Tag Archive for: Justin Reckers

Dependency Exemption Non-Custodial Parents

The Internal Revenue Service released a memorandum in 2009, clarifying the rules governing non-custodial parent’s ability to claim a dependency exemption for their child.

Previously, the Service allowed a non-custodial parent to claim an exemption for a child if the custodial parent signed a written declaration releasing claim to the exemption and the non-custodial parent attached that declaration to their return. IRS Form 8332 is available to document this release.  In Publication 501, Exemptions, Standard Deduction, and Filing Information, the Service has stated that a non-custodial parent may attach certain pages of a divorce decree or separation agreement, instead of Form 8332, if the attached pages include the information required on the form. Click here for more information from the IRS.

The Problem

A problem arose in the ambiguous language of the actual code.  It stated the release of a claim must be on Form 8332 or, if not on such form, must “conform to the substance of such form.” The ambiguity begat creativity and family law attorneys began drafting the declarations into settlement agreements. Taxpayers would then simply need to attach a copy of their divorce decree. This eliminated the need for Form 8332 and therefore, the need to speak to your ex-spouse every year requesting a signature.

The recent memorandum was directed specifically at the question whether it was allowable for a non-custodial parent to prove their right to the exemption by submitting proof of satisfaction of a condition in a divorce decree. The condition was that the non-custodial parent may only claim the exemption if current in his or her support obligation. This raises the problem of substantiation.

In the 2009 memo, the Service concluded the release must be on Form 8332 or must be a document conforming to the substance of Form 8332 and has as its only purpose the release of a claim to exemption. A divorce decree, separation agreement or parenting plan allowing a non-custodial parent to claim an exemption for a child, only if a condition is met, does not conform to the substance of Form 8332.  For tax years beginning after July 2, 2008, a settlement agreement, decree or judgment may not be used by a non-custodial parent to substantiate a dependency exemption for a child.

These regulations reflect the Service’s concern about substantiating a claim to a dependency exemption for a child and are intended to avoid problems of proof, minimize controversy, and minimize costs to parents.  The change does not preclude a non-custodial parent from claiming the exemption; it simply requires more care be made to make sure this is accomplished.

It may be helpful to include language stipulating the custodial parent will execute Form 8332 on a yearly basis. This follow up challenge can be alleviated by insuring the newly single parents consult a financial advisor with specific experience in the field of divorce financial planning. Two parents claiming an exemption for the same child will end in IRS audits for both and possibly bring a settled case back into the courtroom.

Housing Prices About to Get Crushed in Southern California?

Our Divorce Financial Planning business offers an interesting insight into the real estate markets of our communities. We see more homes bought and sold by our clients than all but the top 2% of realtors. In most cases we are also actively engaged in helping our clients make decisions about if or when to buy and sell. In doing so it is important to keep our finger on the pulse of prices and the factors that affect them.

In 2012 real estate prices in Southern California were stable seeing minimal growth in valuations. The market was slow and listing versus selling price spreads were negative meaning most property was selling at or below list prices. The higher the price the bigger the spread and the longer it took to sell. In early 2013 mortgage interest rates sank to such low levels that buyers began to realize they could be missing an opportunity to lock in low rates. At the same time the inventory of homes for sale was anemic thanks to the perception in the sellers market that prices were stagnant and it was not a good time to sell.

I believe the combination of low inventory of homes for sale and buyers starting to come into the market has created a bubble. I started to notice this in full swing during the Spring when homes first began universally selling above list prices and getting multiple bids. The low inventory of homes meant multiple buyers were competing and forced to offer continually higher purchase offers in order to risk getting out bid. The neighbors started to see homes selling at 10% premiums to their list price and realized they could now sell their own home and break even when two years ago they would have done a short sale. Here comes the bubble.

Buyers are worried the competitive offer environment will price them out of the homes they wish to purchase so they make progressively higher bids. Sellers start flooding the market with listings. The competitive purchase offer environment drys up thanks to increased inventory and rising interest rates. I expect prices may fall back to their 2012 levels while interest rates continue to rise over the next six months.

This bubble has made it difficult for many divorcing couples and individuals to make a decision about how to handle their family residence. As part of our Divorce Financial Planning conversation we are making sure clients understand that our current outlook on real estate prices may mean they need to consider alternative methods for valuing the home or mean they need to abandon the idea of keeping the residence thanks to the inflated price level. If you believe prices will fall you may not want to appraise a home today and buy it from your spouse. I am also advising clients that now may not be the best time to buy as I expect prices will be lower by next year.



Divorce Financial Planning: Concentrated Stock Holdings During Divorce

financial planning, CDFA

Your Investments

We have many clients with significant wealth tied up in the stock of their employers. During Divorce Financial Planning it may become necessary to create liquidity to pay fees, facilitate an equalization payment or create diversification where there previously was none.

