Ch11 - Divorce And Blended Families II

Question 1

What are the tax implications for transferring property to a spouse or former spouse?

Answer 1

a) not subject to gift tax
b) no step-up in basis

Question 2

What are the blended family statistics? (5)

Answer 2

1) 40% of families are blended couples
2) Approximately 1/3 of weddings form blended families
3) Nearly 3/4 of divorced people will remarry
4) 42% of adults have a blended relationship (blended parent, blended or half sibling, blended child)
5) 14% of adults are blended parents

Question 3

What are noncustodial parent options in opting out of child support?

Answer 3

There’s NO option to opt out of child support laws.

Question 4

Child Support is money from a noncustodial parent pays the custodial parent to cover housing, food, clothing, and education. What is the taxation of child support considering noncustodial parents and custodial parents?

Answer 4

Child support is neither taxable to the recipient spouse nor deductible to the payer spouse.

Question 5

Tom and Mary were granted a divorce on 10/5/17. As a result, Tom moved to another city to take a job and start over. He sold his house for $800,000 on May 1, 2018, just 6 months after he purchased it for $500,000. When filing his 2018 tax return, how much of the gain must Tom include on his 2018 tax return?

Answer 5

• $800,000-$500,000 = $300,000 profit $250,000.
• The 2-year rule applies, and $250,000 is the single exclusion on the sale of a home.
• $250,000 x 6mo/24 mo = $62,500 profit excluded.
• Balance of profit included for income tax $300,000 - $62,500 = $237,500.

Question 6

What is temporary child support?

Answer 6

Typically awarded by the court to ensure that the children do not have a reduction in their standard of living pending a divorce dispute.

Question 7

What happens if a custodial parent fails to seek an appropriate level of temporary child support?

Answer 7

They run the risk that the amount of temporary child support could become the final amount of child support.

Question 8

When does child support end?

Answer 8

When the child reaches age 18 to 21 or becomes emancipated (end - married), depending on state law.

Question 9

Penalties for failure to pay child support are quite substantial. What are the consequences for failure to pay child support?

Answer 9

a) criminal penalties
b) garnish wages
c) cancel Driver’s Licenses
d) access tax refunds

Question 10

What are the FIVE IRS requirements to meet the qualifying relatives test for income tax purposes?

Answer 10

• dependent to reside in the taxpayer’s household
• meet the gross income test
• meet the relationship test
• citizenship test
• if married, cannot file taxes as married filing jointly with their spouse

Question 11

Why do courts rarely consider the deferred tax liability in a divorce?

Answer 11

Because taxes are considered highly speculative and subject to change or offset.

Question 12

What are the recorded-keeping requirements when transferring property to a spouse during a divorce? (3)

Answer 12

Records sufficient to determine the adjusted basis and holding period of the property. As well as any potential tax liability.

Question 13

Income tax filing status is determined as of the last day of the tax year. What would be the filing status?

If divorced - ___________

If divorce not finalized - ___________

Answer 13

If divorced - Single or Head of Household (HH)

If divorce not finalized - Married Filing Jointly (jointly liable) or Married Filing Separately

Question 14

A divorce decree is used to clarify who claims children for exemption. How has the Tax Cuts and Jobs Act changed exemptions?

Answer 14

exemptions are suspended

Question 15

How much can be deducted for legal fees and court costs for getting a divorce?

Answer 15

Legal fees and court cost for divorce NOT deductible

Question 16

What are THREE money management tips when it comes planning for blended families?

Answer 16

1) Think of children as “our kids”
2) Avoid keeping score: kids cost money
3) Don’t keep financial secrets from new spouses

Question 17

How should a financial plan be addressed with a blended family?

Answer 17

A brand new financial plan should be created, reflecting the objectives of both spouses and the needs of the blended family.

Question 18

A second marriage will likely cost MORE than the first one. How can a budget help with unexpected expenses (e.g. – legal fees)?

Answer 18

Start a NEW budget and maybe even consider joint and/or separate bank accounts.

Question 19

What are the FOUR benefits to entering into a prenuptial agreement?

Answer 19

1) can help sort finances if a marriage ends in divorce or death
2) can let spouse waive rights to any property (e.g. - family business)
3) can clarify financials and marital obligations
4) provide full disclosure of all assets and liabilities

Question 20

When can a couple enter into a postnuptial agreement?

Answer 20

Each spouse could sign this document after the wedding and what is considered separate property varies by state.

Question 21

One estate planning approach is a Qualified Terminal Interest in Property (QTIP). How can a QTIP ensuring that property is passed on correctly after the death of a spouse?

Answer 21

It allows a decedent to qualify for the marital deduction at his death, yet still control the ultimate disposition of property. A QTIP trust holds property for the benefit of a surviving spouse and makes income distributions to the surviving spouse at least annually. At the surviving spouse’s death, the trust property will transfer to the remainder beneficiary as determined by the first-to-die spouse of the QTIP trust.

Question 22

How should retirement investments be adjusted after marriage to a new spouse? (2)

Answer 22

a) Update beneficiary designations and could name children as contingent beneficiaries
b) Passing through trust instead has more control (but greater cost)