How Financially Prepare for AZ Divorce

How to Prepare Finances for a Divorce in AZ

A handful of important considerations beckon your attention throughout the divorce process. And, being prepared can help ensure your assets stay protected.

How to Make Financial Moves Before a Divorce

If you or your partner have recently filed for divorce in Arizona, there are a few things that you should try to do as quickly as possible.

Choose a Lawyer that’s Right for You

One of the most important steps you can take before beginning a divorce is hiring an attorney you can trust. Divorce can be an intimidating process that is already emotional and stressful, and feeling unsure how to proceed can create even more anxiety.

By hiring an experienced AZ attorney, you will receive advice and assistance throughout your divorce, including formidable representation in court. A divorce lawyer is experienced with all the issues that may occur during divorce, including financial considerations. If you and your soon-to-be-ex-spouse differ regarding the division of assets, an attorney can help you handle financial concerns in a way that preserves your future.

Organize and Identify Your Assets

Organize Records

Identifying your assets also helps if you think your partner may try to sell or hide any community assets in an attempt to avoid dividing them with you. Bank statements, credit card statements, mortgage statements, retirement accounts, life insurance policies, and any physical assets or properties should all be accounted for. It is critical to know what you have before you begin the property division process.

Estimate the Cost of Your Divorce

Unfortunately, divorce is rarely a cheap process. Many people go into divorce not expecting its high price tag and are therefore uncertain what to do with money before a divorce begins. Whether you choose mediation to settle various aspects of your divorce out of court or engage in lengthy litigation to make decisions, divorce expenses can add up quickly. Since every divorce is different, it isn’t easy to determine the potential cost of your case. However, estimating attorney fees, moving costs, court fees, and regular monthly expenses can help to give you a better idea of how to manage your money moving forward.

Avoid Making Major Financial Decisions

Of course, divorcing is itself a major financial decision that will impact your finances. However, other major decisions, like changing your beneficiaries, closing accounts, and transferring assets before a divorce can hurt you during the divorce process. These things will be handled legally once the divorce is underway and the division of assets has begun. If you make these moves too soon, you may risk contempt of court or lose your assets to your soon-to-be-ex.

How to Prepare Finances for an Arizona Divorce

During your divorce, division of assets will result in property ownership changes, in addition to your regular and divorce-related expenses. Here are some tips for handling your finances during the chaos of a divorce.

Close Joint Accounts

Close Joint Accounts

Once you have begun the divorce process, it’s time to start closing your joint accounts. Often, bank accounts have both partners’ names, and funds will have to be transferred individually to new accounts. Joint credit cards must be canceled through the creditor, and you’ll have to open your own new credit account.

Closing joint accounts can help prevent your ex-spouse from misusing funds before the divorce is finalized. It’s important that you open a new checking and savings account in your own name and arrange income for deposits and debits for expenses to be handled through the new account. You should also keep documentation regarding when you closed your joint accounts and began your own.

Get An Asset Evaluation

Your assets are important. Whether you’re dealing with expensive collectible items, a shared family home, or your retirement fund, evaluating your assets is critical for a fair property division process. By hiring a professional to evaluate your and your ex-partner’s assets, you can ensure that the correct value is placed on each asset and that they are fairly divided during the divorce. A professional asset evaluation should be done as soon as possible to avoid delays in your divorce and prevent your partner from hiding assets.

Gather Financial Documentation

To properly handle your finances and ensure that property division occurs fairly during your divorce, you will need to collect a great deal of financial documentation. If you have not already done so prior to beginning your divorce, gather bank statements and credit card statements to help to give your lawyers and the court a better idea of how finances were used throughout your marriage. Checking and savings statements, pay stubs, credit card statements, bills, loan agreements, and income tax returns are all critical documentation needed during a divorce. These documents can help the court understand how money was handled as well as its source, such as the individual incomes of each partner.

Maintain Your Individual Credit

Your credit score plays a crucial role in many areas of your life, including your financial health. Despite the difficulties of your divorce, it’s important to maintain your credit. Unfortunately, people often complete a divorce with weak credit due to mounting expenses, their partner’s spending issues, and many other factors. It’s essential to continue building your individual credit so that you can avoid issues like higher financing rates or difficulty renting or purchasing a new property.