These stock holdings are through vehicles such as Employee Stock Purchase Plans, Stock Options and Restricted Stock. They may be vested, unvested or co-mingled, meaning they have different liquidity constraints. Each vehicle also has a different tax consequence at sale. Here is a quick review of some Divorce Financial Planning considerations to consider when seeking liquidity and diversification during during divorce proceedings.

Stock Holdings

For stock held outright we look at tax basis for guidance in our divorce financial planning. Shares with a low tax basis can be sold today to lock in tax rates and later repurchased if the client wishes to continue to hold the stock.

Restricted Stock

Restricted stock generally releases or distributes into a common brokerage account at vesting so it would be treated as normal stock holdings with divorce financial planning decisions based upon review of tax basis. The tax basis is based upon the stock price on the day of vesting and distribution.

Employee Stock Purchase Plans

Stock held in an Employee Stock Purchase plan has a complicated tax picture. The discount, typically 15%, given to the employee on the initial purchase price is taxed at ordinary income tax rates. The difference between the fair market value at purchase and the fair market value at sale is taxable at capital gains rates. ESPP assets often have low tax basis because employees buy and hold the stock  so this may be the first place to look for harvesting gains and resetting basis during your divorce financial planning.

Stock Options

Non-Qualified stock options carry a more complicated set of tax implications and divorce financial planning considerations. Options are taxed as ordinary income for the difference between the strike price and the price at exercise. Options can be exercised today in a same day exercise and sale transaction to lock in tax rates. If you wished to hold the stock you could still exercise the options and lock in the ordinary income tax rates for 2012 but you would have to come up with cash from another source to fund the option exercise. Stock options also become a complicated logistics issue post divorce as the non-employee spouse may not be able to hold the options. For this reason alone it is worth considering liquidation during your divorce financial planning.

Wellspring Divorce Advisors builds long term distribution schedules and detailed analysis of current versus future values including opportunity cost and present value of money to help clients decide how to manage concentrated stock positions during and immediately after divorce proceedings.


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.







Annuities and Your Divorce

Following are excerpts from an article ran in the March 19th 2012 issue of Investment News. It underscores one of the many pitfalls of divorcing without the help of a financial expert. Unexpected penalties, fees, taxes and charges can wreak havoc on a post divorce financial plan.

Breaking up is hard to do – especially with annuities

Attorneys often split contracts in divorce settlements, unaware of the potentially costly impact

 By Darla Mercado

When a client came to his office bearing her new divorce decree, adviser Dale Russell became the bearer of bad news. During the divorce proceedings, the couple’s lawyers decided that their chief financial asset, a $500,000 variable annuity inside one of their individual retirement accounts, was to be split among the two. But that Solomon-like decision was made without the attorneys’ awareness of its dire financial consequences.

Splitting the variable annuity meant that Mr. Russell’s client had to pay an 8% surrender charge and a 10% penalty for an early withdrawal from the IRA.

With nearly one in two marriages ending in divorce, financial advisers who deal with divorcing couples often face complex problems connected with untangling annuities that are in the pool of shared assets.

With divorce attorneys typically unaware of the nuances of annuity contracts and the various ways insurers treat contracts in the context of divorce, and with advisers typically out of the loop when settlements are hammered out, the problem lands in the lap of advisers.

“This was essentially the only asset they had, and instead of my client’s getting the $250,000 she expected, she’s getting almost $50,000 less,” he said,

“It’s a big problem, said adviser Lili A. Vasileff, president of Divorce and Money Matters LLC and president of the Association of Divorce Financial Planners Inc. “Most attorneys think these annuities can be divided, and don’t wait for the consequences.”

Couples who work out divorce agreements on their own are even less likely to consider the financial consequences of splitting an annuity, and typically face surrender charges and loss of accrued living or death benefits due to excess withdrawals.

What makes annuities peculiar is the fact that they usually are not liquid in the immediate term, and each contract has its own rules on how it can be divided.

Contract Terms

Contract terms vary wildly among insurers, with some prohibiting partial tax-free exchanges into other annuities, which potentially could be a way to apportion an annuity in a divorce. Exchanges into a new annuity, however, generally involve the beginning of a new surrender period.

Ideally, an adviser would intercede early in the split, analyze the shared pool of assets and communicate with life insurers about the annuities. This would also entail ensuring that if an annuity split involved a partial Section 1035 exchange, the division would be performed without the risk of taxes.

It pays to be attentive to these details, advisers said, as insurers adhere strictly to the terms of the divorce decree.

“If the court says the contract needs to be split a certain way, we have our hands tied,” said Brian L. Kunkel, national director of advanced planning and solutions at Prudential Financial Inc.

“If the client calls us, we can outline the options available to comply with the court agreement and still be as contract-friendly as possible,” he said. “If people just process the agreement, then we merely follow the instructions.”

In most cases, a divorce decree absolves the attorneys involved from responsibility for any financial consequences.