Articles Posted in Divorce

People with a 401 (k) may consider taking money from their accounts for many reasons. Struggling to make ends meets during the COVID-19 pandemic is one reason. Another reason is that they’ve separated from their spouse and need the funds to survive.

A 401 (k) is a defined contribution plan where employees contribute funds each year to a retirement plan. The employer may provide matching amounts. The advantage of a 401 (k) is that you don’t have to pay taxes on the income until you withdraw the money. Often, withdrawing money later in life means you’re in a lower tax bracket than when you contributed, so you save on federal taxes by postponing the withdrawal.

In Texas, all property acquired during the marriage is considered marital property unless there is a pre-nuptial agreement or a post-nuptial agreement. Marital property does not include property either spouse owned before the marriage. Marital property does not include property acquired during the marriage if the parcel was obtained – by a gift, through a will or estate when someone dies. Marital property doesn’t include a personal injury recovery unless the recovery is for loss or earnings (while the accident victim was married).

The pandemic is affecting the desire for a divorce, the ability to obtain a divorce, and the issues that need to be resolved – in many different ways. A recent article in D Magazine analyzed the many different ways the pandemic is changing divorce in America.

Divorces in Texas are still being filed and resolved during the pandemic. Mediators and collaborators are still working to settle cases. It takes more time to obtain hearing dates in Texas as criminal trials have priority, and safety precautions need to be taken before cases can be heard. Many cases are being heard virtually instead of in-person.

The Texas Supreme Court states that current possession orders in divorce cases should be followed. Lawyers are being asked to keep the status quo as much as possible.

The laws on divorce, property division, child custody, alimony, and child supports haven’t changed due to the pandemic – but the needs of spouses, parents, and children have changed dramatically. A lot of the need for modifications of existing orders and the new requests for divorce depend a lot on the financial ability of Texans to weather the storm and the comfort levels of each spouse.

Courts are generally hesitant to change existing orders if the pandemic is likely to end within a year.

Some of the ways the pandemic is directly affecting family law issues are:

  • Grounds for divorce. One example of a practical change is that living apart for three years, one of the grounds for divorce, is more difficult because people are hesitant to move due to finances and the need to interact with movers and other people – to change locations.
  • Child support. It’s harder to enforce child support payments by holding parents who don’t pay in contempt. Contempt means time in jail, and jails are having some of the worst COVID-19 outbreaks.
  • Child custody/conservatorship. The parent with primary conservatorship is being required to make more decisions than usual.

The Pros and Cons of Virtual Divorces

Practically, most divorce hearings and negotiations are being handled virtually. Zoom is the primary technical medium.

In Texas, according to a Texas family lawyer, “It’s not uncommon now for me to have a three-day trial or several hearings in one day all on Zoom.” With Zoom, lawyers and clients don’t need to wait their turn to be heard. Mediators and judges have been able to adapt reasonably well.

Other lawyers appreciate how well Zoom works – but still think face-to-face hearings are better. In-person, the closeness and stress of a hearing can help forge settlements and help confront spouses who aren’t credible. Virtual trials can make it difficult to see the people testifying for or against a client and to ask them credibility questions and cross-examine them. With Zoom, you can’t see if a client is being coached through text messages or in some other technical way.

Some aspects of remote divorce proceedings may continue even after the pandemic because remote communications help cut down on legal and court costs.

How the COVID-19 Health Crisis is Affecting the Resolution of Divorce Issues – Such as Child Custody, and Child Support

The pandemic is forcing more decisions to be made about child custody and support. Deciding when to divorce and how to divide property often can generally wait longer because they don’t affect life on a daily basis.

Some of the Texas conservatorship issues that are affected by COVID-19 include:

Child custody and visitation. Many schedules do need to be modified – either amicably or through the court process. Modifications are necessary because children are staying home more (during school hours and after school hours). Some of the pros and cons of raising children during the pandemic are:

  1. Parents are finding it challenging to obtain daycare services during the pandemic.
  2. It simply isn’t as easy for the parents to exchange their children due to safety concerns.
  3. Many parents need to stay home to monitor their child’s remote learning.
  4. On the plus side, many parents are getting closer to their children because they’re spending so much time with them.