Don’t Forget About Insurance Policies

Insurance policies can become a complex financial task because they often affect other important aspects of your life, many of which were shared with your partner. For example, most life insurance policies will require beneficiary changes if you wish to remove your former spouse. Car insurance policies may also need to be changed if they were previously shared by both spouses or if vehicle ownership has changed.

How Can I Afford to Live on My Own After Divorce?

During a divorce, you may experience multiple different housing situations, all of which present different financial concerns. So, how does this work?

Home Sale

One Spouse Buys Out the Other

Since a home is a physical asset that cannot be split unless sold, the person remaining in the family home must often “buy out” the other spouse. This can be done via a cash out finance or forfeiture of an asset or assets of equal value. With these assets or funds from the cash out refinance in hand, the other spouse can afford a new living situation. The title will need to be transferred to the remaining spouse, and all ownership and mortgage documents should be solely under that spouse’s name.

Spouses Agree to Sell the Home

Another option is selling the family home. Sometimes, this is the best option for couples who do not have children, or cases where neither partner feels they have the finances to maintain the home on their own. With the help of a real estate agent and your lawyer, you and your partner can sell your shared home and then split the proceeds fairly. If you and your partner can’t afford to keep the home or are worried about selling it in the current market, you may also agree to rent the house to a third party. When this happens, proceeds can be split between both partners.

Other Circumstances

Unfortunately, the above options may not be available for all couples, especially if they owe more for the home than the home’s current market value. In some cases, if neither you or your partner wants to remain in the home, or neither of you feel you can afford to stay there, you may have to agree to sell the home at a loss. In more severe circumstances, foreclosure may be necessary. Moving forward, the assets retained after the divorce and your own efforts to maintain your credit should help you find a new residence you can afford.

Protect Yourself and Prepare Your Finances During a Divorce

We provide affordable legal services for any individual involved in or looking to initiate a family or divorce law case. We offer guidance as well as our professional expertise and knowledge of the law. We are located in the heart of Phoenix, but our services are digital, which allows us to help individuals throughout the state.

 

*Editor’s Note: This article was originally published March 21, 2018 and has been rewritten August 23, 2022.

Co Parenting

When Mom and Dad Work Together, Everyone Benefits: Effective Co-Parenting

Bruno Bettelheim, an esteemed child psychologist, once wrote, “The security of the parent about being a parent will eventually become the child’s feeling of security about himself.” Children become what they are in large part because of the confidence and competence that parents find and create in the parental experience.

An effective parental partnership is perhaps the single most crucial factor in achieving that goal. Likewise for children, the most important element in their becoming healthy, solid, and secure individuals is having two parents who have formed and forged an effective parental partnership. Parenting, like marriage, is a proactive process that couples must think through together, creatively sustain, and nurture as an entity in itself.

An effective parental partnership is one where parents unite to offer their child an ongoing experience where both their individual and parental partnership roles combine, support, and mutually enhance each other for the child’s benefit. The relationship is not just child to mother and/or father, but to parents in a primary way.

Bettelheim stated that “With the single exception of the child’s natural endowment, nothing shapes a child’s personality more than the experience of family living–the feelings it arouses and the attitudes it inculcates.” His view of himself, his relations to others and his expectations of the world are gotten from what he observes, experiences, and internalizes in relation to his parents as a mutual entity–how they act, love, value, and authentically are in relation to each other and him as parents.

How does a couple attain and sustain this desired state in the midst of complicated marital, family, and personal living? The answer is both complex and yet basic in its essence when parents get in touch with themselves as parents and the reasons why they chose to be parents. A mutually supportive, enhancing, and rewarding parental partnership is not only possible, but a natural course of events, if properly formed. This can be true, not only for intact families, but also where separation or divorce is the reality. It is never too late to forge a working parental partnership in a child’s development. It is crucial that a child experiences his parent’s ongoing attempts to do so.

