Divorce Tax Preparation

It’s that time of year again – tax season is upon us. As discussed in my previous blog, it is important when preparing for a divorce in Texas to be aware of your assets and debts before you meet with a lawyer. It is my recommendation to have the two prior year tax returns in your possession at your initial consultation.

The IRS has now made access to your prior year tax returns easier. As reported by TechCrunch.com, Americans can now download their tax return transcript directly from the IRS. Before this feature became available, it would take approximately two weeks for a copy of any prior year tax return to be sent by the IRS through regular mail. 

Take advantage of this new feature and become better informed and prepared. Download your prior year(s) tax return here: http://www.irs.gov/Individuals/Get-Transcript

 

Smart Financial Precautions Every Person Should Make Prior to Filing for Divorce in Texas

Recently on the website Moving Forward Through Divorce, there was an article entitled “6 Smart Things to Do Before the Money Disappears.” This article chronicles financial actions a person should take in preparation for a divorce and contains useful information for divorces in Texas.

Financial preparation is crucial prior to filing for divorce in Texas. It is important to have knowledge about all financial accounts owned by you and your spouse. The article recommends having copies of at least the last three prior year’s tax returns accessible. Additionally, printing a copy of your own credit report can aid you in knowing exactly what outstanding debts are out there in your name. I advise all my clients at the beginning of the divorce process to run a credit check on themselves. More times than not my client will then become aware of a debt in their name that they had no idea about and which had been opened by their own spouse.

The article also recommends having your own credit card available in your own name. Many times at the beginning of the divorce process, one spouse will cancel the only credit card accessible to their spouse. However, having your own credit card takes away the financial control a spouse could potentially exert over you.

Finally, there are two actions that this article recommends a person take in order to maintain privacy. In Texas, a person should accomplish these tasks prior to either spouse filing for divorce as they are usually prohibited during the divorce process. The first would be to open your own bank account in your own name at a new bank. Use this account to set aside financial reserves for the divorce process. The second action to be taken would be to change your passwords, PIN numbers, and obtain a new email address. I recommend you do not use the family computer as it may be possible for your spouse to access your accounts and information.

Implementing these actions will better serve you when going through the divorce process and will expedite your ability to move forward financially.
 

Preparing for Divorce in Texas

Jeff Landers, the author of the new book, Divorce: Think Financially, Not Emotionally – What Women Need To Know About Securing Their Financial Future Before, During, And After Divorce, wrote an interesting article for Forbes.com regarding asset division during divorce. 

The focus of the article centered on women preparing themselves and their finances during the divorce process and to become educated on what assets they are entitled to at the conclusion of the divorce.  The biggest mistake I see either spouse make during the divorce process, not necessarily just women, is to rely upon the representations made by the other spouse when it comes to what a person is entitled to when dividing property.

Texas is a community property state.  This means that everything a person owns at the time of divorce is presumed to be community property and is thus divisible by a Court.  However, if a person can prove that an asset is their separate property, the Court cannot divide that asset and will award it to the person whose property is characterized as separate.  A piece of property can be separate property in Texas if it was 1) owned prior to marriage 2) inherited either prior to or during the marriage 3) was gifted to a person during the marriage or 4) is a personal injury award for pain and suffering.  It is important that you consider these factors when you are meeting with your attorney to discuss your options and how you are going to prove an asset is your separate property. 

Many types of assets can be what are called “mixed character assets” meaning that the asset can be made up of both community and separate property.  The most common example of this type of asset is a stock option.  For instance, a stock option can be awarded to a spouse by their employer during the marriage but the stock option will not fully vest until after the divorce.  The stock option has both a community property and separate property aspect.  The employee’s continued work after divorce is required in order for the option to vest and this continued work after divorce is considered the spouse’s separate property.  Therefore, the community property portion of the stock option needs to be assigned and then divided at the time of divorce.

Education and preparation is necessary when preparing for and going through the divorce action.  Your divorce attorney is your guide and advisor during this process.  However, the more you know, the more successful of an outcome you will have.

