Articles Posted in Divorce

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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While the unique characteristics of a couple and their separation means that no two divorces are ever the same, many couples still make a few common mistakes when separating from one another. Whether you’re in the middle of a divorce, or still contemplating one, try to keep the following common divorce mistakes in mind to avoid unnecessary complications.

Settlements that Don’t Anticipate Future the Events

One of the primary objectives in a divorce settlement is to divide marital the assets equitably, which requires a valuation of your assets and understanding each spouse’s current circumstances. But in many divorces, spouses can make the mistake of focusing too much on the present, failing to anticipate what could happen in the future.

Remember, what seems fair now may put you in a difficult situation in the future, especially when it comes to events like job loss, disability, changes in your health or your children’s health, or a depreciation in your assets. Bottom line? When negotiating a settlement, always take into account things that may happen in the future.

Unrealistic Expectations

Lifestyle changes are an unavoidable aspect of any divorce. Even if you were somehow able to negotiate to keep the marital house, get child custody and child support, and even receive spousal support, you need to be ready to make financial trade-offs in your life after marriage.

This might mean dialing back on your monthly spending, nixing the lavish annual vacation to the Bahamas, or postponing your plans to reward your teenage daughter with a car when she turns 18.

Not Paying Attention to the Details

The devil is in the details when divorces are concerned—more so if the divorce is of a complicated or contentious nature. Many would-be divorcees are often caught unaware by how exhausting the divorce proceedings can be, and how it often entails revealing details of their life they may not be comfortable sharing.

At the same time, you and your attorney need to gather volumes of data to support your claims during negotiation—something that may continue even after the finalizing the divorce. For example, if your splitting the costs of raising your children, you may be required to keep a record and share:

Tuition expenses
Doctor’s visits
Transportation
Miscellaneous living expenses

“Uninsured” Marriages

And by uninsured, we mean marriages without a prenuptial agreement. Although prenup agreements often have a negative stigma, they are a practical and realistic backup plan for protecting your interests and assets should the worst happen.

Prenups aren’t just for wealthy couples because they can help regular spouses stay together, helping them understand the repercussions of breaking up.
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When a marriage ends in divorce, it’s necessary to settle a number of issues concerning different types of property. Things can get especially tricky when individual retirement accounts (IRAs) are involved. In this case, it pays to know how to transfer an IRA properly—failing to do so could lead to a host of adverse consequences, not to mention tax headaches.

Common Questions About IRAs and Divorce

If you’re going through a divorce, or are about to go through one, you probably have these questions about IRAs:

What happens to assets like IRAs?
How are they divided?
When transferring or splitting funds in an IRA, who is responsible for taxes?

According to Section 408(d)(6) of the Internal Revenue Code, the transfer of a person’s interest in an IRA to his spouse or former spouse is done under a “divorce or separation instrument” and is a non-taxable transfer.

For qualified retirement plans, on the other hand, when a transfer is made to a former spouse after a divorce, the person’s interest in the plan at the time of the transfer is considered an account of the former spouse.

In other words, the spouse who transfers retirement assets is not liable for any taxes or penalties from future distributions. The spouse who receives the assets, however (i.e. when the plan becomes their own IRA), will be responsible for taxes and penalties from future distributions.

Are All IRA Transfers Tax-Free?

But not all IRA transfers are automatically tax-free. According to the Internal Revenue Service, spouses must present a number of documents, as defined in Section71(a)(2) of the IRC:

A final decree of divorce
A decree of “separate maintenance”
Or a document or written instrument incident to such decree

A decree of divorce is also known as a “judgment of dissolution.” A divorce decree may also come with an order to divide the IRA as part of the judgment or at any other after the judgment is entered.

How to Transfer an IRA

Although the process of transferring an IRA looks simple on paper, it is still complex enough that if you were to miss one technicality, the transfer can still trigger income tax. This is why having a divorce attorney by your side is so important.

In any case, a transfer of an IRA can be done in one of two ways:

Transferring a fixed amount or percentage of one spouse’s IRA to the other spouse’s IRA.
Setting up a new IRA to which the will be transferred

Remember that if any retirement funds are cashed out or distributed and then paid to the spouse or ex-spouse, the IRS will see this as a taxable event to the original IRA’s owner. In other words, it is crucial that any transfer of IRA funds is conducted as an actual transfer—not a distribution.
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As the biggest change to the federal tax code in decades, the Tax Cuts and Jobs Act of 2017 (TCJA) will have a sweeping impact on how much individuals and businesses will have to pay the tax man. But what many people don’t realize is how the TCJA will also directly affect the world of family law, particularly divorce.

Although the TCJA’s provisions technically took effect on January 1, 2018, those that involve the taxability and deductibility of alimony/spousal maintenance will only apply to divorce and separation agreements after December 31, 2018. So, it might be in the best interest of anyone looking to file for divorce to weigh the risks and benefits of separating this year, while the tax changes have yet to take effect.

Here’s what you need to know about these new tax rules.

Alimony Payments

Alimony or spousal maintenance is a common solution to a disparity in the income of divorcing spouses, ensuring that the spouse with the lower income can continue a decent standard as part of a settlement or as ordered by a court.

Under Section 215 of the tax code, alimony payments used to be deductible by the supporting spouse.

Here’s where the TCJA changes things:

Section 11051 of the TCJA removes Section 215 altogether.
Alimony payments are no longer tax deductible by the supporting spouse, nor will they be considered as income to the recipient spouse. The TCJA removes such payments from the definition of gross income under Section 2016.
Moreover, income for alimony and spousal payments will be taxed at the higher supporting spouse rate instead of the previous lower rate of the recipient spouse.
Alimony payments will have the same designation as child support payments and will not be tax deductible by the supporting spouse nor taxable to the recipient spouse.

