When it comes time to share your assets you need to be mindful of the valuation of investment accounts. If you have two accounts, both with a value of approximately $100,000 you might think that I will keep mine and my spouse will keep theirs. Sounds simple, but you need to look a bit deeper.
If one of the accounts is an active trading account and the other is used for long term investing, which is often the case with a balanced portfolio, the long term investment account may have long term capital gains inherent in the investments in the account where the other may have short term capital gains (I am being optimistic here rather than talking about losses, but the analysis is the same). This will result in a much different after tax number which you need to consider in the valuation.
Short term capital gains, when you have investment held less than one year, are taxed at your ordinary tax rate which is from 10% to 39.9% (federal tax rate) depending upon your income. Long term capital gains, investment held more than one year, are taxed at only 15% until you reach an income of over $415,050 where it jumps to 20%. That could be a big difference (19.9% of the value in the portfolio) in the tax cost associated with each portfolio.
When you consider who will keep which account, look at the income levels of each party. Will one spouse’s income be taxed at the 39% level where the other will be at the 20% level? To optimize the outcome for both of you perhaps the lower income level spouse gets the portfolio with the short term gains as their tax rate will only be 20% rather than the higher earning spouse who might pay 39.9% tax on the positions. In valuing the accounts the after tax number needs to be used.
You also need to look at your previous year’s tax return to see if you have capital loss carry forwards which might offset the capital gains associated with either portfolio; this could be used by the spouse to offset the capital gains. This loss carry forward is also a marital asset, which needs to be shared, but this is a topic for another day and is not an everyday occurrence.
The other alternative is that the spouse getting the portfolio with the short term capital gains can elect to hold everything until the portfolio shifts into the long term capital gain tax rate, which could be up to a year. This hold period can be detrimental in a trading portfolio which is geared to moving with the market so talk to your investment adviser! This strategy can also pose a liquidity problem if you wanted to liquidate the account to buy a house, pay for college or for living expenses.
Not an easy analysis so consult a Divorce Consultant to figure out the optimal solution that will net you the best result. Working tax issues into your property settlement agreement can be complicated and, in my experience, attorneys are not always aware of the possibilities to optimize your results so make sure you obtain the right financial advice before you make any decisions.
Monday was Martin Luther King Day. A time to remember a great man who had a great vision for our country.
When I hear the words “I have a dream” it makes me think about what I wish for my clients in their divorce.
The current way folks get a divorce in this country is really messed up. It is adversarial and causes everyone involved to pick fights to gain an advantage where it all could have been avoided. The system seems to reward the spouse that lies and exaggerate, particularly where children are involved. False claims of abuse or negligence; using temporary restraining orders to force one spouse out of the house are used so frequently that the family Judges on the bench are overwhelmed. How can they parse out the truth from the endless “he said she said” motions presented to them?
Not a task I envy.
Unfortunately “divorce” is a $100 billion a year industry in the US. The most frightening aspect of this is that the $100 billion is all from individuals; from life savings and children’s college funds. This “business” convinces you that you need to get experts and retain attorneys as the “winning strategy” and your only real option to succeed during your divorce.
This is wrong on every level.
Other parts of the world have a much more civilized approach to divorce. In Quebec (province of Canada) for example, the government pays for 6 divorce mediation sessions where they pay for one here. In Quebec 90% of couples get divorced using the free mediation in 3 months or less!!
Is there a simple solution to this? NO. The recent changes in the divorce laws in NJ, which took years and years to implement, did not address some of the fundamental issues in the divorce process albeit they did clarify a few issues.
My thoughts are along the lines of limiting what a lawyer can charge for the divorce. A fixed fee basis(like they do for bankruptcy). Before all you lawyers start to scream; the fees could be based on a % of assets or different if there are children or not so I am contemplating that the fees could be reflective of the degree of complexity.
What this would do is to stop the back and forth letter writing and the inflammatory claims that sometimes happen. Lawyers would tell their clients “no, not doing it; not worth the paper or, you will not win that one” and the conflict would subside. So often I have heard lawyers say that they were just doing what their clients wanted. If there was only a fixed amount of fees, lawyers would push their clients to settle and settle fast. I have personally seen multiple cases where the battles stop when there is no more money for legal fees. I have heard more than one lawyer say that once the money is gone people are ready to settle. Really! Once people are bankrupt they are ready to settle?
Additionally, if the fixed fee was paid up front, in advance, it might make more folks inclined to go to mediation as a way to get their divorce done.
A question I would like to ask is how much do lawyers walk away from due to debt forgiveness/compromises on the bill or from bankruptcy? I would guess that it is a lot. I know that the spouse of a client of mine left her lawyer with an unpaid bill of over $296,000 in her bankruptcy. That amount could have bankrupted the legal firm let alone caused severe hardship for the lawyer.
This has turned into a rant and I apologize for that. It is just that I have seen too many cases where families spend everything they have to fight over their right to see their children. A pissed off spouse uses the children as a way to extract money. What if the court automatically awarded 50/50 custody, in all cases, unless an infant was nursing under the age of one? Only way that changes is if one spouse says can’t do 50/50. No more fight there.
This could change everything. Parents know they have equal time with the children and the rest is just money. It would take the emotion and sting out of divorces. How would things change?
Last year was tough, no question. You are caught up in your divorce and you feel like you are drowning. Not a way to live.