Benefits for the child 
The child basically benefits in two ways. First, the child has the chance to absorb and internalize the very experience of mother/father interactions, actively identifying with each and, at the same time, as a parental duo. This is a powerful emotional and behavioral formula that creates unique and authentic individuals. Secondly, the child learns to integrate disparate and contradictory elements in his/her developing self as parents do in their relationship, a parallel process. Opposites such as love and hate, frustration and adaptation, self-esteem and worthlessness, and confidence and humiliation are integrated cohesively into the viable internal and external “playground” to safely and securely grow into his/her authentic self.

When both parents are actively involved and children reach higher levels of emotional and cognitive development, they are less likely to be violent or be hurt, get into serious trouble, or do poorly in school. When fathers stay close during infancy and adulthood, a boy has a less turbulent adolescence, is less aggressive and overly competitive. He is better able to express feelings of vulnerability and sadness. He can more easily resolve conflicts, and can develop more of a sense of empathy. Daughters with active fathers have higher self esteem, are less likely to have sex before they want to, become pregnant, or be assaulted.

How to forge the partnership 
Using a child’s puzzle of about eight to 10 pieces as a metaphor, the elements of a parental partnership can be seen and understood as a whole picture or as the separate components that link to each other in complementary fashion to comprise the whole. Individual pieces represent parental strengths/skills or weaknesses/gaps in either mother or father. To have a coherent picture, one parent’s weaknesses should be compensated by and connected to the other parent’s pieces representing strengths/skills. Where the pieces are placed in relation to each other and why is a joint creative process by both.

To create a viable partnership/puzzle, each parent needs to become aware and accepting of their own strengths and weaknesses (which is not always an easy task). Making this a mutual process and discussion can lead to further or new understanding of how each parent sees themselves, and also in what areas they need understanding, support, or active help. Areas where both need help should lead the couple to new creativity in their partnership, possibly with the help of outside expertise.

Most importantly, to begin assembling the puzzle, a process and language of cues and communications needs to be agreed upon so that when help is needed, the needed supportive process can swing into action. Examples of these could be:

• “Please step in and take over. I need a break.” (parent acting as a buffer) • “I need your assistance.” (parent complementing other parent’s attempts with their own skill, support)
• “Let’s go talk.” (parent knowing when it is time to think something through rather than react)
• “Let me do my own thing.” (parent knowing when not to step in or interfere)
• “Please be understanding.” (parent being patient and supportive, even if not in total agreement with spouse as a parent).
• The more these and other cues can be used and heard in daily life, the more there will be an actual parental partnership at work. How this works, what else is needed, and how each feels about the process should be an ongoing mutual conversation. Different “pieces of the puzzle” can be focused on at any point without losing
• site of the whole picture or what holds it together.

Examples of effective partnerships 
Here are a few examples of effective parental partnerships.
• Fathers help mothers understand the needs of a growing boy
• Mothers, with a spirit of kindness, try to understand a father’s parental insecurities.
• Fathers have—and mothers allow—one-on-one time. They feel engrossed with the experience, and discover their own fatherly impulses.
• Both parents understand that, in a family, shared daily acts and routines are valuable opportunities for connection and true shared parental nurturing.
• Mothers don’t leave lists of activities for husbands to do with the kids, but allow them to have their own experiences.
• Husbands and wives don’t let child rearing be the only center of their bond.
• A strong and supportive parental partnership allows for both parents to have jobs and interests outside the home.
• Shared parenting further commits a couple to each other, as they protect, nurture, worry and rejoice about their children-–a daily intimacy that enhances marital love.
• Children of parental partnerships learn directly that: marriages grow stronger, mutual respect is essential, promises are to be kept, and that conflicts don’t have to destroy relationships.
• Sons of two active, involved parents will likely be nurturing fathers themselves.
• Parents don’t have to be the same or agree on everything. They can play very different roles as equal partners. How they integrate things makes the difference. • Parents act as mutual supporters and consultants. It’s OK for one to be lost, overwhelmed, or confused, as the other supports and understands.
• At times, each parent acts as a buffer for a child and the other parent.
• Learning on the job is OK. There is no need to feel perfect. Children will understand and learn from watching their parents develop as parents, as they do as kids.
• Parents can rotate roles. There is no need to always be the disciplinarian or nurturer.
• Creating enough family time for the ongoing parental and family interactions to be truly experienced by the kids. DON’T farm out essential roles to others. Being there is everything!