Child support. Some parents have lost their jobs due to the pandemic crisis. Losing a job is a proper reason for seeking a modification of a child support order.

Some couples are fighting more because of the pandemic for different reasons:

  1. Sometimes being in the same home 24/7 makes it hard to find escape valves for releasing tensions.
  2. Spouses may discover that the other parent isn’t willing to take care of the children.
  3. Spouses may discover that the husband or wife can’t handle stress well.
  4. For some spouses, the close quarters only makes clear that the marriage isn’t working.
  5. Different parents may have different ideas on their children’s education and social activities during the pandemic.
  6. Marriage counseling is continuing online.

How Lawyers are Trying to Help Spouses and Parents During the Divorce

Lawyers are trying to help couples with marital difficulties by clarifying what their lives will look like during and after a divorce – so they can better decide whether to work through the pandemic issues or seek a divorce. Family lawyer help spouses and parents by explaining:

  • How the divorce process works;
  • What issues need to be resolved;
  • How the resolution process works;

Some of the mechanisms family lawyers are using during the pandemic are:

  • Informal settlements;
  • Encouraging more flexibility;
  • Reducing the number of exchanges of children;
  • Collaborative divorces (which use a team approach with financial and mental health professionals), are working well during the pandemic – because the core idea behind the collaboration is to work out solutions instead of focusing on confrontation. Mediation is also a valuable divorce resolution tool.

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In 2017, National Defense Authorization Act (NDAA) made a radical change to the way states divide the military pensions of divorcing spouses. Before the NDAA, states had the discretion of dividing pensions of divorcing military personnel as they saw fit. Now, the federal government has not only imposed significant restrictions, it has also changed the military pension division rules of 45 states.

Historically, these states divided military pensions using the Time Rule Formula as stated under the Uniformed Services Former Spouses’ Protection Act (USFSPA) of 1982. The formula has been the source of criticism in the past because it allows the ex-spouse to benefit from any increases in rank and time-in-service pay of the military member long after the couple ended their marriage.

Let’s suppose a couple divorces while the military member spouse is an Army Captain with four years of service—all through which the couple were married. Under the old rule, the divorce court could award the service member’s wife 50 percent of his pension and base the corresponding dollar amount not on the husband’s rank at the time of the divorce (i.e. Captain) but the rank at the time he retires. Let’s assume again that spouse rises to the rank of Army Colonel and retires after 20 years of service. Even if the service member divorced his spouse 16 years ago, she would still collect the retirement benefits the Colonel earned with 20 years of service.

Moreover, this award was irrevocable. Even if the military service member were to remarry and stay married to another spouse for the next 20 years, the first spouse would still be entitled to half of his military pension.

The NDAA, on the other hand, implements what’s known as the “Frozen Benefit Rule,” rewriting the USFSPA and stating that a service member’s rank and number of years spent active are “frozen” at the time of the divorce. So, using the same example above, the new rule would limit the share of retirement benefits the non-military spouse can collect to 50 percent of the service member’s pension as a Captain with four years of service. It cannot be based on the total value of his pension at the time that he retires with a higher rank and more time-in-service pay.

This rule, however, is not retroactive, applying only to divorces finalized after the NDAA was signed into law.

What Does This Mean for Military Divorce in Texas?

Nothing. The frozen benefit rule is already in effect in five states, namely Florida, Kentucky, Oklahoma, Tennessee, and Texas. The NDAA applies to all military personnel in the service, including the Army, Navy, Air Force, Marine Corps, Coast Guard, National Oceanic and Atmospheric Administration (NOAA), and Public Health Service’s Commissioned Corps.
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As 2019 rolls in, divorced individuals will have no choice to but to bid farewell to alimony tax rules that have been around for decades. Under a new tax code—made possible by the Tax Cuts and Jobs Act (TCJA) of 2017—that takes effect on January 1, alimony payments will no longer be considered tax-deductible for the spouse paying alimony and taxable income for spouse receiving spousal support. These new rules take effect after December 31, 2018 and will not affect existing divorces and separations.