The TCJA’s new alimony provisions apply to:

Any divorce or separation instrument accomplished after December 31, 2018
Any divorce or separation instrument accomplished on or before December 31, 2018 and modified after the deadline, provided the revision uses language to comply with the new alimony provisions

Tax Deductions

In situations that allow for the deduction of alimony payments, the supporting spouse, who belongs to a higher tax bracket, will receive a deduction higher than the amount the recipient spouse, who belongs to a lower tax bracket, will pay on alimony as taxed income.

In other words, the after-tax net savings will only be available to the supporting spouse.

Other things to remember include:

Changes to alimony taxability and deductibility will directly impact the total net income of former spouses bound by child support guidelines.
The courts, family law attorneys, and mediators will have to consider the net income of each spouse to determine the appropriate amount of alimony and child support payments.
If you are in the middle of a divorce, you can file your taxes in one of two ways. If you are still married by December 31 of the tax year, you can file as married or married filing separately. How you choose could make a significant dent on how much taxes you will have to pay.
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Although much has been said about the emotional and mental turmoil brought about by a divorce, there’s not a lot of information on just how damaging it can be to your finances. Sure, you’ll occasionally hear about the professional athlete or celebrity driven to bankruptcy because of ridiculously high spousal and child support payments. But things like debt, property division, and credit during a divorce don’t get the attention they deserve.

In truth, a divorce can have a significant impact on your credit score, which in turn, affects your ability to take on a loan, open a new line of credit, or refinance an existing loan. The good news is that there are ways to protect your credit during and after a divorce. Below are four steps to do just that.

Check Your Credit Report

Run a credit report during the divorce proceedings and double-check every credit card or loan item in your report. You might have a credit card under your name you’re unaware of with a balance owed that should be settled in the divorce process. Ideally, you want to close all joint accounts before finalizing the divorce to insulate your credit score from any spending activities.

Close Joint Accounts or Remove Your Name from Them

For loan accounts that can’t be closed right away, such as your mortgage or car loan, be sure you and your spouse agree on how to divide these debts.

When it comes to the family home, the cleanest thing to do is sell the property and use the proceeds to pay off what’s left of the mortgage. If your spouse insists on keeping the family home and shouldering all subsequent mortgage payments, remember that late payments will still affect your credit score.

The lender only cares about whose names are on the mortgage, regardless of their marital status. In other words, your liability for shared debt doesn’t go away after a divorce.

Apply for a Personal Credit Card Before Finalizing the Divorce

A credit card under your name can be a lifesaver for a spouse with no income after the divorce. To get circumvent the problem of having no income or not enough income to qualify for a credit card post-divorce, you can apply just before finalizing your separation. This way, you can leverage your spouse’s income to meet the credit card company’s requirements.

Evaluate Your Cash Flow Needs in the Future

High interest rates on credit cards will make it a challenge to pay off credit card debt with just one source of income after a divorce. It’s a good idea to consult a divorce financial planner to assess your cash flow needs and determine how much debt you can realistically keep. It may be in your best interest to sell off assets to pay your debt or create a settlement to pay off credit card debt.
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Financial problems are a dimension of divorce that catches many divorcees off guard. Aside from the emotional turmoil and mental and physical exhaustion of the divorce negotiations, you also have to anticipate its financial impact during and after the proceedings.

Many men and women are shocked when they learn that their money problems don’t go away after their ex-spouse signs the final divorce settlement papers. Sure, these documents will state how your assets and liabilities will be divided, but as with many things in life, actual implementation is often another story.

The good news is that most financial problems you’ll face during and after the divorce can be mitigated with some simple measures. If you’re in the process of a divorce or have already signed the papers, be sure to follow these 6 steps to protect your finances.

Take Care of Your Credit

If you still have any joint credit cards with your ex or soon-to-be ex, make sure you cancel these to avoid tying your credit to your ex’s spending habits. If you have yet to build a good credit score under your name, now’s the time to do it.

Plan Your Estate

If you’re still in the middle of the divorce proceedings, it’s a good idea to prepare to disinherit your ex. If the divorce has already happened, talk to an attorney about altering your will and estate planning documents in light of your new status. Should something happen to you, you may not be keen on your ex inheriting your estate.

Update Your Beneficiaries

You should also update all your insurance policies, pensions, annuities, trusts, retirement accounts, and anything else where your ex is listed as a beneficiary.

Divide Your Retirement Plan

Dividing retirement assets can be tricky, requiring the guidance of an attorney who knows how to split retirement plans while protecting you from exorbitant administrative costs and tax consequences. For division of 401(k)s and pension plans (not IRAs), you will need to execute a Qualified Domestic Relations Order (QDRO), which will ensure your plan administrators will pay benefits according to your divorce’s settlement.

Ensure Your Receive Alimony and Child Support

Although your divorce settlement states that your ex must pay child support and alimony, many former spouses do not honor these obligations. What you can do is place measures to ensure you receive maintenance and child support, whether it’s through an annuity purchase, automatic bank transfers, or transfer of specific property to your name.

Sell or Refinance the Family Home

The cleanest way to ‘get rid’ of the marital home is to sell it and split the proceeds equally between the two parties. If either spouse chooses to stay in the home, it’s critical to refinance the mortgage under the name of the person who gets to keep the property. This will ensure that whoever moves out is no longer liable for mortgage payments. Remember, just because your name isn’t in the title, doesn’t mean you’re off the hook as far as the mortgage goes.
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