Interactive parenting 
• During each stage of a child’s growth and development, both parents play key roles. For example:
• During their child’s infancy, dads can begin their own unique relationship with the infant. A father’s voice is uniquely experienced, even in the womb. He becomes the protector of mother from “the outside,” so she can focus on “the inside” with her infant.
• As the infant, then the toddler, begins separation from the mother, dad actively becomes the first important “other’ in the world outside him and mom. Mom will become security and safety, and he will be the initial connection to the outside world–a critical mutual process in the child’s development as a unique individual.
• When toddlers throw a tantrum “storm” out of separation anxiety with Mom and is all “no’s,” Dad can assist by neither giving in to the toddler’s demands nor by getting into a lose/lose control battle. His calm, re-directing behavior into established routine and rituals, supports mother in modulating the child.
• Parents of a four-year-old experience both mature behavior and then melt- downs over minor incidents. Mother helps Father to understand that, even though he tries to instill moral directives, the operative factor is the parents and their behavior—especially interactions between the parents—that models for the child how to deal with situations.
• The father of a seven-year-old boy relishes in showing his son how to do things, without listening closely enough to the child’s stories of his own masteries. Mother gently and supportively talks with Dad about how, if he listens and admires his son’s “showing off,” that he will be truly idealized by his son, as interactions will be a mutual experience.

Barriers to effective parental partnerships
Barriers can exist that need to be understood and attended to before developing an effective partnership. These can include: fathers who haven’t had strong parental models and are unsure; men who feel that nurturing might not be masculine; men who see their role primarily as the family provider exclusively; or dads who are comfortable with the “policeman role” and not as a caretaker or teacher/playmate. Mothers may be reluctant to share the power as the primary parent; be critical or anxious about the dad’s style of parenting; or may be threatened by the father’s active role as an infringement on her role and relationship with the children. Couples who are experiencing disconnected or dysfunctional relationships may not feel ready or safe to intimately share parenting. Sadly, negative parenting disagreements become a lightening rod for other marital difficulties, with the children as the real losers.

Is it possible? 
An effective parental partnership is certainly possible when both parents see the benefits, not only for their children, but for themselves. What is essential is that each parent be aware of their own parental styles, needs, and shortcomings. Couples must think about what each partner needs from the other to complement their parenting style. The discussion and resulting journey can be rewarding, and make family life an engrossing, enriching experience for all.

A good parental partnership, like a good marriage, is based on trust, commitment, shared visions about a relationship, and a willingness to work at it. A parental partnership needs to be established in all family constellations, intact families, separated or divorced situations, or any other situation where two adults are fulfilling the parental roles for a child.

Tom Bass, L.C.S.W., is the clinical director at Family Services of Winnetka-Northfield. His clinical practice has included work with children, adolescents, adults, and families. This article was first published in the Fall/Winter 2007-08 issue of Early Childhood.

Source: http://www.theallianceforec.org, “http://www.theallianceforec.org/library.php?c=6&news=106”, Tom Bass, Fall/Winter 2007-08.

Wrecking Your Finance

How To Keep A Divorce From Wrecking Your Finances

By Laurence Kotlikoff, Next Avenue Contributor 

(Kotlikoff also contributes to Forbes. His posts can be found here.) 

Divorce is always sad, but when it turns ugly, it’s terrible. You may remember The War of the Roses, the dark comedy where Kathleen Turner and Michael Douglas start out as a perfect couple and end up destroying their possessions — including their luxurious house and cars — because they can’t agree on who gets what. That movie is unfortunately hitting home for plenty of boomers and Gen X’ers. According to a recent survey by Allianz Life Insurance, two thirds of divorced women feel their divorce created a financial crisis.

Many of my friends have gone to divorce war, but unlike Turner and Douglas, they destroyed their finances (by paying steep legal fees), not their possessions. Divorce doesn’t have to be as financially painful as it so often is, though.

