is in writing.)

Question 7

Divorcing spouses either live in a common law state or a community property state. How is property divided fairly?

a) common law
b) community property

Answer 7

common law = usually 50/50 equally

community property = undivided property and each spouse owns 50% no matter who acquires it

Question 8

What are the FOUR considerations when valuing a closely held business during a divorce?

Answer 8

(1) whether separate property was invested in the business
(2) whether the business grew during the marriage
(3) when the business was established
(4) whether both spouses ran the business or contributed to the busines

Question 9

What is quasi-community property?

Answer 9

When property is treated just like community property at the time of divorce, even if it’s acquired in common law state.

Question 10

Divorce costs are new and often excessive. What are some expenses that should be expected?

Answer 10

attorney fees

business valuations

arbitrators/mediators

vocational experts, therapist

Question 11

Who pays and what is paid comes down to which spouse is in the best financial position. Which spouse generally bears the majority of the divorce cost?

Answer 11

higher wage earner

Question 12

Which party is the financially responsible party and which is the non-payor party?

a) payor spouse
b) payee spouse

Answer 12

payor spouse = financially responsible party

payee spouse = non-payor

Question 13

This establishes a set amount of support that may limit what each spouse is able to spend during the divorce process.

Answer 13

temporary order

Question 14

Each spouse has a legal responsibility not to do anything that would harm the other with regard to joint interests. What actions should be done to protect joint assets?

Answer 14

Best not to take joint assets and wait until officially divided. Anything else could be problematic.

Question 15

What happens after divorce papers have been filed? (2)

Answer 15

The court restricts the taking or transferring any jointly-owned property and a letter must be sent to the financial institutions notifying them of the divorce to protect both parties.

Question 16

In planning for a divorce developing a budget is important. How should a budget be done to avoid litigation?

Answer 16

1) both spouses should track incomes and expense
2) check for accuracy to confirm expenses aren’t inflated

Question 17

Once the budget is completed, what are the options for paying for the divorce?

Answer 17

1) liquidate joint accounts or assets
2) try joint credit cards or loans to protect the lower wage earner
3) use retirement funds
4) sale rental real estate or other assets

Question 18

Divorce usually include the immediate division of assets and liabilities through what TWO forms of settlements?

Answer 18

property settlements

ongoing payments (e.g. - alimony and child support)

Question 19

IRC Section 1041 states property settlements are made within ______ after the marriage terminates.

Answer 19

one year

Question 20

IRC Section 1041 does NOT apply in what THREE situations?

Answer 20

spouse is a nonresident alien

certain transfers in trust

redemption of the former spouse’s stock in a family corporation

Question 21

This is property acquired by a spouse prior to marriage, or received as a gift or inheritance during the marriage, is considered _______.

Answer 21

separate property

Question 22

A common law marriage is when couples who act like they are married are considered legally married in some states. What is required for this type of relationship to end?

Answer 22

divorce is required to terminate

Question 23

Since a couple cannot split the family residence down the middle, what are FOUR other alternatives for dividing the residence?

Answer 23

1) appraise, sale, divide proceeds from the home
2) transfer ownership (and mortgage) to only one spouse
3) one spouse keeps house for a while (eg - kids are grown), then sell
4) gift house to the child

Question 24

How should personal belongings be divided during a divorce process?

Answer 24

Assets should be listed and assigned individually. This include vehicles and associated loans.

Question 25

What makes investments difficult to value during a divorce?

Answer 25

Because of the constant fluctuations in the value. It’s best to pick a valuation date (e.g. – date of separation)

Question 26

What is a great way to ensure income protection in the event of the payer spouse’s death or disability?

Answer 26

The payee spouse should own a life insurance policy on the payer spouse. The divorce agreement should state time limits for when the insurance should be bought. The payer spouse should have disability insurance coverage.

Question 27

Which spouse will generally provide health insurance (fringe benefits) for children during a divorce settlement?

Answer 27

Court may provide coverage for children

Question 28

Who has to report a constructive dividend or capital gain created by a stock redemption when divorcing spouses co-own a closely held business?

Answer 28

Spouses can determine who reports dividend or gain

Question 29

How are stock options viewed during a divorce settlement?

Answer 29

Stock options are deferred compensation and considered martial property. However, because they are issued to the employee, they CANNOT be transferred as part of a divorce settlement.

Question 30

What happens if a client is the business owner and DO NOT want the other spouse to take any part of the business?

Answer 30

Any value the opposing spouse has in the business will need to be satisfied with an equivalent amount of other assets in trade.

Question 31

What are the THREE methods to valuing a closely held business during a divorce?

Answer 31

fair market value (price upon which a willing and able buyer and seller agree, usually based on cash)

capitalized earnings (often used when limited assets but constant cash flow like a “professional practice”)

future earnings capacity (similar to discounted future cash flow method)

Question 32

What should be done when getting a valuation report for a closely held business that is now considered marital property? (3)

Answer 32

1) provide necessary documents to valuators
2) get valuation report orally or in writing (if needed)
3) get a second opinion (if desired)

Question 33

What are FIVE considerations when addressing retirement plans during a divorce settlement?

Answer 33

1) split account 50/50
2) keep with current owner and balance with comparable assets
3) for pensions, how do you treat future income streams
4) any need for protections for other spouse’s remarriage or death
5) how vesting rules impact accounts

Question 34

How can double dipping be avoided when dividing retirement plan assets?

Answer 34

Have a provision in the divorce settlement, exempting retirement payments from being considered income for the purposes of spousal support.

Remember, the plan can be divided as a marital asset or can be treated as a stream of income for the participant.

Question 35

How are social security benefits handled during a divorce settlement?

Answer 35

Social security benefits ARE NOT considered marital property and ARE NOT divisible at divorce. However, if married for 10+ years, then that spouse can claim the higher of their own benefit or the spousal benefits (e.g. - 50%).

Question 36

A court order that allows a portion or all retirement plan assets to be transferred to an alternate payee (someone other than the named beneficiary in the pension plan).

Answer 36

qualified domestic relations order (QDRO)

Question 37

What happens during the discovery process of uncovering each and every retirement plan accrued during the marriage?

Answer 37

Contact plan administrators to confirm plans and identify any frozen or overlooked plans.

Question 38

What does spousal support (also referred to as alimony or maintenance) represents?

Answer 38

A payment made to an ex-spouse under a divorce or separation that is NOT part of the property settlement.

Question 39

What is the purpose of spousal support? (3)

Answer 39

a) create economic equality after a divorce to for the ex-spouse
b) gain the necessary training to re-enter the workforce
c) maintain a living previously accustomed to

Question 40

What are the payment options for spousal support?

Answer 40

Spousal support payments can be lump sum or installments. Spousal support payments can also be modified based on the need (changes in income, changing needs, disability, illness, etc).