Archive for the 'Divorce' Category

Tax Implications

Tuesday, June 3rd, 2014

Very often the marital home is the most valuable asset a divorcing couple divide, particular since the IRS permits homeowners to exclude from taxes a certain amount of capital gains from the sale of a primary residence. The gain (or loss) is the selling price of the home, minus any selling expenses, minus any adjustments or improvements. Currently, the IRS allows up to $500,000 for couples and $250,000 for individuals in capital gains exemptions.

In order to qualify for the $500,000 cap, the couple files a joint return for the year in question and meets the IRS “own and use test.” If either spouse does not meet the own and use test, then the maximum exclusion allowed would be the amount that each spouse would qualify for if treated separately. To qualify for the maximum exemption, the couple must have owned the house and lived in it and considered it their primary residence in at least two of the previous five years. The couple has three years starting from the due date of their return in the year of the sale to decide whether or not to take this exclusion. To exclude gain under the main home sale rules, a person generally must have owned and lived in the property as his or her main home for at least two years during the five-year period ending on the date of sale. If he or she has two homes and live in both of them, his or her main home is ordinarily the one lived in most of the time.

This exemption can only be claimed once every two years, calculated from the date of the sale, unless the reason for selling a second home within a two-year period is related to health, change of employment or unforeseen circumstances. In this instance, you may still be entitled to claim a reduced exemption.

Moreover, the IRS requires one spouse to have met the own and use test for married couples that file a joint return. This means that if the couple is still legally married and either spouse meets the two-year requirement, then the couple can still qualify for the full $500,000 couples exemption on their joint return.

The IRS “own and use” is satisfied when the spouses legally owned the property and one spouse continues to use the home as his or her primary residence under a divorce decree or legal separation agreement. That means that as long as a person’s remains on the deed and his or her spouse lives in the home, he or she is eligible for the full capital gains tax exemption when the house.

Divorce and an Underwater Mortgage

Monday, May 5th, 2014

Generally, when a married couple divorces, they split assets between them according to the divorce agreement. When the family house is worth more than its purchase price — in what used to be the normal situation — any appreciation is included in the value of the home. The home is either sold and each spouse takes an equal share of the proceeds, or one spouse keeps the property with the positive equity counting toward his or her share of the property division.

In the case of an underwater mortgage, however, the home is worth less than the mortgage balance. This difference between a home’s original purchase price and its present value is negative equity, and it can be very problematic when it comes time to divvy assets.

One way for dealing with an underwater mortgage is to provide a “credit” to the spouse who keeps the home. In this, the couples compensate for the drop in value by providing that spouse a bigger share of another asset. For example, if a couple’s joint assets total $500,000, including a home worth $250,000, one spouse keeps the home while the other takes the remaining $250,000 as part of the divorce settlement — 50/50 split. However, if the couple’s home is underwater by $50,000 (the mortgage balance is $300,000), for example, the spouse who keeps the home is awarded an additional $50,000 to compensate for that negative equity, and the other spouse gets $200,000.

This routine does present the possibility for an uneven distribution of assets. Home values are depressed now, but are certain to improve later. If the home undergoes a short sale or foreclosure soon, it makes sense to provide the homeowner a credit for the negative equity because there will be no opportunity to recoup that loss. However, if the spouse plans to keep it long-term, it is very likely to regain some, if not all, of the value lost following the housing market crash. That means the homeowner doubles his or her money in receiving a credit while the home is underwater and then selling the property when values have recovered.

In some cases, rather than making up for the property debt by allocating a larger portion of another asset, the couple simply “zeros out” the debt. They do not consider the negative equity when assets are split, and the person with the home receives face value. If one spouse decides to keep the home as a long-term investment and anticipates a lift in value eventually, this is a better course.

Zeroing out the debt is not always a possibility, however, depending on the state of residence. Some states require that all assets and liabilities be divided in a divorce, including negative equity.

