Life After Divorce: Determining Your Beneficiary Designations

beneficiary designation

A Little Backstory

In January 2009, the U.S. Supreme Court ruled (Kennedy v. DuPont Plan Administrator) against a woman suing her late father’s pension plan for money her mother received. This occurred even though the mother had forfeited her rights to the pension in their 1994 divorce. The Supreme Court determined the beneficiary designation form and the procedures set under the plan were sole determinants of benefit distribution.

Employers are required to pay benefits as stated in the original beneficiary designation form, in spite of a divorce decree.

Have You Changed all Your Beneficiary Designations?

It is important for all divorcing individuals to revisit their estate planning, including beneficiary designations, wills and trusts.  Changes must be made to retirement plans in accordance with the rules set forth by respective employers.  Otherwise, children and/or new spouses may not be eligible to receive benefits.

Remember the following points:

  1. Wills have no precedence/jurisdiction over the beneficiary designations of IRAs, 401(k)s, insurance policies and annuities.
  2. It is always important to designate a contingent beneficiary for these accounts. Otherwise, if a  primary beneficiary predeceases the owner, the account will need to be probated.
  3. Naming a minor as a beneficiary sends estates straight to probate.  Probate courts must supervise distributions left to minors.  Establishing trusts in the children’s name will bypass probate.
  4. Changing beneficiaries can often be done online or with the assistance of a financial advisor.

If you do not have a financial advisor with expertise in divorce, please consider obtaining one. Divorce is likely to be the most difficult financial transition you will ever experience.In fact, in an article on Forbes.com, contributing author Robert Laura said, “I would even go as far as saying some people actually come to us (financial planners) before going to a therapist, pastor, or other source.”

The Bottom Line.

Professional guidance and support during and after this emotionally charged time will prove invaluable.

 

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

 

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

The Tax Cuts and Jobs Act: A Closer Look at How it Will Change Divorce

tax cuts and jobs act

As you may have heard, Congress will likely be voting on major changes to the tax code this fall through the Tax Cuts and Jobs Act (TCJA).  At this time it has not been put into law, and the Senate may propose changes; however, if it passes, here is what you need to know.

(The changes are generally effective for tax years after 2017.)

How will these changes affect you?

There is one main change that will impact divorcing couples:

Alimony or Maintenance will no longer be tax deductible.

Up until now, alimony (aka, spousal support or maintenance) is deductible by the payor and taxable to the payee.  This often allows divorcing couples to shift income from a higher tax bracket to a lower tax bracket and reduces their overall tax bill, thereby sending less money to the IRS.

The proposed change could have large financial implications: It will cost the payor more and allow the recipient to receive more. Per the language in the Act, the change applies to divorce decrees and separation agreements executed after 12/31/17. Only time will tell if State Laws and alimony formulas will be adjusted to account for the change in tax treatment.

The proposed tax change would mean that alimony would have the same tax treatment as child support.

More changes you should know about.

1. Change to the income tax rate.

In an effort to simplify the tax code, there will be 4 tax brackets instead of the seven brackets that we currently have.  The new brackets would be 12%, 25%, 35% and 39.6%.  Note that the highest tax bracket is unchanged at 39.6%.

2. An increase in standard Deductions.

Current standard deductions would almost double to $24,000 for joint filers and $12,000 for single filers.  While there is currently a standard deduction for those filing Head of Household, the TCJA is silent as to the new standard deduction for Head of Household filers.

The purpose of this change is to simplify the tax filing process by greatly reducing the number of taxpayers who itemize deductions.

3. Maximum Rate on business income for individuals.

Small businesses such as Partnerships, Sole Proprietorships, LLCs, or S- Corporations are considered “pass-through” entities.  This means that the income generated from the business is reported on the owner(s) individual tax return and taxed at individual rates. The highest rate of tax under the current system is 39.6%.

Under the proposed changes, a portion of the income can be treated as “business income” and will be taxed at a maximum rate of 25%. This could potentially be a huge saving for those who own these types of businesses.

In reading the Tax Cuts and Jobs Act, this provision is complicated.  It’s a good idea to consult a tax professional.  This provision alone will keep the CPAs quite busy!

4. A new limit to Mortgage Interest Deduction.

Currently, if you have a mortgage up to $1,000,000, you can deduct the interest on that mortgage as an itemized deduction. However, the proposed change reduces the limit to interest on mortgages of $500,000 or less.  This change has an effective date of November 2, 2017.  So any mortgage or refinance incurred after November 2, 2017 would be affected by the new law.  Existing mortgages would be grandfathered in and not affected by the change.