Overall, it looks like spouses will end up pocketing less cash from alimony payments, whether they’re the ones paying or receiving money. But there are ways to make up for this.

Tax Benefits from Selling the Home

If you are getting divorced and thinking of keeping the family home, see if you can qualify for any tax benefits. The best option might be to sell the home to take advantage of a capital gains tax exclusion of up to $250,000 if you’re single and up to $500,000 if you are still married and filing jointly. So, it may be in your best interest to sell the property before the divorce is finalized.

Take Advantage of Child Tax Credits

Under the new tax code, the Child Tax Credit (CTC) amount awarded to parents will see a significant bump next year, raised to $2,000 per qualifying child—up from $1,000 under the current rules. So, if you’re negotiating for child custody, you can use plan ahead and use the CTC to offset alimony taxes.

And this part is important. If you are the parent of three children under the age of 17 and make $100,000 as a divorced spouse (the CTC is unavailable to individuals making $200,000 a year and couples earning more than $400,000), you qualify for $6,000 of tax credits. This makes the CTC more powerful than a tax deduction as it reduces your tax bill dollar-for-dollar.

Consider this situation: You’re a mother of three who owes the $4,000 to the IRS for the previous tax year. But you also qualify for a tax credit of $2,000 for each of your three children, which means you no longer have to pay last year’s taxes.

Look to Other Payment Methods

Spousal maintenance payments don’t have to be in the form of traditional alimony. For example, couples can consider property division payments instead of alimony.

If the couple’s marital estate is worth $2 million, they can agree for one spouse to pay the other $1 million in staggered payments. The benefit? Property division payments are non-taxable.

But this option isn’t perfect either. If the spouse paying property division files for bankruptcy, the property division payments could very well go away. In contrast, alimony payments are not dischargeable in bankruptcy.

What if You Beat the December 31 Deadline?

To be honest, if your divorce proceedings began during the last few months of the year, you’re probably too late. For example, if you had filed for divorce in November, it’s very likely you won’t get a judgment until next year.
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One of the more unexpected effects of going through a Texas divorce is one spouse losing his or her health insurance coverage once the divorce becomes final. Given how expensive healthcare is, it’s important to be mindful of this consequence after a divorce, especially if you are currently under your spouse’s health insurance plan.

If you’re presently employed, the most sensible thing to do is move to your company plan—premiums are low and deducted from your payroll, which means you also get a tax break. The appeal of company health insurance is why many at-home spouses seek employment or look for associations that offer group health insurance plans after a separation.

But what if you can’t do either? Below are a few options to choose from.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 allows individuals to keep their health insurance coverage for a specific period provided a qualifying event, such as a divorce, happens. COBRA is particularly useful for individuals who are part of their spouse’s company health insurance, as a divorce—no matter how amicable—automatically terminates the dependent spouse’s coverage.

This is where COBRA comes, applying to employer health insurance groups with at least 20 employees. If you are in the middle of a divorce, you can use COBRA to remain under your ex-spouse’s health insurance plan for up to three years. The key, however, is to fill up and return COBRA enrollment forms within 60 days of receiving an eligibility notice—missing the deadline forfeits this option.

State-sponsored Continuation of Healthcare Coverage

Texas and some other states allow individuals who are not eligible for COBRA or have exhausted their COBRA coverage to avail for of state-sponsored healthcare coverage continuation—a perk often called mini-COBRA.

In Texas, the following rules on coverage continuation rights apply:

Dependents can stay covered under their ex-spouse’s employer’s health plan for up to nine months if they are not eligible for COBRA.
Depends who have exhausted their COBRA coverage can seek state-sponsored continuation for six more months after their COBRA continuation ends.

When in doubt, check with your state’s department of insurance and the company’s human resources to go through the finer details of this setup.

