Remember the Taxes in a Divorce

Nashville Divorce Client Did Not Understand Federal Tax Consequences

A client in my Nashville, TN office told me that he wanted to keep the investments / stocks and his wife could keep an equal amount of cash. He was a very successful business owner and informed me that this is what he wanted to do and his divorce attorney agreed that it was a good idea. He told me that the investments had good growth potential and that was the basis for his decision and proposed property settlement. I reminded him that he would have to pay long-term capital gains taxes of 15% when he sold the investments / stocks. I asked him if he had he factored that expense into his calculations. He had a blank stare and responded, "No, I did not consider the capital gains taxes".

This example shows that even the most intelligent and successful people do not think clearly during their divorce regardless if is in Nashville, Brentwood, another city in TN or beyond. If you are in the midst of a divorce, you should not rely on your attorney to understand all of the financial details of your proposed settlement. The divorce attorney is only responsible for the legal issues. You are responsible for the financial / money issues and consequences. Take the time to understand the financial issues to ensure you get a financially smart divorce.

Sandy Arons, Divorce Financial Specialist Nashville

Beware of the Pitfalls of Pensions During Divorce

Pension Details During Divorce - Tennessee Important Facts

A client came to my Nashville office yesterday and said "I want to request a portion of my husband's pension in the divorce settlement. His first wife got a portion of his retirement funds and I deserve some too." I asked her if the pension administrator allowed for the pension to be divided. Her reply was "Of course, the divorce settlement said it would be divided." I explained that just because the divorce settlement document said the pension would be divided, that did not mean that the pension administrator would allow it to be divided.

To make a long story short, after some research, she discovered that her husband's pension was not divisible and that his first wife would never receive her portion of his pension ($250,000). I encouraged my client to consider asking for a portion of her husband's IRA rather than his pension. She did and received a portion of his IRA. This story had a happy ending. Many times individuals in the midst of divorce rely on their attorneys to address the financial issues of divorce. The attorneys are responsible for the legal aspects. The client is responsible for financial aspects. I encourage my clients to do their own research and save the attorney fees for legal matters. After all, it is the client's future and financial well being that is at stake.

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TN DIVORCE LAWS AND THE INTERNET

Learning Tennessee Divorce Laws Via the Internet

A Nashville client asked me yesterday about some divorce laws and legal issues of divorce in TN. He had scoured the internet regarding the divorce laws in TN and had gathered quite a bit of information. He had also calculated his Tennessee child support payment by reading the child support guidelines and completing the child support worksheet provided on a state website. He had even researched via the internet the different types of divorce alimony allowed by law in TN and rulings on divorce by the state supreme court.

Being Informed about Tennessee Divorce Laws

Being an informed consumer is critical. We read Consumer Reports to determine the best tires for our car or vacuum cleaner we should buy. Why don’t more people research the divorce and child support laws in their state? Probably because those in the midst of a divorce are emotionally rattled and rely on their attorney as the authority figure to protect them.

Attorney Responsibility vs Your Responsibility

Yes, that is the attorney’s responsibility. However, if you were in a sinking ship, would your first instinct be to run to the captain, or put on a life preserver? Self-preservation is critical throughout our lives and especially during divorce. If you are in the midst of a divorce, or even considering it, do your homework. Use the resources of the internet to educate yourself concerning the divorce laws and child support laws of your state. This knowledge will likely help you control your attorney fees and calm your nerves.

Buying a House During a Divorce - Renting vs Purchasing Your Next Home

Purchasing a Home During Divorce Process

I do not encourage my clients to buy a house, condo or townhouse etc. during the divorce or within the first year of the divorce. The reason for this is simple. Research has shown that divorce is the second most emotionally traumatic event you will experience in your life. The most emotionally traumatic event is death of a child. If you are in the midst of a divorce or recently divorced, you are not thinking straight. You may think you are fine. You are not. You just don’t realize it, yet.

Renting vs. Buying Following a Divorce

I do not recommend that those in the midst of a divorce or very recently divorced consider purchasing a residence or make any important decisions that can wait. I do encourage my clients to rent until the divorce is over and they’ve had a chance for the dust to settle. Many times, my clients are starting new jobs, or are working long hours just to make ends meet. They don’t need a house with a yard to mow, a roof to fix or garage door that needs replaced. Their post divorce life will be difficult and they will likely be “time poor”. Combining that with being “house poor” is a recipe for stress. Renting will not only simplify their life in the short-term, but also decreases expenses because they will not have expensive maintenance repairs and taxes.

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Child Custody in TN

Child Custody and Divorce - State of Tennessee

During divorce, the most heated debates include money and children.  The money issues are not surprising.  Research has shown that the majority of marital arguments are related to financial issues.   But child custody issues during divorce can also be very emotional.