While many regions across the country will not be impacted by this change due to lower housing prices, this will impact many buyers in areas with expensive real estate markets.

It’s time to consult a professional.

There are many other changes listed in the Tax Cuts and Jobs Act.  If you are concerned or want to know if you should do any tax planning before the end of the year, it is a good idea to consult your tax professional sooner rather than later.

 

Sandi Gumeson

 

Sandi Gumeson is a Certified Divorce Financial Analyst® in the Denver area.  She is also a CPA (CA License), a member of the AICPA, and a member and on the Board of Directors for the Institute of Divorce Financial Analysts.  Sandi’s extensive experience in finance, analysis, operations, budgeting, and forecasting enables her to provide a high level of expertise in understanding the overall financial picture for her clients.  To contact Sandi for assistance, call 303-378-9323 or email sgumeson@wellspringdivorce.com.

 

 

For more about the TCJA from Wellspring Divorce Advisors, click here.

A Long Separation: How this can affect your future financial planning

long separation

We have seen many new clients recently who have experienced a very long period of separation from their spouse. Why? The couple made a conscious decision to simply live apart in separate households without progressing to divorce proceedings.

There are many divorce financial planning complications created by these long separations. Here are a few that come to mind.

1. How will we determine the date of separation for valuing assets and other considerations?

Many of the couples choosing to live separate lives do exactly that with the exception of their finances. We see cases were the couple owns two homes together and each lives in one of them. They may even continue to share income by having both parties deposit their earnings into joint accounts.

In the State of California all earnings of an individual are the separate property of the party earning them. In the event the divorce does happen down the line a decision must be made about separating out these post separation earnings. In the instance where only one party has earned income they may argue for a much earlier date of separation in order to claw back all of those post-separation earning as their separate property.

Of course the non-working party would then seek the latest possible date of separation to combat the other’s claim. Date of separation is a legal issue with potentially major financial implications. We suggest you work with your attorney and your Divorce Financial Analyst at Wellspring Divorce Advisors to determine the cost vs. benefit of making a claim on date of separation as the litigation can be costly and your position hard to prove.

2. Who has had use of the community property assets?

In the State of California we have precedent case law that requires the party making use of the community asset be charged for the value of that usage. The most common example is a home owned by the community used exclusively by only one party for an extended period of separation. This is known as a Watts Credit in California.

In order to determine the amount of a Watts Credit for exclusive use of a Community Property home a real estate appraiser will determine the Fair Rental Value of the home. Your Divorce Financial Analyst will then determine the actual cost of maintaining that home such as mortgage, property taxes, insurance and basic maintenance if the Fair Rental Value exceeds the cost of maintaining the home the party with exclusive use must pay the Community for the difference.

Example: I can rent my home on the beach in La Jolla for $12,000 per month (The Fair Rental Value), it has no mortgage, $2,500 per month in Property taxes and $300 per month in insurance and $700 per month in maintenance for things like a gardener and large water bill to maintain my rare orchid garden. In total it costs $3,500 per month to maintain the home but is worth $12,000 in Fair Rental Value to the Community resulting in a $8,500 per month credit owed from the party with use of the home to the Community. Over a four year separation the total Watts credit would be $408,000 or $102,000 per year. Ouch.

Talk to your attorney and Divorce Financial Analyst at Wellspring Divorce Advisors for assistance in making a decision about the long term viability of maintaining the home in your individual financial circumstances.

3. Who has control over Community assets during separation?

Whether it be a traditional stock and bond portfolio traditionally managed by one party, a real estate portfolio managed by a professional manager or a business started and owned by the Community, someone must maintain control and oversight of the assets or else risk their partial or complete loss due to lack of management. We usually see couples separate and simply maintain the status quo where whomever was responsible for certain financial decisions remained in that role during separation.

We are here to tell you – DO NOT FALL INTO THAT TRAP.

Abrogating your responsibility for financial decisions during marriage is a bad idea in our opinion and a full scale sin in the middle of a separation. Yes, you may trust your spouse still but now you have no ability to see what they are doing, what kind of decisions are being made and where you might find concerns in those decisions because your financial partner now lives in another house.

The minute you separate you should discuss the separation with a Divorce Financial Analyst at Wellspring Divorce Advisors so we can help you to set up workable ground rules for financial decision making and assist you in making those decisions through our sophisticated and experienced financial advice. We have seen jobs lost, investment accounts dissipated, credit card debt accumulated and many other financial calamities during these long separation and can help you avoid making the same mistakes.

