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.

Who’s to Blame? The History of No-Fault Divorce.

no-fault divorce

What is No-Fault Divorce?

No-fault divorce refers to a divorce in which the granting of a dissolution of marriage does not require  a showing of wrong-doing of either party. It is therefore not necessary for one party to produce evidence that the other has committed a breach of the marital contract. In other words, you do not have to prove that your spouse cheated or misrepresented themselves in order to seek a divorce.

The Beginning

“No-fault” divorce in the United States originated in the state of California effective January 1, 1970, in a bill signed by then governor, Ronald Reagan. In August of 2010, New York governor, David Paterson, signed “no-fault” divorce into law. Since October 15th, 2010 no-fault divorce has been legal in all 50 U.S. states.

Prior to no-fault rules, a divorce could only be obtained through the showing of fault of one of the parties. Unfortunately it wasn’t just about proving the other party didn’t love you anymore; instead you had to prove one party had breached the marital contract through adultery, abandonment, felony or other culpable acts.

In circumstances where there was no party at fault and the couple simply wanted to dissolve their marriage, they might arrange for what New York practitioners called “collusive adultery.” A pre-arranged time would be set by mutual agreement for Wife to return home to find Husband with a mistress. This finding would offer the evidence of adultery necessary to obtain a divorce.

These types of arrangements were common along with blackmail through unsubstantiated accusations of fraud, cruelty and criminal behavior.  I am told by attorneys in New York and Connecticut that blackmail and other legal fictions were common for divorces in New York state until the 2010 adoption of no-fault laws.

The Result

The opposing party would often not contest pleadings or do so only sparingly as a token for the courts. Ultimately judges and some lawyers began to recognize the affect these legal fictions could wind up having on the judicial system considering the dissolution proceedings were started with lying under oath.

The term no-fault may eventually fall out of the vernacular of the American people as no-fault laws have now been adopted by all states in the union.

 

 

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.

 

From Dr. Phil: 5 questions to ask yourself before your divorce.

Dr. Phil

As we all know, divorce can be complicated. It involves money, custody issues, child support, spousal support, and other legal aspects. You need to educate yourself, protect yourself and empower yourself on these issues. Until you’ve done that, you’re not ready.

For example, do you know how many bank accounts you have as a couple and individually? Any other marital assets you might be entitled to? Consult with at least three attorneys as you explore the option of divorce. “There are economic realities that you have to acknowledge,” says Dr. Phil, “but you are not powerless.”

Dr. Phil’s Questions:

1. Have you done everything you can to save and rehabilitate your marriage?

2. Do you have unfinished emotional business?

3. Have you researched, planned, and prepared yourself legally for divorce? 

4. Are you ready to adopt a new standard of conduct with your children? 

5. Are you willing to create a new relationship as a co-parent? 

 

Our thoughts.

Here is our take. All of these questions are important to consider before embarking on dissolution proceedings. If you enter divorce proceedings without having them answered the process is guaranteed to take longer and cost more money because the unanswered questions will play themselves out in conflict during negotiations.

Or course, Wellspring Divorce Advisors gravitate directly to question #3 because it deals with money and we agree it is absolutely mandatory to do your homework before filing if possible. Find the family bank accounts, copies of tax returns and investment account statements and research the options available for settling your differences outside of court.

However, we also find it helpful for our divorcing clients to work with a mental health professional as a coach during the process to get assistance with difficult and emotional decisions.

Read the full text at the link below courtesy of Huffington Post.

5 Questions You Need To Ask Before You Decide To Divorce.

 

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.

The Death of an Ex: How does that affect spousal support?

spousal support

Q. What if spousal support is payable for 6 years, but one spouse dies?

Payments must cease upon the death of the recipient in order for it to be considered spousal support for tax purposes and tax deductible to the payor. Spousal support can be paid after the death of the payor, typically from their estate in some form, but most settlement agreements and divorce decrees state that it will stop upon the death of either spouse.

Our suggestion.

We suggest the payor spouse be required to carry a life insurance policy to cover the lost cash flow for the payee spouse in the event of premature death. If this isn’t required in your settlement you should ask for it to be added. In the event the agreement can not be modified you should consider buying the policy on your former spouse yourself. You will have to pay for it but the peace of mind is worth the cost.

In order to determine the death benefit amount needed you would do a present value calculation on the stream of cash flow from the spousal support payments.

For example, a $5,000 per month spousal support payment payable for 10 years would have a present value of $471,540. (Call us if you need help determining the right amount of life insurance.)

No matter the route you take for insuring the payments make sure you, the support recipient, are both the owner and beneficiary of the life insurance policy. Losing the cash flow from spousal support can have devastating affects on your ability to maintain your lifestyle.

 

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.