Custody Options and Child Support Payments in Tennessee

Unfortunately, while some parents profess to love their children and want to share custody 50/50 (joint custody), their underlying motives are frequently financial.  Child support calculations in TN are based on several factors including how much time each parent will be spending with the child/children.  This encourages a parent who wants to reduce his/her child support payments to the other spouse to request joint custody (50/50) even if they have typically spent very little time with their children during the marriage.

I’ve seen this custody scenario play out too many times.  The children are often the innocent victims of divorce, being pulled from both directions.  Nashville judges tell me the cases that require a child to testify as to which parent they prefer to live with are their least favorite type of case.

Advice when You Face a Custody Battle

I encourage parents in the midst of a TN custody battle to reflect on their motives and how their actions will impact their children in the long run.  I always ask my clients “How do you want your children to remember your divorce when they are adults?”  “Do you want to ruin your daughter’s wedding because she is so worried that mom and dad will fight that she can’t enjoy the day?”  Self-reflection is very powerful and I encourage a parent in a TN custody battle to consider the long-term consequences of their behavior. 

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Nashville Client has ‘Aha Moment’ about Social Security Benefits and Her Pending Divorce Settlement in Tennessee

During a recent meeting with a new client she told me that her divorce had been dragging on for 2 ½ years and she wanted it over in 45 days.  I understood her frustration and emotional exhaustion because in addition to being a financial counselor, I too am a divorcee.   I asked her how long she had been married and she responded 9 ½ years… I asked her if she knew that if she remained married for 10 years, she would be entitled to ½ of her husband’s social security benefit.  She replied no, but her husband’s attorney would never agree.

My client’s attorney had not properly addressed the financial issues.  My client did not know that if she remained married for 10 years, she would be entitled to either:

-          Half of her husband’s monthly social security benefit or

-          Her monthly benefit, whichever is larger

And her husband’s benefit would not be affected.  If she divorced her husband in 45 days, as she and her attorney desired, she would not receive ½ of his monthly Social Security check when she turned 65.  She would be walking away from a guaranteed monthly income of approximately $1,300.  My client was totally unaware of this issue.  She sat motionless at the conference table with a blank look on her face as I explained this fact, appearing totally stunned.  When she finally spoke, all she said was “I didn’t know.  Why didn’t my attorney tell me?”

I replied “Because your attorney went to Law School and there are no finance or even math classes in Law School.  They don’t teach attorneys about these types of financial issues because the finances are not their responsibility.  They are responsible for legal issues.  You are responsible for the financial issues.  Check your retainer agreement.  I am sure it clearly states that your attorney is not giving you financial or tax advice.”

To condense the story that evolved over a few weeks, my client decided to remain married until she had been married for 10 years.  When potential clients enter my office, they are usually unaware of their attorney’s limitations regarding the financial matters of their divorce.  When they leave my office, they are aware that they alone are responsible for the financial issues of their divorce.  I take pride in my ability to educate and empower my clients.  I’m glad I make a difference in their divorce settlements.  

5 Tax Traps to Avoid During a Divorce

I was speaking with a new client yesterday and discussing the importance of understanding the tax consequences of her divorce settlement.  Like most of my clients, she had not paid the family bills or addressed paying their taxes.  She was totally unaware of how ignoring tax issues could cost her tens of thousands of dollars in her settlement.  Listed below are some common tax pitfalls of divorce that she and most of my clients do not know when they enter my office:

1.      Not knowing how to execute an institution to institution transfer of retirement funds and therefore having to pay taxes on those funds.  Do you know how to correctly transfer funds to avoid taxes? 

2.       Not knowing when you can withdraw retirement funds from a retirement account without paying a 10% penalty if you are younger than age 59 1/2.   Attorney fees are not the only costs of divorce.  Financial missteps during divorce can easily overshadow the known costs.

3.      Failing to realize that your alimony will be taxed.  Forget this detail and you’ll ask for too little alimony.  You’ll need to add your monthly alimony taxes into your monthly budget to understand how much alimony you really need to pay your bills each month.  Are alimony taxes included in your monthly budget? 

4.      Failing to have tax credits/refunds or capital gains/losses carried forward as divisible assets listed in the MDA.  Did you forget about those assets? You may unintentionally give your ex-spouse a parting gift.  Paying attention to details is vital during divorce.

5.      Not deducting your attorney fees that are attributable to receiving alimony or retirement funds, if you qualify.  Do you know if you qualify?  This information can potentially save you thousands of dollars.

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I always encourage client to consult their tax advisor concerning the information addressed above to ensure that it applies to their unique situation.  I help my clients understand these tax and other financial issues before they sign their final divorce paperwork. I know they have one chance to get their divorce settlement right.  If you are divorcing, take the time to secure your future and your children’s future.  Don’t just get a divorce.  Get a financially smart divorce.