Selling the house at a loss is one of the less desirable options for dealing with an underwater mortgage. This is known as a short sale, and it is only possible if the homeowner is financially incapable of paying the mortgage payments and the lender approves it. A short sale, however, can prevent the lengthy headache of a foreclosure; however, it can still be detrimental to the personal finances of the spouses, who receive less for the house than what was originally paid. This may amount to which may amount to a loss of tens of thousands of dollars or more. A short sale also damages credit; it can make it difficult to acquire new loans and favorable interest rates in the future. Moreover, the lender may still hold the borrower responsible for loan balance.

A short sale requires that the parties are clear about the terms and condition of the arrangement, particularly that the negative equity does not become the responsibility of the spouses following the sale. Finally, a short sale may result in unexpected — and potentially significant — tax consequences.

The number of options available may be dependent on the state’s divorce laws. These options for can help determine the best course of action, but good legal and financial advice during the process is imperative.

A divorce is chaotic enough, but a house with an underwater mortgage makes a bad situation worse. Over 20 percent of homes are currently underwater, so it is a common problem.

Marriage Counseling May Help

Friday, April 25th, 2014

Many couples going through rough waters in a marriage turn to counseling. Counseling can help a couple having problems, and troubled partners should not wait too long to seek professional help.

Partners who married at an early age, did not graduate from high school, are in a low-income bracket, or are in an inter-faith marriage are more at risk of a breakdown in marriage than other couples. Spouses whose parents divorced also run more of a risk of a marital failure. Additional red flags include frequent criticism, defensiveness and withdrawal.

Spouses who have realistic expectations of one another and their marriage, communicate well, use conflict resolution skills, and are compatible with one another are better set for sailing in smoother marital waters.

Some couples get more from counseling than others might. Young couples who love one another and do not have sexist views seem to benefit more from counseling. Spouses who wait too long before seeking help, those who are in second marriages and those who are closed to any suggestions that may save the marriage get the least.

A 1995 Consumer Reports nonscientific reader survey rated marriage counselors below other types of therapists, but a study by the American Association for Marriage and Family Therapy (AAMFT) showed that families do want therapy and place a high value on the experience.

Some research studies suggest that marriage counseling is not as effective as people think. Women seem to get more from marriage counseling than men. Research also suggests that counseling may not have a lasting effect on the couple’s marriage. Counseling appears to be most beneficial before problems reach a critical stage.

A Beneficiary, not a Victim

Wednesday, April 9th, 2014

Even when a breakup ends a marriage gone bad, separations and divorce hurt because divorce is a beginning that assimilates of the traumatic dislocations that happen when a marriage dies.

Breakups hurt so much, even when the relationship is no longer good, because divorce is a loss, not just of the marriage, but also of dreams and commitments. Romantic relationships begin on a high note of excitement and hope. When marriages fail, spouses who loved each other suffer profound disappointment, stress, and grief. They have seen each other naked (both literally and figurative) and have a knowledge and intimacy of each other that makes separation and divorce an amputation.

Divorce means a long slog in uncharted territory. Yesterday lies in ruins; tomorrow seems a mirage. At times, the unknowns may seem worse than the unhappy knowns of a failed marriage. Routines and responsibilities — home, family and friends, and even identity – all are deranged. Fears and uncertainty infiltrate the moment.

The sense of loss seems ineffable — the loss of companionship and shared experiences; the loss of support, be it financial, intellectual, social, or emotional; the loss of hopes, plans, and dreams. Going through the recovery, rather than getting over the divorce, are two different experiences. Rushing to escape the necessary suffering means missed opportunities to learn. Learning makes a person a beneficiary of suffering, not a victim.

Uncontested versus Contested Divorces

Wednesday, February 19th, 2014

A divorce is either uncontested or contested, and the process of divorce moves much faster when neither spouse contests the end of the marriage.

In an uncontested divorce, the spouses agree on the terms and conditions of the divorce. They agree about the division of community and/or marital property and debt, the custody of any children, and the payment of child and/or spousal support. In the contested divorce, one or more of these issues blocks a settlement, and the couple may have to go to court to resolve the issue.

