But in the rush to break free, experts say, many crucial details of tax law, financial planning and simple arithmetic easily get lost. And there are some new wrinkles in divorce law. There’s an ever-expanding definition of ““marital assets’’ to be divided that often includes his-and-hers retirement funds, and the likelihood that one spouse has built a better career and will earn more than the other.
Divorce-savvy CPAs and financial planners are flourishing, even if the splitting spouses are not. As couples turn to the courts this year, these are some of the hot issues:
Unwary partners easily get blindsided by the tax consequences of divorce, says Newport, R.I., CPA David Rooney. And, he adds, it doesn’t help that lawyers and judges are often behind the curve on tax law, too: ““Someone is just not paying attention to the fine print.’’ Consider the case of Arthur Hawkins. When the Albuquerque, N.M., orthodontist turned over to his wife $1 million in retirement funds, he thought the distribution, like a rollover from one bank to another, would be tax-free – or her tax problem. But he failed to characterize the transfer correctly in the divorce papers, a mistake the U.S. Tax Court says will cost him $384,792 in back taxes.
Most company pension plans can be divided without being taxed – if you follow all the rules. But others, including executive deferred-compensation plans and Individual Retirement Accounts, can’t escape.
A tax avalanche can fall on unsuspecting partners (usually wives) whose spouses try to cast pension-fund payouts as taxable ““alimony,’’ warns Arthur Andersen CPA David Bradt. If the husband uses pension money for alimony payments, he will get a deduction while his ex-wife pays taxes.
Then there’s the house. When one partner buys out the other’s share of the marital manor, he or she may forget that they’re getting a taxable gain along with the house. Suppose Mary and John bought a house for $50,000 that’s now worth $200,000. Federal tax on their $150,000 gain could be $42,000 when the house is sold. If he buys her half for $100,000, she pockets tax-free money while he gets the $42,000 future tax liability. Deconstruct the deal: Mary nets $75,000; John ends up with $33,000.
Disturbing new findings from Princeton University show that children of divorce are less likely to go to college because the money isn’t there for them.
Battling spouses get so focused on today’s blue jeans, bikes and dentist bills that they forget the 500-pound gorilla lumbering toward them: college and graduate-school tuition. Most child-support agreements end when the child reaches 18, at which time it dawns on everyone that neither spouse did much about saving for school. (While one parent may not contribute to the college kitty, college-aid officers may count the income of both.)
During negotiations, most couples avoid the subject or come up with vague agreements like ““We’ll both pay for college.’’ That’s useless, says Chicago mediator Cicily Maton, when one spouse envisions the community college on the corner and the other’s dreams are hung with ivy. New York divorce lawyer Marcy Wachtel pushes affluent clients to establish education trusts, but that’s rare. ““Most [divorcing people] today don’t have enough money to split into two pots, much less three,’’ says Violet Woodhouse, an Anaheim Hills, Calif., divorce lawyer.
Stay-at-home mothers have suffered big losses in the no-fault-divorce era, but the divorce establishment is beginning to take note.
A few years ago, the courts were awarding financially dependent spouses a disproportionately small share of assets and some ““rehabilitative’’ alimony – just enough cash to put her back on her feet, or at least in a word-processing class. The result: even by conservative estimates, wives’ standard of living may drop 24 percent. Husbands’ fortunes drop by 5 per- cent at most.
The pendulum ““swung too far,’’ says Michael Albano of the American Academy of Matrimonial Lawyers, and will now swing back, with more long-married wives getting lifetime alimony. Even in the more common case of short-term alimony, courts are ditching that insulting ““rehab’’ term, ordering larger monthly awards and arranging to check in five years to see how wives are doing.
Breaking up can be costly even before marriage. Chicago lawyer Sharon Wildey and her onetime fiance Richard A. Springs III, an Oregon cattle rancher, are asking an appeals court just how much pain and lost income his broken engagement cost her. A jury has already awarded her $178,000, but a federal judge reduced the figure. Watch for a landmark ruling from the appellate court.