Affordable Care Act (ACA)

You also have the option of buying individual health insurance under the ACA instead of going through a group-based plan. You can purchase your plan through the government exchange or off-exchange directly through a health insurance provider or broker. Either way, individual plans are guaranteed issued free of any underwriting or exclusions for pre-existing conditions. Benefits are also more robust than ever—a big reason behind why many people get healthcare coverage under ACA after losing group coverage.
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For many couples, planning for divorce might as well as be hoping for the worst to happen to their marriage. But just like life insurance, planning for a divorce is something you’ll thank yourself for doing when the need for it actually arises. And with 40 to 50 percent of marriages in the United States ending in divorce, the chances of it happening to you are not exactly out of the realm of possibility.

If you’re in the middle of a divorce, careful planning is key to a speedy and hassle-free resolution. And contrary to what you might think, divorce planning happens before, during, and after the divorce, and, ideally, with the help of your family law attorney. Here are a few things you need to know when planning for divorce.

Make Up Your Mind

If you’ve yet to file for divorce, now is as good a time as any to decide if this is really the right choice for you. Divorce is stressful, painful, and expensive. It represents a dramatic change in your life that will affect your emotional well-being and finances. This is a decision that should never be taken lightly.

Do Your Homework

There’s a lot work that needs to be done, so do your research. Not only are there different divorce timelines to consider, the divorce process itself can vary between states. In Texas, fo example, either spouse must have been a resident of the state for at least six months before filing, and must have lived in the county of filing for at least 90 days. While a divorce attorney is not technically necessary, going without one could lead to costly mistakes.

Take Time to Set Goals

What do you intend to accomplish with your divorce? More importantly, what are your goals in terms of your personal and financial life? A divorce is likely to throw a wrench in any 5-year plan, so it’s important to re-align your goals during and after your separation.

What’s Best for the Children?

When it comes to child custody in Texas, the Court will always have the child’s best interests in mind. You and your spouse will likewise have to think about what makes sense for your children. Is 50/50 or joint custody the best option? Should the mother keep the children? Perhaps something unorthodox like taking turns living with the children in the family home (while the other spouse lives in another home) could be what’s best for the family.

Assemble Your Team

Aside from a reliable Texas divorce attorney, your team can also be composed of a therapist, a financial advisor, and an accountant (for your taxes). Most people make the mistake of treating their attorney as their therapist, but they are ultimately specialists in matters concerning the law, not the heart.
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College is more expensive than it’s ever been, so it’s not surprising why thousands of college graduates are still struggling with student loan debt years after finishing school. But according to a new report, the problem of exorbitant student debt has gotten so bad that it is now causing marriages to end in divorce.

While financial problems have long been identified as a primary cause of failed marriages, a report by Student Loan Hero is perhaps the first to pin marital distress on student loan debt—a problem most commonly associated with the Millennial generation.

The report states that 13 percent of divorced borrowers blamed their student loan debt for the failure of the marriage.

Unfortunately, this trend may only become more prevalent in the years to come.

How Bad is the Student Loan Problem?

It’s estimated that more than 44 million Americans carry the burden of tens of thousands of dollars in student loan debt, contributing to an incredible national total of $1.5 trillion. But not only has the percentage of students borrowing money for college increased over the last 10 years, the amounts they’re borrowing have also grown steadily in recent years. The Student Loan Hero report points out that graduates from the class of 2017 were saddled with an average of $39,400 in student loan debt.

It’s no surprise why many couples feel they’re being held back by this amount of debt, as it can affect their financial and lifestyle decisions, such as when they can get a home or when they should have kids.

Student Debt Affecting Family Decisions

And true enough, millennials are taking longer to buy homes and get married because they want to be financially secure first—a feat easier said than done when you have a small mountain of debt nagging at you.

A New York Times survey published in July this year also found that of the respondents who said they didn’t want children or felt unsure about having children, 13 percent blamed it on having too much student debt. And of those who had or expected to have fewer children than planned, almost 50 percent said it was because of financial pressure/instability.