 

Are My Earnings My Own Once I File For Divorce in Dallas, Texas

 

Texas is a community property state which means that all assets and debts acquired during the marriage are presumed to be community property and thus divisible by the Court. There is no legal separation in Texas. This means that even after a person files for divorce in Texas, the assets and debts acquired after filing for divorce are community property and divisible by the Court at the time of a final trial.

Dallas, Texas has what is called a Standing Order. The Standing Order is in effect on all parties who file for divorce in Dallas, Texas. The Standing Order contains injunctions that remain in place on each spouse during the pendency of the divorce action. These injunctions regulate how you are to spend money during the pendency of the divorce. Specifically, the Dallas Standing Order enjoins a person from spending funds unless it is for reasonable and necessary expenses and attorney’s fees. The Standing Order becomes effective on the person filing for divorce once the divorce petition is filed with the Court and effective on the other spouse once that person is served with the divorce petition. The purpose of the Standing Order is to maintain the financial status quo during the pendency of the divorce.

Just because you have filed for divorce and/or are in the middle of the divorce process, your income is still community property. This means that your spouse’s income during the divorce is also community property. Any contributions to a spouse’s retirement accounts during the divorce process are community property. Any debts incurred during the divorce process are community property as well. However, the Standing Order is in place to minimize any debts incurred during the divorce process in order to protect the community estate.

 

Texas divorce FAQ: Can I make my spouse sign a joint tax return?

The tax filing status as married or single is determined as of the last day of the year. So, if the divorce remains pending as of December 31st, the parties are still married for tax purposes. If the divorce is granted during the tax year, then the parties’ marital status is probably single as of December 31st. Typically, parties cannot be forced to sign a joint tax return. In most circumstances, it is usually more advantageous for parties to file a joint return than to file separately. The advice of a good CPA to give each spouse independent advice makes sense.

Texas divorce FAQ: Can my spouse continue to use our credit cards?

At the beginning of a divorce, most courts enter orders that regulate each party’s use of credit during the divorce. Although a judge won’t prohibit use of credit altogether, the order will require only reasonable spending. This isn’t the time for extravagant purchases. Sometimes a spouse will cancel credit cards prior to the divorce being filed. If there is a question about this, call the credit card company in advance and confirm.

What's Ours Is Mine: Signs Your Spouse Might Be Hiding Money

 

Divorce can bring out the worst in people or uncover bad behavior that has been there all along. Unfortunately, some people try to hide money from their spouse in a divorce. Other people have hidden money throughout the entire marriage. Clients often sense that something is just not right. This is the time to take action and seek legal advice. 

Often it is hard for people to put their finger on exactly what sets off the alarm bells for them. To help, here are the top 5 signs that your spouse is hiding money from Nancy Van Tine of Burns & Levinson, LLP:

1. No transparency.  This can be a problem from the beginning of the marriage.  You don't have joint accounts.  There is no openness about finances and no real economic partnership.  This makes it super easy to hide money!  Every spouse should understand the family finances and be aware of what you have and how it is held, always.  It just makes it too easy for a spouse to transfer funds and hide cash if you don't know how it all fits together.

2.  A change in behavior.  Instead of mail coming to the house, it goes to a spouse's office or he/she gets a post office box.  The spouse opens new bank accounts and you don't see the statements.  He/she gets new credit cards, and the bills don't come to the home.  He/she has more than one cell phone, and you don't see the bills.  The extra phone can indicate a lover, and that often means money is leaving the marriage.

3. A sudden decrease in income.  One of my favorite quotes (and I have used it for so long I can't remember the source, other than it was another divorce lawyer) is, "once again, the magic alchemy of divorce turns yet another prince into a pauper." This can happen more often with the self-employed, as it is much easier to finagle finances in your own business than if you are a W-2 employee. If it occurs in conjunction with #2 above, watch out!

4. New and unusual economic behavior. This tends to be more on the spending side.  The spouse is buying stuff which depreciates, i.e. a fancy car, a new motorcycle, boat or jet ski -- basically wild spending on toys.  If your spouse starts running up large debts or cleaning out accounts to pay for new acquisitions, watch out!