Why Divorce Turns Into War

What drives divorce wars? My hunch is that many are driven by very different assessments by spouses of the impact of their proposed settlements. For example, a husband may think his settlement proposal is incredibly generous while his wife thinks it’s miserably cheap. Without a neutral measurement stick, their fight — with the lawyers’ meters running — can go on and on.

s an economist, I’d say that this is where economics can help couples. Its math and computer algorithms can figure out precisely how much each spouse will get to spend now and in the future under any given divorce settlement. And this analysis can take into account all relevant factors, including the division of assets, alimony and child support, child custody and the disposition of the marital home.

How do I know? My company just released a new software tooldesigned to limit divorce wars (full disclosure: I derive no income from it). It calculates each spouse’s living standard under any proposed divorce settlement.

John and Sally’s Equitable Divorce

Let me illustrate this new technology:

Take John and Sally Doe, both 50, who are untying the knot after 25 years. John earns $200,000; Sally earns $40,000. John and his employer both contribute $6,000 a year to his 401(k). Sally and her employer both contribute $3,000 to hers. John and Sally plan to retire at 65. The couple has one child, Sam, 10. Sam will spend 80% of his time with Sally and 20% with John. John will cover Sam’s college expenses. The couple own a $450,000 house with a $90,000 mortgage. John proposes that Sally live in their house for eight years, while he picks up three-quarters of the housing cost. Meanwhile, John will buy a condo for $200,000. Sally will buy the same-priced condo when they sell their house, sharing the proceeds 50/50. John also proposes dividing the couple’s $200,000 in regular assets and $1 million in retirement assets in proportion to their labor earnings.

John wants to be fair. He figures that paying for most of Sally’s and Sam’s housing for the next eight years, covering Sam’s college expenses and housing and feeding Sam one-fifth of the time is highly generous. He also believes his and Sally’s living standards will be pretty similar once his much higher tax payments are factored in. So John proposes no alimony or child support.

Is John right? Will he and Sally be able to spend roughly the same amount over the rest of their days?

No, he’s wrong. But by playing around with the numbers and the software they can arrive at an agreement that works for both of them.

John’s proposed settlement lets him spend $83,215 annually and Sally spend $23,353 annually (measured in today’s dollars) after covering all housing costs and taxes. There are lots of reasons for this big differential, including John’s higher salary, his large asset share and his receipt of higher Social Security benefits.

When Sally points out the large spending (living standard) difference, John offers to split all assets 50/50. Now John’s and Sally’s annual spending amounts become $73,891 and $35,757, respectively.

Sally, who sacrificed her career to put John through law school and raise Sam, digs in her heels. “John, you need to pay alimony and child support,” she says. John agrees to $25,000-a-year in child support until Sam goes to college. Sally runs the computer program again and finds that John’s annual spending would now be $68,783 and hers would be $41,158.

Sally says, “John, sorry, but you wouldn’t be making five times my salary if it weren’t for me. There is no reason I should have a lower living standard going forward. If you pay me $20,555 each year in alimony and agree to the other things you offered, we’ll both get to spend the same amount each year: $54,836.”

John thinks this over and then counters with a $10,000 annual alimony payment, pointing out that his job is far more demanding than Sally’s. Sally, upon reflection, decides this is reasonable and the two hire a single attorney for one hour to draw up the agreement. Sally and John used economics to save their divorce.

How to Divorce Fairly

Couples don’t have to use this software to come up with equitable divorce agreements. You can also get a rough handle on your relative spending levels by comparing each spouse’s disposable lifetime resources.

To arrive at this number, you’d start by calculating your lifetime resources (the present value (how much a future sum of money is worth today) of your future labor, Social Security and other income including alimony and child support plus your current net worth. Next, you’d subtract the present value of your projected taxes, housing costs, expenditures on children and other expenses including alimony and child support payments. The difference is your spendable resources.

Do this for your spouse, too, and then divide by each spouse’s maximum remaining lifespan (use a calculator like this one) to find what each spouse will be able to spend annually. This is a rough calculation primarily because you’ll need to guesstimate your taxes and may mis-estimate your Social Security benefits, since they may be different in the future than what you expect today.

Source: www.forbes.com “https://www.forbes.com/sites/cdw/2017/09/21/three-organizing-principles-for-digital-transformation/#1900a7504da3”, Laurence Kotlikoff, 5/31/2017.