 

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

WHAT YOU NEED TO KNOW: GOP Tax Reform Bill & Alimony Deductions

alimony deduction

Understanding Alimony Deductions

Under current tax law, alimony payments are deductible to the individual paying the alimony and reported as taxable income by the recipient (unless the divorce decree or separation agreement stipulates otherwise).

In practice, this tax treatment often generated tax savings for a divorced couple, as the payor of the alimony (who received the deduction) was typically the higher income spouse (in a  higher tax bracket), while the alimony recipient was typically the lower income spouse (in a lower tax bracket). Transferring income from the higher tax bracket to the lower also allows for some creativity in settling cases and to allow a Certified Divorce Financial Analyst to expand the pie before dividing it up by minimizing tax liability.

The new law

The Tax Cuts and Jobs Act (TCJA) legislation announced this week would eliminate the alimony tax deduction for the payor and make the alimony payments received tax free to the recipient, effectively eliminating the tax bracket arbitrage between the divorced spouses’ tax brackets and render other tax codes like alimony recapture and child contingency rules obsolete.

It is important to note, this change in the treatment of alimony would only apply to new alimony agreements entered into after 2017. Existing alimony agreements and court orders would not be altered unless the couple expressly modified an existing divorce decree or separation agreement to change the treatment after 2017.

Many people who have read the bill think there is a very good chance it will pass and become law very close to its current form. From our perspective, this law will take away one great financial benefit of post-divorce life.

What does it mean for you? If you are currently in the middle of divorce proceedings you should consider the effect the rule change will have on you long term whether you are the payer or recipient. It will also require many states to revisit their guideline formulas for determining alimony and even re-write the code underlying computer programs used to calculate the guidelines.

Remember this bill has not become law as of writing this post but beware of the pending change and check back as we get more information.

Your thoughts?

Join the discussion! What are your thoughts on this bill? Comment on our Facebook and/or LinkedIn pages and let us know!

 

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Divorce Mediation: Controlling the outcome of divorce

divorce mediation

What is divorce mediation?

The concept of divorce mediation has increased in America in the last thirty years as divorcing parties realize that divorce court should be a last resort. Divorce mediation helps those people whose lives are actually affected by the decisions and allows divorcing individuals a sense of control of the outcome IF it is done right.

Here are 4 things to keep in mind when considering divorce mediation.

1. Balance of Power

Too much power on one side of the table creates an unsafe environment. The power could be due to the marital dynamic, control of financial resources, or access to information. A skilled divorce mediator will recognize the power imbalance together with the dynamic creating it and set out to level the playing field.

2. Safe Container

Lack of a safe container leaves couples feeling lost in the ambiguity of a complicated decision making process. A skilled divorce mediator will insure the couple is constantly apprised of where they are in the process. They will inform the client of the next steps in the process, homework assignments to be completed, and timelines for their completion. The mediator will also maintain an awareness for the parties of the legal process they are engaging in.

3. The Mediator

“Mediators” are unregulated.  This means that there is no credential that guarantees a divorce mediator has the requisite knowledge and experience to assist a couple in navigating the largest financial transaction of their lives.

The increased interest in divorce mediation means that the number of divorce mediators has risen as well. Individuals with varying backgrounds have hung up shingles as divorce mediators.

Divorce mediation is a process that can be taught. What can not be taught is the human dynamic that occurs during the process. For this reason it is important to engage a divorce mediator with experience and training specific to divorce. This probably means a lawyer and/or Certified Divorce Financial Analyst.

4. Costs

Beware the flat fee divorce mediation. It is extremely rare for a couple to successfully navigate and complete a divorce for a flat fee. Often the professional will reach the extent of the time they have allocated for the flat fee and ask for more money or begin to disengage and abandon the parties before the diorce mediation process has been completed.

Divorce mediation is not always cheap. However, failed mediation proceedings may be a complete waste of money and time.

One last thought

Just because you resolve your differences outside of court does not mean you are engaging in divorce mediation. Mediation is a process where a neutral facilitator guides a couple through decision-making around legal, emotional, and financial issues that must be resolved in a divorce.

Couples need to understand that divorce mediation is not the only way to resolve their differences outside of court. Many will be better served by a process where they have legal counsel actively engaged which usually does not occur in mediation.

Divorce mediation participants need to advocate for themselves and demand clarity regarding process expectations and costs.

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.