5. Rushed and controlling. When tax returns need to be signed, you get the return on the day due and there is no time to read it, nor is there a copy for you to keep.  Estate planning is rushed and/or unexpected, and you don't get to discuss the plans and their meaning with the lawyer.  These and other areas where speed and lack of clarity can really hurt you are considerable.”

If any of these five signs set off alarm bells in your own relationship, or more importantly if your instinct tells you that something is just not right about your spouse’s behavior lately, consult a good divorce attorney immediately. An experienced divorce attorney can inform you of your legal rights and can explain the steps you need to take to better understand your financial situation. 

Above all else, the most important thing you can do is to become knowledgeable about your finances – review your tax returns, meet with your CPA, learn about your spouse’s business. This investment will pay off for you by allowing you to be an engaged and active participant in your divorce and empowering you to manage your own finances once your divorce is final.

 

 

Taking Control

Excerpted from an article by Diana Shepherd, CDFA

Posted by Michelle May O’Neil on August 8, 2011

 

Do you have a written, detailed, up-to-date budget detailing all your daily, weekly, monthly, and yearly expenses and income? If you’re like most people, your answer to this question will be “no.” The lack of a budget may have caused financial problems during your marriage, but it could be ruinous post-divorce.

The first step to gaining control of your finances—and life—during divorce is to prepare an accurate current budget and a post-divorce budget. You will need to gather documentation to ensure that your budget is objective and not the product of guess-work.

Identify your sources of income, which includes revenue from full- and part-time employment, investment return, and self-employment income. Add up all the income from different sources to come up with total income. If you’re clueless about what your spouse earns, obtain or make copies of his/her tax returns for the last three to five years.

After you have an accurate picture of what’s coming in, you need to create an equally accurate picture of what’s going out. You should review your check register and credit-card statements—or your online banking records if that’s how you usually pay your bills. Remember that not all your expenses are paid monthly; some insurance premiums or tax bills might be payable quarterly or annually, so make sure to account for those as well.

Don’t forget about cash withdrawals using ATM cards; you’ll be surprised how quickly taking $50 here and $100 there can put you in the red if these withdrawals are not included in your budget. Also, you need to be able to account for where/how you spent the cash: was it taking taxis to work, going out to restaurants, on a new outfit, or paying the babysitter?

After you’ve completed a “first draft” of your budget, ask a reasonable and financially-savvy friend or family member to review it and question the expenses that seem unreasonable. If you’re going to ask for help with your budget, you’ll have to agree to keep an open mind and not to become angry or defensive if he/she questions one of your items. This person is trying to help you, and he/she will probably be a lot easier on you that a judge would be!

If you’re like most people, your number-one financial concern during divorce is maintaining positive cash flow—in other words, being able to pay the bills on a monthly basis—not only on the day after divorce, but five, ten, 15 years into the future. In order to meet cash-flow needs, there are three sources of money that may be available to you as a result of your divorce: child support, spousal support, and marital property. Let’s take a quick look at all three.

 

Child Support

In the US and Canada, a parent is obligated to support his or her children, regardless of the parent’s marital status. All states and provinces have child support guidelines; you should review the guidelines in your area to get a rough idea of what you might be entitled to receive or have to pay. Generally speaking, child support is based on factors such as the ages of and number of minor children, the amount of time they will reside with each parent, and the income of each parent. These factors are plugged into a formula, which then supplies a recommendation for the Court. In a divorce situation, the non-custodial parent is usually ordered to pay child support to the custodial parent, from which the custodial parent pays the child’s expenses.

However, the child support formula does not take into consideration your child’s actual expenses. For example, extra-curricular activities, private school tuition, and college funding are not factored into the formula. These are considered “extraordinary expenses,” and they are often an area of great discussion and/or argument. One of the ways in which a Certified Divorce Financial Analyst™ (CDFA™) can help their clients is to determine which costs may not be addressed by the guidelines and then to help them find alternative solutions to cover these expenses. Since child support is such a complex area of the law—and because it can be a very contentious issue between divorcing parents—you should ask your lawyer for guidance regarding the child support amount.