When you start down the path of a divorce the process can become all encompassing. The critical decisions you need to make are about situations you have never faced and for which there are rarely clear answers. Your friends provide advice, well meaning, but not always on point and often colored by their own divorce experience. Your lawyer will advise you as to what is typical in a divorce but they will expect you to make the decision. Money is always an issue, even if you have buckets of it, it never seems like enough.
What I am attempting to say is that it is hard. Really Hard!
So what can you do to shift your life so that you can have at least a few minutes a day that are joyful and happy?
Focus on you. Your needs and your future; stop thinking about your soon-to-be-X, the decisions you need to make and your children, at least for a few minutes each day.
A few easy suggestions;
Pamper Yourself – Buy some wonderful hand cream with essential oils and message your feet and hands before you go to sleep. (Yes for the guys too – get sandalwood or rosemary scented and enjoy) The pressure on you feet will be relaxing and the smell of the cream will be soothing.
Meditate – Get a CD form the library and download it to your computer or download one on to your phone and take a few minutes to calm you mind. It will be hard at first to stop your thoughts racing but it will be worth it. When you calm your mind decisions will be easier to make. If the thought of meditation is a little out there for you; pray or sing (in the shower or your car). You need to just focus your thoughts to get the benefits.
Make your home beautiful. Hire a Divorce Decorator and let her bring some joy into your home. When you walk into your home and feel happy about your surroundings it will bring you joy. Worth the investment even if you can only afford to paint a wall and buy a few beautiful pillows from a thrift shop.
Get some exercise. The endorphin’s that are released during exercise will make you feel great. Go for a walk or go to a class at the gym, walk a dog (yours or your neighbor’s). Dance or go take a Zumba class, from the internet if all else fails.
You need to take care of yourself; mentally and physically. If you can care for yourself you will be better able to help your children and you will feel so much better.
So promise yourself that you will do something nice for yourself every day.
In a divorce, the assets that you have acquired during the marriage are shared and, in most cases, this means that one of you will transfer funds out of your name to the other’s name or that funds in joint names will be transferred to an account in a single name. This situation covers financial assets and real estate and businesses you may own.
The key to avoiding taxation on these transfers is to make sure that the correct procedures are followed. The tax authorities recognize that a divorce is merely a sharing of existing assets so they have established a set of rules to allow for a tax free transfer.
Financial assets have the most tax consequence so you need to follow the rules to avoid a tax issue in April. If you have a 401K you are transferring to your spouse, need to have a Qualified Domestic Relations Order (“QDRO” pronounced “quad-row”) and the correct forms from the financial institution holding the 401K. The QDRO is required under ERISA (“Employee Retirement Income Savings Act” – pension rules and regulation law) to give the pension company the authority to transfer the assets to an alternative party (your spouse).
The court will give you the QRDO and once received you fill out the forms from the financial institution the transfer can be done tax free. Sometimes the firm holding the assets may have a QDRO from they like to see so it pays to call and ask the question rather than have you attorney automatically draft the documents.
If you do not get a QRDO, and the appropriate forms, the pension plan will not likely transfer the money or, if they do agree to transfer, the funds there will be a tax consequence to the receiving party.
The transfer out of a 401k without the right documents will result in the receiving party being taxed on the gross amount of the funds transferred at their normal tax rate on income. In addition if the receiving party is younger than 59.5 years old, there will be a penalty associated with the withdrawal of 10%. Not a good result!
So while it may seem like a tiresome thing to do, getting the correct documents will result in funds getting to you tax free and you will not be facing a tax bill in April.
As always, if you need assistance with preparing for you divorce or structuring you property settlement agreement, reach out to set up a free consultation.
This blog touches close to home. I recently ran into a man in the gym who seemed very familiar but I could not place him. I asked him, how do I know you? He introduced himself and then it all came back.
He was a friend of my X’s who turned against me in my divorce because he believed every word out of my X’s mouth. My X was telling everyone who would listen, that I was not giving him enough money for food.
Very scary thought, not being able to buy food.
At the time I was working on Wall Street and had a very substantial income. The court had awarded my X, and I was paying over, $15K a month in support to my X. Yet he told everyone that he had no money for food.
My point in telling you this? My X had worked himself up into believing that he had no money for food. He was so caught up in his story and lost the reality of the situation. My X was used to having no limit on his spending, and now he had to live within the monthly amount. It likely felt like there was no money for food despite the absurd amount of money at his disposal. Had he stopped and recognized that he had $15K a month, perhaps he would not have felt so panicked.
Listen to the stories you are telling yourself during your divorce. Are you making yourself feel worse than the reality of the situation? Uncertainty causes fear and if you are fearful everything will seem more difficult.
Your ability to discern the reality of your situation will be difficult because you are in the thick of it. So here is what you do – write it down, get the situation on paper. If you are panicked about money, figure out how much you are spending and on what. Look at what you have and see where you are. Do you have enough money or do you need to curtail your spending? Once you know your numbers you will be in a much better position to determine if you can buy a new pair of Jimmy Choo shoes or if you have to go to DSW and buy the knock off.
The stuff you tell yourself will determine how your day goes. If the first thought in your head in the morning is fearful and stressed, your day will be stressful. If you can see the reality of what you are facing fear will subside and your day will be better.
