October 17, 2006 by wendy.

   People going through divorce span the entire spectrum of emotions.  I have found occasionally, one spouse has moved through the emotions and is over the marriage, while the other is still going through the emotional process. Grief, anger, regret, sadness, and fear are all emotions common to divorce.  Money is a main divider of people, and the division of marital property can be a major point of contention.  Often emotions are involved, and prevent people from making smart money choices.  For some people, avoidance is the easiest thing (”I just gave up everything to my spouse to get out of the marriage”).  For others, fighting to the point of running up attorney fees over minor items (such as the china, or the Christmas decorations) is common. 

    It is helpful for clients to understand where they are coming from emotionally, so that they may be able to focus on their decisions more rationally.  Once clients acknowledge their emotions they can work to satisfy their emotions and still make smart choices.

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October 8, 2006 by wendy.

Taxes may have a big impact in a divorce.  Many people have complex financial situations, which means that there are also a lot of moving parts in a divorce.  When any of these parts changes, a taxable event may (or may not) occur. 

Generally, a transfer assets between spouses is not considered to be taxable, but a transfer of marital property.  For example, in order to ensure a 50/50 split between a couple, one spouse may transfer a savings account to the other spouse in exchange for the pension.  Or the first spouse may transfer the title to the house to the second spouse in return for the brokerage account.  Transfer of funds are generally not taxed  in these examples.

However, if the recipient spouse then uses the savings account (as in the first example) or the brokerage account (as in the second example) then a taxable event could occur. 

One of the biggest traps to watch out for is:  using funds from accounts that are actually retirement accounts, such as 40lKs or traditional IRAs.  Not only are the withdrawals taxable at the ordinary income rate, but if the recipient is under 59 1/2, a 10% penalty may apply. 

One of my clients showed me a property settlement proposal from her spouse.  She had sufficient pension funds, but needed cash to purchase a home, and he was offering “all these accounts” worth up to several hundred thousand dollars.  After reviewing the accounts in question, it became apparent that they were retirement accounts, and in order to use them, she would need to liquidate them.  This would incur a very large tax to her, so I suggested that some other, more liquid assets, might be more appropriate for her settlement.

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