Tax Invoices

Effects of Taxes on Divorce Negotiations in 2018

With the passing of the U.S. Tax Cuts and Jobs Act of 2017, it is even more important than ever to make sure you’re taking taxes into account when you’re negotiating your settlement. There are several changes to the law, but the main ones that you should be paying particularly close attention to as you negotiate a divorce agreement are as follows:

1.     Alimony payments made by a former spouse will no longer be tax deductible for the payor. This is going to have the biggest effect on divorce negotiations.

a.     Until the end of 2018

i.     The payor of alimony is able to deduct that amount against his/her taxes. What  that means, is that whatever the alimony amount is, in effect it’s less for the payor once you take into account the tax deduction.

ii.     The recipient will have to pay taxes on the alimony which is treated as income. Typically, tax rates for the recipient are lower than the payor thus making it a win/win for both parties.

b.     Beginning in 2019

i.     Alimony payments will no longer be tax deductible to the payor.

ii.     The recipient not be taxed on the alimony received as income.

2.     The loan amount on which mortgage interest can be deducted has been reduced to $750k from $1m (not for existing home mortgages only new ones).

a.     If you’re renegotiating your mortgage because the home is being transferred into your spouse’s name, that will affect your taxes.

b.     If you’re looking to move and take out a new mortgage greater than $750k, again, you will feel the effects.

3.     Interest on Home equity loans is no longer tax deductible.

4.     The deduction of your State and Local taxes against Federal Income taxes has been reduced to $10k.

This is a very simplified version of the changes. Make sure you should check with your CPA or Certified Divorce Financial Analyst to help you accurately plan for the tax consequences.

Source:https://thedivorcierge.com “https://thedivorcierge.com/2018/01/effects-taxes-divorce-negotiations-2018/”, Karen Bigman, January, 24, 2018.

BAD MARRIAGE

Why a Good Divorce Is Better Than a Bad Marriage for Kids

Anyone who is considering divorce knows that there is a lot of research demonstrating that divorce is difficult for children. If you’re considering divorce or in the process of getting one it can seem as though researchers are shaking their fingers at you, predicting the worst for your child. As a former divorce attorney, mediator, and Law Guardian, I worked with families going through divorce as well as those who returned to court for updates and changes to their parenting plans. I’ve also seen acquaintances, friends, and family members who have stayed together for the sake of the children. It’s time someone stood up and spoke the truth. While there is no question that divorce is hard for kids, it is a far cry better than raising your children in a violent, abusive, angry, or deeply resentful marriage.

If you stay married for the sake of your children, you expose them to daily arguments, negative undercurrents, shouting, possible violence, and an atmosphere that is in no way calm and peaceful. This has a huge impact on your child. When parents stay in a bad marriage, kids have to cope with the fall out from a never ending cycle of disputes, resentment, sadness, and even hate. A bad marriage is an open wound that can never heal as the scab is picked off again and again no matter how hard the parents try to keep things together for the sake of the kids. Children live in a volatile environment, which even if it is not violent, it is not nurturing and loving.

While the research is clear that divorce does have an impact on children, it fails to take into account the permanent emotional damage children suffer when they stay in one home with parents who can’t get along. A divorce frees everyone from this environment and offers many benefits to children:back to back

– Two homes where there is no constant arguing. This allows kids to just be kids without having to work around the complex negative emotions present in a conflict-filled home. Yes, having two homes is a change. It’s not always perfect but two homes without fighting is almost always better than one filled with arguments and marital tension.

– A calmer emotional baseline. Things are complicated in the months following divorce, but most families get through this transition and find a new normal. Children are no longer riding the waves of their parents’ relationship on a daily basis. Things settle down and everyone is calmer and less combative.

– Happy parents. The benefits of this are enormous. Happy people are better parents. Happy people create happy environments. Happiness rubs off on children. While it takes time to find your equilibrium after divorcing, it does happen for most people and is certainly a better outcome than living unhappily for years in a difficult marriage.

– Children learn that compromise matters. When they see their parents co-parenting and working through the issues in a divorce, children learn that compromise is an important and effective skill. While no divorce is without challenges, getting through it shows your child how to work through hard times to achieve a brighter future. Parents who choose to mediate their divorce show their children that working together to find a solution is preferable to fighting against each other.