The results of the Student Loan Hero study echo those of the Times survey, indicating that 46 of respondents took their time to start a family because of student loans. In addition, one-fourth of the respondents admitted to keeping their student loan debt a secret from their partners, while 36 percent said they lied about it.

The problem of student loans and its effect on divorces needs to be further established, but one thing is clear—it has exacerbated the financial and marital issues that many couples around the country have long faced.
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The Tax Cuts and Jobs Act of 2017 (TCJA) will have sweeping effects on how individuals and businesses file their taxes in 2019 and onwards, with ramifications affecting even family law. If you’re in the middle of a divorce or are considering one, it may be in your best interest to wrap up your separation this year as the federal tax code could affect the tax liabilities of divorcing spouses.

Tax codes are already complicated enough—the last thing you want is to deal with tax issues and divorce at the same time, which is why it’s important to steer clear of complications while you still can. Below are more reasons to act this year and minimize the tax pain from the TCIA.

Reduced Alimony Taxes

Spousal maintenance will undergo significant changes in 2019. At present, alimony payments are deductible by the paying spouse and taxable to the receiving spouse. This means that receiving spouses can pay lower taxes by reporting alimony as income, while payors can deduct it from their tax returns. This is important, because the tax deduction can save as much as 50 percent in taxes for high-earning individuals in high-tax states.

Going forward, however, alimony will neither be deductible by the supporting spouse or taxable to the receiving spouse. This might seem like good news to the recipient, but this will likely have the effect of hurting the supporting spouse, resulting in less alimony paid. With the new tax law, the government intends to raise more than $6 billion in taxes over the next decade—that’s over $6 billion less in the pockets of divorced spouses.

By finalizing your divorce in 2018, the tax rules for alimony payments will remain as-is for the duration of your agreement. And even if you modified your divorce agreement in the future, your deductibility and taxable status will not change unless stated otherwise.

Higher Taxes on Your Home

The family home tends to be a hot-button topic in many divorce situations; the new tax law will only make discussions on what to do with the family home after a separation more complicated. For starters, the law reduces the deductibility on property taxes, as well as the amount of mortgage that can qualify for interest deduction. This has the effect of making homeownership more expensive.

Selling your home will also be more expensive. While married, you can accrue up to $500,000 in capital gains without tax consequences. When single, however, this amount falls down to $250,000. In other words, you need to decide whether to sell the home before finalizing your divorce.

Prenup and Postnup Agreements

Couples who have signed a pre-nuptial or post-nuptial agreement should take the time to review their agreements this year as the law may end up rendering some points they have agreed to moot. For example, alimony provisions affected by the new law may necessitate a re-negotiation.
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The Supreme Court has ruled that a Minnesota law that revoked a former spouse’s insurance beneficiary designation after divorce does not violate the contracts clause of the U.S. Constitution when applied to a life insurance policy before the law’s enactment. Justice Elena Kagan and seven other justices sided with the adult children of a deceased Minnesota man in their majority opinion in Sveen v. Melin. Justice Neil Gorsuch dissented.

Case Background

In 1998, Mark Sveen of Minnesota named Kaye Melin, his wife at the time, the primary beneficiary of his life insurance policy. The couple divorced nine years later, but Sveen never removed his ex-wife from his policy.

In 2002, Minnesota amended its state probate law to include insurance designations in the “revocation-on-divorce” statute, making it one of the 26 states that have adopted such laws, which are based on a 1990 amendment to the Uniform Probate Code. As Justice Kagan pointed out, the law assumes that failure to change an insurance beneficiary after a divorce is likely caused by inattention instead of intention.

According to the amendment law, the dissolution or annulment of a marriage rescinds any revocable beneficiary designation made by a person to that person’s former spouse. Sveen passed away in 2011, four years after separating from his spouse, who was still the primary beneficiary on his life insurance policy. The problem is that Melin and Sveen’s adult children, both filed claims for the policy’s proceeds.

