Lesson 5 Flashcards
Costs of Divorce
• Everyday Life Expenses
– Money spent on housing, utilities, insurance,
food, etc.
• Divorce Costs – Attorney fees – Business valuations – Mediator and arbitrator fees – Fees for vocational experts, therapists, etc.
Financial Responsibilities
• Often the higher-wage earner bears most of the
cost.
• The payer spouse is the financially responsible
party.
• The payee spouse is the nonpayer.
• Temporary orders outline costs paid by the payer
spouse during the divorce process.
– These costs are usually itemized.
– The temporary orders may limit what each spouse
can spend.
Pre divorce
- Each spouse has to take legal responsibility to do no harm to joint interest.
- Taking joint assets can be problematic.
- It is best to wait until a divorce is final and property is divided before taking joint assets.
Postdivorce
After filing, court orders restrict the taking or transferring of jointly
owned property.
– Financial institutions will need to be notified about the divorce to
protect both parties.
Budgeting During and After Divorce
- Track income and expenses
- Needs for each spouse will need to be determined.
>Needs can be inflated
>Need to be checked for accuracy. - Avoid litigation if at all possible. (Don’t get picky, because lawyers charge by the hour).
Paying for Divorce, Where does it come from?
• Liquidate joint accounts or assets.
• Consider the actions that need to be taken
with regard to joint credit cards or loans.
– This helps protect the lower-wage earner.
• If needed, consider using retirement funds.
– If allowed, consider borrowing.
– Tax liability and a 10% penalty may be incurred
due to withdrawals.
• Consider selling rental real estate or other
assets.
Financial Issues of Divorce
Property settlements & Ongoing payments (Spousal support (alimony) and child Support)
- Spouses can be amicable or not amicable.
- Equitable does not mean equal
- Update estate planning docs (bene’s…)
What is section 1041?
It governs property settlements due to divorce.
Specifies rules to avoid capital gains to the transferor spouse.
- nonrecognition applies if transferee provides consideration
- Transferee spouses takes transferor’s basis.
- Nonrecognition apples for interspousal transfers during marriage.
Sec. 2516 eliminates gift tax implications for timely written property settlement agreements and divorce decrees.
Sec. 2516
Sec. 2516 eliminates gift tax implications for timely written property settlement agreements and divorce decrees. (1 year before the divorce decree is signed 3 year period)
Common-Law
- Property is divided through equitable distribution.
- Usually 50/50
Community Property
- All assets and income unified and undivided.
- Half owned by each spouse no matter who acquires it.
Quasi-Community Property
- Some states treat property as though it is community property, even if the property was acquired in a common law state.
Separate Property
- Property that regardless of community property status is separate (Before marriage, by gift or inheritance, legal damages…)
WARNING: paying expenses or taxes on separate property with community funds may convert separate property to community property.
Splitting Up Primary Residence
- Cannot split in half
- Options:
> Sell outright, pay mortgage and taxes, and divide proceeds.
>Transfer ownership (and mortgage) to one spouse.
>One spouse keeps house for a while then sells.
-Needs to be appraised and reduced by outstanding mortgage balance.
Valuing a Closely Held Business
- Funded with separate property or joint?
- Avoid double-dipping, the payee should not get % in business and income for support.