– Parents who choose personal happiness teach their kids to do the same. While putting your kids first is often held up as the gold standard of parenting, deciding that your personal happiness is more important than having a nuclear family under one roof sends a powerful message to your children. It shows them that everyone deserves to be happy and that happiness is an important consideration in your life plan.

– Divorced parents can find their parenting mojo after divorce. This isn’t guaranteed, but if you have a reasonable parenting plan and are able to cooperate, each parent develops a unique parenting style from the ongoing one-on-one time with the children.

Source:https://www.huffingtonpost.com/ “https://www.huffingtonpost.com/brette-sember/why-a-good-divorce-is-better-than-a-bad-marriage-for-kids_b_6925236.html?ncid=engmodushpmg00000004” Brette Sember, March 24, 2015.

Price of Divorce

The Price of Divorce has just Increased

Divorce might have just become more expensive for US taxpayers. In the US, alimony payments (otherwise known as maintenance or periodical payments in the United Kingdom), but not child maintenance, are deductible by the paying spouse and are taxable to the recipient spouse as income. In the small print of the widely heralded tax reforms approved by the Trump administration in January 2018, the tax break will end for all divorce financial settlements finalised after December 31, 2018.

This has led some to predict a divorce rush before the new rules take effect.

I asked Ed Rieu of US tax advisory firm Sopher & Co to explain the history and the impact of this change:

“The US originally allowed a deduction for alimony by the paying spouse equal to the amount included in taxable income by the recipient spouse. The rules evolved to the current rules that allow a deduction even where the recipient did not include any amount in income.

To be deductible, the alimony needs to be paid in cash, under a court order between legally separated persons and must end on the death of the payee spouse (or on a fixed date). Further, the order must not designate the payment as not being deductible by the payor or includible in income by the recipient. A lump sum prepayment can also qualify as deductible alimony. Fixed payments for child support, however, do not qualify as deductible alimony nor do lump sum payments in splitting marital assets.

As an aside, this non-taxation rule on lump sum pre-payments does not apply to transfer of assets to a non-US citizen spouse. Thus, where a US citizen or permanent resident transfers assets to such spouses, gain will be realised on the value of assets transferred in excess of base cost and income will be realised to the value of any pension or other deferred income rights transferred. This requires up-front strategic planning to identify what assets may be transferred with a minimum US tax exposure.

Because the spouse paying alimony is typically in a higher tax bracket than the recipient, the alimony payment usually results in an overall tax saving which is often split by the parties in the financial settlement. The US Congress recognised this and recently legislated that effective for court orders issued after 31 December 2018, no deduction will be allowed for alimony payments and the receipt of income will not be taxable. Alimony paid on court orders issued prior to 1 January 2018 will still be deductible (and receipt of alimony will still be taxable). While the overall savings gained by the couple may be lower given the reduction in US tax rates (from 39.6% to 37%), the net savings to be realised has nevertheless led to a current rush by couples to expedite resolution of financial issues by year end.”

Inevitably there will be pressure for US taxpayers to finalise divorce settlements over the next eleven months and for some, the loss of the tax break may even be a tipping point spurring them to divorce. Before taking any radical decisions, however, it might be valuable for US citizens seeking their divorce in England (perhaps because they are resident here) to consider how the changes will impact. Maintenance settlements here are awarded based on “need”. There is no principle of a “fair sharing” of income. The less well-off spouse (usually the wife) will present a schedule of her own and any children’s annual income needs. The schedule will be a comprehensive list, everything from bath salts to butlers, aiming to reflect the actual standard of living of the marriage. The needs, of course, must be affordable and reasonable, but the court will normally carry out a balancing exercise with the edge being given to the parent who has the primary care of children going forward.

Yet since the English court also looks at the net income available in prescribing maintenance payments, it is inevitable that some separated households will be impacted by the new tax hit and will find the future a good deal harder. One would like to think the new rules may create a short term financial disincentive to divorce but I suspect for wealthy US clients it simply means divorce has become more expensive.

Source: http://www.theamerican.co.uk “http://www.theamerican.co.uk/pr/ea-Divorce-for-US-Taxpayers-Kingsley-Napley.php”  Michael Rowlands Undated.

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