Spousal Support

Another source of income (or an expense) for many divorced people will be spousal support. Spousal support is based on different factors, and it’s a very gray and subjective area. However, the two most heavily weighted factors are need and ability to pay; the length of the marriage is another factor that is considered when awarding spousal support. Unless you have prepared an accurate budget, you will not know how much spousal support you need—or, if you’re on the other end of the equation, how much you can afford to pay.

Property

The third potential source of money in a divorce is property. Many states and provinces call for an equitable division of property. “Equitable” does not always mean “equal”—it is, however, supposed to mean “fair.” If the spouses can’t agree, the judge is the final arbiter of what constitutes fair. Although most divorces settle 50/50, it can make a huge difference which 50% you get; in other words, all assets are not created equal. The first thing to know is that there are two kinds of property: Marital and Separate. Anything that is marital will go into the marital pie that’s going to be equitably divided; anything that’s separate property will not. The distinction between the two is a gray area and should be discussed with your lawyer. To read more about the types of property, click here.

The Last Word

You need to create an accurate budget today, and you need to understand how child support, spousal support, and property division will impact your ability to cover your cash-flow needs. Remember, you only get one chance to negotiate your property settlement. Can you really afford to make a mistake?

Click the link to read the entire article and find our more about how a CDFA can help you take control of your finances during and post divorce.

More Tips for Avoiding Financial Disaster in Divorce

1. Negotiate a reasonable settlement.

Get some professional advice from a CDFA or CFP to make sure you'll be able to live with the financial terms of the settlement -- now and into the future. 1.Don't live beyond your income. Reduce your expenses -- or increase your income -- so that you are always saving something for a rainy day. Ask your financial advisor for help creating a budget if necessary.


2. Think twice about keeping the family home.

Ask your financial advisor whether you can truly afford it, and ask them to show you what cash you'd have available for investment if you moved to a smaller home.

3. Realize that you won't get everything you want in the property division.

Don't spend months and thousands of dollars fighting over furniture, appliances, or other personal items. Make a short list of "Must-Haves" and be prepared to compromise on everything else. Look at the big picture; is this asset best for your situation?

4. Protect your Retirement Assets.

In the U.S., have the QDRO (Qualified Domestic Relations Order) filed as soon as possible. 

5. Use debt sparingly.

Get a copy of your credit report and close all joint accounts and all credit you do not use. Avoid maintaining balances on credit cards.

How Divorce is Worse Than a Recession

Can anyone argue that a divorce can be more ruinous to your finances than just about any other financial catastrophe? 

Ron Leiber of the Your Money column in the New York Times writes about the Four Money Talks to Have Before Marriage:

Divorce tends to be emotionally gut-wrenching for the people who go through it (not to mention those around them). But most couples don’t realize that divorce can also be among the most ruinous financial moves anyone can make.

Sure, you could bet big and lose on a single stock or money manager. Or your small business could go bankrupt, taking your life savings with it. But divorce and the costs that often come with it — from legal bills to the sudden need for an additional residence — affect far more people.

The risk that any marriage will end in divorce is about 45 percent, according to David Popenoe, a professor of sociology emeritus at Rutgers University. The chances fall to about 40 percent for first marriages and decline further for college-educated couples, people from intact families and couples who share the same religion.

Given the various financial complications, I’ve long wanted to devote a series of columns to divorce and money. This week, I’ll start with a topic that could save some marriages if more people made it a priority. It’s crucial to air and resolve financial disagreements beforehand.

“It’s almost impossible to be hooked up to somebody who has the same balance of spender and saver as you, or expansiveness versus conservativeness or financial circumstances,” says Gregory A. Kuhlman, a New York City psychologist who runs marriage success training programs with his wife, Patricia Schell Kuhlman.

He adds that the mix gets even more volatile with second marriages, when couples may have children, ingrained financial habits and savings or other assets that necessitate the discussion of a prenuptial agreement. “Success in marriage is only partly attributable to compatibility. It’s about how you manage those differences and whether you have a style for doing so that is successful.”

