When it comes to divorce and financial planning, every case presents different challenges, opportunities and client goals. No two negotiations are the same, but some financial strategies during divorce are important to consider in every case.
IRS rule 72(t)
This allows hardship withdrawals without the 10% penalty from 401(k) plans during divorce. Consider this strategy to help with cash flow problems during dissolution proceedings.
The Government Pension Offset and Windfall Elimination Provision
These are federal Social Security rules that often unexpectedly reduce Social Security retirement benefits in divorce situations and may cause inequity.
Consider that an apples-to-apples comparison may not be possible…
…for before tax and after-tax dollars from an individual brokerage account versus an IRA. Agreeing to an equal offset of accounts with different tax ramifications may result in inequity.
Know the value
Comparing the present value of a currently available liquid asset such as a savings account versus the future value of a non-liquid asset such as a pension may result in inequity.
Child contingency and Alimony recapture laws
These are hard to analyze and often missed in setting support awards but can cause unexpected tax ramifications of great magnitude if left without review.
Capital gains
Unrealized capital gains that may cause future taxes should be included in estimates of value when considering asset division. Agreeing to a division where each party receives an asset of equal value, but one has a large capital gain built in will result in inequity.
Know what has cash value now
Dependency exemptions and tax filing status may have real cash value now and in the future and can be used as bargaining chips for financial settlements.
What about the life insurance?
Life insurance placed as security for support payments should be positioned before a final settlement is reached to ensure a policy will be available with an efficient cost structure.
Retirement plans
Qualified Domestic Relations Orders necessary to divide retirement plans should be drafted and approved by the plan administrator prior to the divorce being final to avoid delays common post-divorce.
Don’t forget the real estate
Consider the advantages of deferring capital gains taxes on real estate assets by using a 1031 exchange or converting a rental property to a primary residence for tax purposes.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
Lou Falvo is a Certified Divorce Financial Analyst® and CIMA® (Certified Investment Management Analyst) who assists clients by evaluating the tax and financial aspects of divorce. Lou is dedicated to reducing the burden of each client by thoroughly examining the financial elements of the client’s divorce, with a keen focus on what is in his or her best interests. Contact Lou to find out how he can assist you with your divorce proceedings at lfalvo@crossroadsdivorce.com or (585) 542-2382.