Uncontested divorces allow for default judgments. A default judgment can be made when the defendant makes no response to the petition. The failure to respond results in a default judgment against him or her, and it is done deliberately. Uncontested divorces move more quickly through the courts and are less expensive than contested divorces, and an uncontested divorce reduces hostility, allowing both parties to resume their lives more quickly.

Other Options to End a Gay Marriage

Friday, January 24th, 2014

Just like straight couples, gay men and woman who build lives together sometimes find that the relationship does not last. And just like heterosexual couples ending the union, dividing assets, interests and debts of the partnership requires careful thought and unselfish consideration.

Absent a prenuptial agreement that outlined the rights of each should the relationship end they are left with gay couples have three options:

> Private negotiation. Since there is no legally binding contract there is no balance of power. One partner may walk away with more than is his/her right, and communication and compromise can be difficult.

> Divorce attorneys. This option could is expensive since both partners have the cost of a lawyer, but since there is no need to file in the courts, couples would not be faced with that extra expense.

> A private mediator. The couple turns to the guidance of a mediator. They negotiate a legally binding contract and, within a shorter time span.

Each of these options may demand that the partners improvise solutions. For example, the second parent of a child who is not biologically related to it may want visitation rights that would normally be automatic to any parent.

The Six Steps of a Divorce Trial

Tuesday, January 7th, 2014

A divorce that goes to trial (only a tiny fraction do) has six steps. They are

> 1) The Petition, which identifies the parties, gives the basics of the marriage and states the grounds for ending the marriage;

> 2) The Service of Process, which is the delivery of the petition to the respondent (or defendant) and a summons to appear;

> 3) The Response, in which the Defendant replies to any allegations made by the petitioner (or plaintiff), usually within 30 days;

> 4) Discovery, which includes a financial investigation of the marital estate; negotiation, wherein the parties attempt to reach agreement about the terms and conditions of the divorce and sometimes a settlement;

> 5) The Pretrial Conference, which, when the parties are unable to reach agreement, happens in a judge’s chambers when both attorneys present their respective positions and the court makes recommendations in hopes of a settlement;

> 6) The Trial, which happens when the parties cannot negotiate a settlement.

Divorce Recovery Means Pain and Suffering

Monday, November 18th, 2013

Even when divorce ends a bad marriage gone terribly wrong, a divorce does not make people happy. Pain and suffering are natural and inescapable consequences of any divorce. Even after the divorce, waves of pain and suffering shoot through consciousness, like the phantom pains in an amputated limb. Something hurts, but only the stump of memory remains. Sadness and anger, fear and anxiety, sorrow and denial — all race like alternating current, back and forth.

In the face of this, divorce recovery is a do-it-yourself project. Divorce recovery means acceptance and the ability to go forward. The ability to keep a perspective, a sense of humor (even a dark one), but in the end people recover by putting one foot in front of the other and living.

After a divorce, getting through the day often seems no small accomplishment. There is no single right way to survive a divorce; there is no universal right way to start over. A person does it by doing it. Even with help such as counseling and support groups, the surviving divorce is a self-help project. The ancient Greeks believed that the reward of suffering is experience, and so it is with divorce.

Change of Beneficiaries Should Not Be Forgotten

Wednesday, November 6th, 2013

As a rule, divorce does not effectively change a beneficiary designation unless the divorce decree makes a stipulation to change the beneficiary. It could be argued that the individual retirement account (IRA) owner wants the former spouse to remain the beneficiary of this IRA. Unless a court order states otherwise, the former spouse may be entitled to receive the assets if he or she is the named beneficiary on record at the time of the IRA owner’s death.

Assets with a designated beneficiary – life insurance, pension plans, IRAs, annuities, investment and bank accounts – bypass a will. Upon the death of the owner, they are paid to the person identified as a beneficiary.

After a divorce, naming the right beneficiary is very important.

