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.