While a federal judge ruled in favor of the children, a three-judge panel in the Eighth Circuit reversed the decision last year, arguing that retroactively applying the 2002 amendment to Minnesota’s revocation-upon-divorce law to Sveen’s life insurance policy violates the U.S. Constitution’s contracts clause, which prevents a state from meddling with contractual agreements.

According to U.S. Circuit Judge William Benton of the Eighth Circuit panel, what is most important are the policyholder’s rights and expectations, not the interests of the beneficiary.

High Court Steps In

Sveen’s children, however, took their case to the United States Supreme Court, arguing that Melin was automatically removed as a beneficiary on their father’s life insurance when the 2002 law was applied to the policy. The High Court reversed the Eighth Circuit ruling in an 8-1 decision.

“Three aspects of Minnesota’s law, taken together, defeat Melin’s argument that the change it effected ‘severely impaired’ her ex-husband’s contract,” Justice Kagan wrote. “First, the statute is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme. Second, the law is unlikely to disturb any policyholder’s expectations because it does no more than a divorce court could always have done. And third, the statute supplies a mere default rule, which the policyholder can undo in a moment.”

What About in Texas?

Texas Family Code § 9.301 states that when you divorce your spouse, your spouse’s beneficiary status on your life insurance is automatically revoked. There are, however, three exceptions to the rule:

The divorce decree indicates the ex-spouse as a beneficiary
The person intentionally adds the divorced spouse as a beneficiary after the divorce
The former spouse receives life insurance proceeds because he or she acts as the legal guardian of the children
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Much has been said about the short-term impact of a divorce on your emotional and mental well-being. What many divorcees and people about to file for divorce fail to consider, however, is just how bad a divorce can be for their retirement readiness.

According to a report from the Center for Retirement Research at Boston College, half of American households are at risk of being unable to maintain their desired standard of living during their retirement years. The risk is worse for divorced spouses—higher by 7 percentage points.

The reason is simple, if you think about it. Couples benefit from economies of scale when they’re married, combining their incomes and splitting the costs of housing, food, and utilities. Many divorced spouses, however, are unprepared for the financial shock of continuing their standard of living now that they have a smaller income stream. This strain on their finances can also affect their ability to save for retirement.

What About Alimony?

Alimony, or spousal maintenance or spousal support, has long been the financial lifeline for many divorce spouses, allowing them to maintain some aspects of their desired standard of living. Alimony is paid by the higher-earning spouse to the lower-earning spouse, ensuring that the latter can still support himself/herself after ending the marriage.

It used to be that the supporting spouse, or the person paying alimony, could deduct this expense from their gross income for tax purposes, while the spouse receiving alimony is required to report it as income. In some instances, the higher earning spouse’s tax savings make it possible for him/her to pay more alimony.

But this could all change with the Tax Cut and Jobs Act, which removes the ability for spouses divorcing in 2019 and beyond to claim a tax deduction from alimony payments. Likewise, people receiving alimony can no longer report it as part of their income.

This has the effect of slashing the amount of money the higher-earning spouse can pay as alimony, raising the risk of the receiving spouse finding himself/herself in a worse financial situation. If this happens long enough, the receiving spouse’s ability to retire in comfort could be compromised.

Financial to Prepare for During and After Divorce

To protect your retirement readiness, there are a number of financial strategies you can look into:

Investments – if you’re a person receiving alimony, receiving a smaller amount could place you in a lower tax bracket (alimony is no longer reportable as income), which in turn, means you may qualify for a 0% tax rate on your capital gains. During property division, you can use this to your advantage by negotiating to receiving investment assets instead of the marital home. This should help you stay in a better position to retire with cash in your pocket.
The family home – Keeping the marital/family home in a state with high property taxes may be more disadvantageous in light of the new tax law, which limits state and local tax deductions at $10,000 a year. You may be better off renting a smaller home and claiming the new larger tax deduction. If you’re in your senior years, you can take out a reverse mortgage to use your equity and buy a new home.
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