Today I want to talk about divorce and how to handle some of the financial issues that may arise. This will be a two part series and I will try to make it interesting.  So here goes.

As our society continues its moral decay, the divorce rate has increased dramatically. As a result, millions of couples endure personal and financial and emotional devastation, and if there are children there will often be long term family devastation.   Under these circumstances it is absolutely  essential  to get good advisers to help with the planning of the marital dissolution because the consequences are long term and significant.

So today were going to talk about some of the financial issues that arise when we get divorced.

  1. Rate of Divorce

Here are some statistics on this which I find a most interesting:

– Approximately 50% of all first marriages end in divorce. The percentage of divorces in second marriages is much higher.

– wives ask for the divorce about two thirds of the time. It is shocking to me that so many women do not appreciate us husbands (that’s a joke folks).

– if you live with your soon to be spouse beforehand, then your rate of divorce after marriage is much higher

– if you were married and committed adultery, and then marry the adulterer, those divorce rates are approaching 75%!

– The rate of divorce among children who have divorced parents is also much higher

  1. Emotional Issues

As you can see, divorce has become commonplace and generational.  In my tax practice, clients often ask for help in handling their tax issues, but only after long narratives describing the character flaws of their soon to be ex-spouse.  I am often asked not only how to help on tax issues, but also how to hurt that ex-spouse on the same tax issues.

Unfortunately,  the emotional anger that divorcing couples feel towards each other makes them prime targets for divorce lawyers that are willing to fan that flame and who bill attorney fees by the hour.

Folks, if you are getting a divorce, try to focus on the financial, tax, and family issues and keep the hostility to a minimum and out of the proceedings- no matter how justified they are.  It is better for everyone to focus on resolving  these issues properly.

  1. Financial issues

We are all aware that money is a significant factor in marital discord and subsequent divorce. Many of my clients have divorced and then declared bankruptcy. Many others were saddled with the tax debts that arose during the marriage. It is essential that you  consult with an attorney and accountant before  getting married to make sure that the divorce decree protects whatever rights we may have. tax

  1. Taxes

Many of my divorced clients operate under the mistaken belief that the divorce decree governs their tax situation. They often believe that if one spouse has agreed to pay all of the income taxes that may be owed that they are relieved of the obligation to pay those taxes.

Unfortunately this is a federal issue and not a state issue. If you filed a joint return you are  liable individually for the entire amount that is due. That’s right folks,  if you owe money on your tax return and then get divorced, the state law divorce decree cannot prevent the IRS from collecting all of the money owed from either spouse. The divorce decree just gives you the right to sue your ex-spouse for his or her share of that liability. That is not much reassurance if your ex-spouse is insolvent or has declared bankruptcy.

In addition, the tax treatment of spousal support and alimony is very different. One may be taxable and one may not be. In addition, the IRS may seize one and not the other. As a result, something that seems as simple and routine as how to categorize continuing payments can really have very significant tax consequences.

In addition, a spouse in a new marriage may very well bring with him or her a federal tax liability or become subject to one because of the other spouse. This is very significant if one party has assets or income that may become subject to the tax liabilities of the other  new spouse. These can be handled if properly planned for. They can be handled if the marriage has not yet occurred and they can even be handled if the marriage has  long since occurred. However it is essential that planning be done before the Internal Revenue Service becomes involved.

  1. Dependency deductions

The federal tax law allows divorcing spouses to enter into a written agreement as to who will receive the dependency deduction. If the high income earning Parent receives that dependency deduction, there might be a significant tax savings available.

  1. Innocent Spouse

People unfamiliar with federal tax law know the term innocent spouse means someone who may benefit from equitable division of the tax liability. But the reality is the term innocent spouse encompasses a variety of statutes that are very complicated and should only be handled by tax lawyers. If your spouse is a high income earner or if a significant tax liability arose during the marriage, or if you’re uncertain as to the accuracy of the tax returns, please consider having a federal tax lawyer review the divorce decree for possible treatment as an innocent spouse. Items in the divorce decree, while not  not determinative of federal tax liability, can be significant factors in determining whether innocent spouse relief should be offered allowed.

  1. Basis

Some couples are fortunate to have accumulated wealth during  the marriage, often  either  through their own hard efforts, inheritance, or gifts from family members, commingling of separate property, etc.  When they get divorced they have to divide these assets among themselves. For most people this appears at first glance to be fairly simple in that they just consider what the value of those assets are and divide them accordingly.

However, from a tax point of view, the basis of those assets can be very important. There can be a hidden tax issue there.

Basis is essentially the cost of those assets reduced by any depreciation. Once the asset is sold or otherwise disposed of, we have to report income tax gain on the appreciation- the sale price over that basis. Thus, the couple may make an equitable division of assets but because of the difference in basis one party may have a big tax bite once those assets are sold.  This may be magnified even further if the gain on the sale of one asset is not taxed- such as on the sale of a house.

A simple example may be one party gets the home and the other gets rental property.  The home sale may generate a large gain that is not taxed under the tax law while the sale of the low basis rental property generates a large taxable gain.

I’m suggesting to you that in a divorce setting  the tax basis of the assets acquired during the marriage should be an important consideration in the division of the assets .

  1. Life Insurance

In many divorce decrees, one of the divorcing spouses  may be required to continue to maintain life insurance and medical insurance for the benefit of the ex-spouse or  for the benefit of the children. Life insurance is a difficult matter to consider because of its complexity. The decree can arrange for the  insurance premiums to be deductible alimony depending on who the owner and beneficiary is. The life insurance can also generate estate taxes depending on who the owner and life insurance beneficiary is (the person to pay those taxes needs to be identified).  I don’t want to say any more about this because of its complexity other than careful consideration needs to be given to this issue.

It has been my experience over the last 38 years of law practice that most divorces end up sooner or later being a bitter and angry affair and financial and tax issues that were not properly considered before hand for inclusion in the divorce decree can inflamed that hostility into something even more  ugly.

Folks, I encourage you  to get a good family lawyer to represent you in the divorce but  also to specifically ask him or her to consider some of the items I’ve  described herein so that you can be adequately prepared and that there are no surprises down the road.