What follows is a list of four financial issues that ought to be near the top of the discussion list before getting married. Please add to the list in the comments of the online version of this article.

ANCESTRY When Lisa J. B. Peterson started her Boston-based financial planning firm, Lantern Financial, she knew she wanted to focus her practice on young professionals. She quickly realized that many of them could use premarital financial counseling and built a program called Harmoney around their needs.

One of the first things she asks clients about is what she refers to as their financial ancestry. “It’s looking back at your own personal past,” she says. “How did your parents deal with money, how does that impact how you deal with it, and how might that impact the couple’s relationship?”

Because so many of our money behaviors are learned, she asks couples to share their earliest money memories — whether their father hid money from their mother or how either parent fretted over the funds available. This can be a particularly intense discussion for people whose parents were divorced, and the stories are sometimes accompanied by tears. “Money is so emotional, and people forget that,” Ms. Peterson says. “You think that it’s just numbers.”

CREDIT While it’s about the least romantic subject imaginable, your credit history holds a chunk of your permanent financial record. It follows naturally from the ancestry conversation, and Lantern Financial pulls credit reports and scores for its clients.

Molly Milinazzo and Scott Donovan, an engaged couple who live in the Dorchester section of Boston and are both 24 years old, were relieved to discover that their scores were within about 15 points of one another when they went through the Harmoney program in May. “A lot of people end up surprised, and it’s best to keep those kinds of surprises at bay,” Ms. Milinazzo says.

Full disclosure on the credit front is useful for two reasons. First, a credit report is, in part, a catalog of past mistakes and overall habits — loan payments you missed or department store credit cards you didn’t really need. That in itself is a good starting point for a discussion about what you’ve learned (or still need to learn) about handling money.

There’s an immediate practical side to this, too. If there are errors or low credit scores that a couple can improve, there may still be time to make the fixes so that the couple can get the best rates on a loan for their first home a year or two later.

CONTROL Figuring out who will pay the bills each month may not seem to be an important conversation or assignment. But it gets tricky when both people want to take it on. “People understand that in a relationship, money is control,” says Jeff Kostis, a financial planner in Vernon Hills, Ill., who walks engaged couples and newlyweds through a checklist of questions. “If you’re not paying the bills, you don’t know where the money is going, and you feel like ‘He doesn’t want me to go out with my friends’ or ‘She doesn’t want me to play in the fantasy football pool.’ ”

For two people who have both been on their own for a while and don’t want to give up doing the monthly financial chores their own way, Mr. Kostis suggests, at a minimum, regular household meetings complete with Quicken or other spreadsheets so that the person writing the checks can keep the other one up to speed. With more stubborn couples, he might suggest handing the controls back and forth at the beginning of each year.

Mr. Kuhlman, who explains the counseling approach he and his wife take with clients at stayhitched.com, says it shouldn’t be surprising that control issues come up constantly when talking about money. “It’s concrete, you can see it,” he says. “It’s not ephemeral or less measurable, like affection.”

A few things that he suggests couples discuss early on: If one person is making most or all of the money, does that person get to make most or all of the financial decisions? If you’re the car aficionado or have researched all of the local school options for the children, do you get to make the decisions about those things? “These are the kinds of things that don’t come out when you’re dating,” he says.

AFFLUENCE Here’s another question that tends not to come up during courtship: Just how rich do we want to be one day? Mr. Kuhlman refers to this more politely as the “desired level of affluence.” “Are our career paths going to be something that pulls us together? Or, more often, are they things that will tend to pull us apart, where we’ll really have to be proactive to make sure it’s under control?” he says.

Mr. Kostis might put it a bit more bluntly, say to a spouse of an aspiring investment banker or corporate lawyer: Are you O.K. with acting essentially as a single parent, with your partner working 80 hours a week until the age of 80? “Not that there is a right or wrong answer,” he says. “It’s just about understanding, going into the marriage, what that would really mean.”

He adds that people in the financial advice business often joke that they spend half their time talking about money and the other half acting as marriage counselor. “But it’s the same communication style,” he says. “You’re giving people permission to be honest without having someone jump down their throat for giving the answer that they really want to give.”