If there are children and they are named beneficiaries, a court guardianship is established for the minors. Some people name the former spouse to manage the funds for the child until he or she achieves a majority, which is 18.

Reciprocal Altruism Versus I’m Only in It for Myself

Tuesday, October 22nd, 2013

According to Herb Guggenheim, writing for CapitalM, a Mensa newsletter, the “only two social strategies that human beings use” come into play in divorce negotiations. They are:

> “Reciprocal Altruism,” which is the psychological equivalent of the Golden Rule, or “do unto others that which you would have them do unto you”; or

>“I’m Only in It for Myself,” which is an every man for himself concept that works in a dog-east-dog world.

Reciprocal altruism is based on the belief that kindness is rewarded. As the French say, “You send the elevator up to me and I’ll send it back down to you.” I’m Only in It for Myself, on the other hand, appeals to people who see the world as a hostile place where only the strong survive. Social Darwinists believe “the inferior, weak people are busy being nice to each other, they will swoop down and take what they want, when they want, no matter what the consequences may be.”

When spouses use reciprocal altruism, the negotiations can move to an easy conclusion; when the spouses try to rip and tear, the negotiations often break down.

Uncontested Divorce Makes for A More Gentle Climb

Divorce is not an easy road, but uncontested divorce is a more gentle climb for both spouses. Negotiating an uncontested divorce means that the two spouses are in agreement about the terms and conditions of their property division, spousal and child support, custody and visitation. In short, they have nothing lest to argue and fight about.

When couple can agree on everything, they are in effect their own negotiators. Although each spouse may want her or her lawyer to check the paperwork, the involvement of the attorneys is greatly reduced.

So are the legal bills because when a couple negotiate for themselves, they can sit down and do at no cost what lawyers do at a great cost. The courts will approve anything the spouses decide that is fair and reasonable.

Interest-Based Bargaining Versus Position-based Bargaining

Collaborative negotiators describe two types of bargaining that happens when spouses negotiate a divorce. They are interest-based bargaining and position-based bargaining.

In interest-based bargaining, the parties focus on their underlying concerns, needs or interests; in position based bargaining, the parties lock in early on inflexible positions defining their needs and wants.

In interest-based bargaining, the parties communicate what is important about an issue rather than arguing for a specific position or solution. In position-based bargaining, the parties become adversarial and go one against the other.

Interest-based bargaining aims to understand the other party, and it is cooperative. Position-based-bargaining, the traditional approach, allows for little emphasis on future relationships.

Couples and their lawyers who can negotiate interest-based positions find the resolution of a divorce settlement must less painful.

Negotiating a Divorce Is a Matter of Timing

Rarely do the two partners mutually decide on a divorce at the same time. Invariably, after some long period of reflection and consideration, one spouse decides to end the marriage and, one way of another, tells the other the marriage is over. Call him or her the leaver; the other, the left. The leaver does not decide impulsively and he or she may think about divorce for years before acting. The spouse left may take the news “on a continuum from resigned acceptance to utter shock and surprise.”

According to divorce mediator and psychologist Sam Margulies a “good divorce” happens when both spouses are ready to negotiate, that is, when both accept that the marriage is over. “If you are the one who wants out,” says Margulies, “you have to give your partner time to adjust, time to mourn and time to explore his/her own possibilities. Push too fast and your spouse retreats to the perceived safety of a lawyer who she thinks will “protect” her interests. Then you will have a long divorce.”

No One Gets It All

Sometimes when a marriage crashes the spouses become possessed by an idea that they can vindicate themselves in the divorce negotiations. That is, an angry spouse uses the negotiations — and the distribution of assets and liabilities — as a way of vindicating their own conduct during the marriage. In particular one spouse may wish to punish the other for real or imagined misconduct during the marriage.

It is easy to see that angry spouse is not going to be able to negotiate a fair and reasonable – equitable—divorce. No matter how hard it is, anger has no place in the negotiations, and no one gets everything he or she wants.