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We just read the article If the Reason You Earn Money is Just to Spend it, You will Always Financially Struggle on thesimpledollar.com. Of course he’s right. If you look forward to your paycheck so you can get the latest or a bigger this or that, be seen here or there, or go wherever, instead of using it for the essentials and then saving the rest, you will always struggle financially.

But even though that registers mentally, for some, spending money is tied to emotions. For example, I (Tracy) definitely spend more money when I have a job I don’t like or live in a place that doesn’t excite me. My money isn’t buying things. It’s buying happiness. (Yes, I’ve actually analyzed this.) When I’m happy it’s much easier for me to think about where my money is going and to control it.

During a divorce or separation ,one household becomes two. And items that your partner used to pay for (or at least their part)  will have to be paid for by you, or else disappear from your life. This is no time to go on a wild spending spree. Yet, this might be exactly when you fell most like doing it to make you feel better. To buy happiness.

If this sounds like you stop. Don’t make impulse buys. Sleep on it. It’s amazing how something you just had to have in the store is the last thing you think about the next day if it was a “want” and not a “need.”

Also think about what you won’t have if you buy that shiny new thing. Food, the ability to pay your electric bill, money for gas, money for car repairs, rent? You get the picture.

Think about what your money is really buying. And if it’s happiness, believe me, there are free ways to achieve that (exercising, listening to music, being with your real friends, doing something for someone else, for example).

P.S. If it’s social status and that really makes a difference to your friends, are they really your friends? Think about it.

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Current logo using "Dodgers" Script

Current logo using “Dodgers” Script (Photo credit: Wikipedia)

Have you heard about the post divorce woes of Frank McCourt? Well in case you haven’t…
  • Frank McCourt is the former owner of the Los Angeles Dodgers baseball team.
  • Jamie McCourt is the former Los Angeles Dodgers CEO and Frank McCourt’s ex.
  • The two were married for 30 years and have been divorces since 2010.
  • Jamie received a $131 million (tax free) settlement in exchange for her share of the team. She also got four of the six homes she shared with her ex.
  • Now, three years later, she claims that the settlement was a “huge mistake” and wants it to be thrown out.
  • Why? Because at the time of the divorce the team was valued at $300 million, but was later sold for 2 billion. (Less than a year after the original agreement, the team went into bankruptcy.)
Now you might not be the owner of a famous baseball team, but this case shows that even after the divorce agreement has been signed, your ex can still try to get more money from you.
Maybe you get a raise or a better job. If your ex gets wind of it, they may be able to say, “Hey, I want some of the loot.” That’s right. Even though the two of you are divorced.
How can you prevent this from happening? Make sure a Consent Order is drawn up that records the agreement the two of you made and states that neither of you can make financial claims against each other in the future.
If you ask us, this is a must if you want to avoid the problem that Frank McCourt is facing.

If your ex is honest, they won’t mind signing. If they protest, you now know that this is one of the best financial agreements you’ve ever made.

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Welcome to money-issue Wednesday.

The article we’ve reposted below has some great advice that lots of people don’t realize until it’s too late. Keep your emotions out of the process and pay attention to what it has to say before it’s too late for you and your children.

Managing Finances Through a Divorce
by Andrea Murad

Divorce is a trying time for anyone—especially when children are involved.

The separation process is long and filled with paperwork, especially when it comes to sorting out finances and budgeting for separate households. Experts advise parents strive to maintain their children’s lifestyle during and after the divorce to keep a sense of normalcy and planning a budget for potential custody or child support will help to make the split easier for all parties.

The problem in every divorce is that you have the same income but two households, says Randy Kessler, founding partner of Kessler & Solomiany. “Very few people make enough money to support a child the way they want to.” Lawyers and judges try to fix this problem by determining the minimum amount one parent can accept and the most the other can afford to pay for their children.

“Before you break up, become a better parent—take your kid to school, make them lunch,” says Kessler. Spending time with your kids as well as staying calm and saying nice things about the other parent, will help the custody case process.

Before heading into the legal process, work to create the custody outcome you want, recommends Kessler. If a judge has to make a decision about custody, he or she may keep the parents’ current arrangement. “If they share the child like they would in a divorce, they don’t have to pay a lawyer.”

Understand How Much your Child Costs

Maintaining a child’s lifestyle post-divorce requires parents to negotiate expenses and child support. “Every state has guidelines so a judge has a starting point for child support,” says Kessler. A judge will calculate child support and explain any deviation from the guidelines because of, for example, housing, extreme travel costs, medical needs or tuition for a child requiring extra training because of a learning disability.

Child support can be adjusted up or down after the divorce since a person’s income can change due to a raise or job loss. To avoid future trips back to court, Kessler suggests making payments a percentage of income.

To know how much you spend on your child, review 12 months of bank and credit card statements, says Tracy Stewart, certified public accountant and personal financial specialist in College Station, Texas. “Break down expenses for mom, dad and the children into categories like clothing, groceries, transportation and dining.” Also include summer camp and other activities. For categories like groceries that are shared by family members, figure out each person’s percentage of expenses. Adding up the numbers will help create a baseline for the money spent on your children in the last year.

It’s important to be clear about your expenses and that you’re able to live within a certain budget, says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. “In general, the court will ask you for budgets or for you to provide records to help determine the amount of child support payments.”

While you review your child’s expenses, experts suggest examining your budget as a single parent. As a general rule, Jonathan Clements, director of Financial Education for Citibank, suggests keeping fixed costs like housing, utilities, food, insurance and property taxes at 50% of pre-tax income. The great litmus test is whether you can save on a regular basis—if you can’t, your expenses are too high and you’re probably spending too much on housing, says Clements. “You want to live within your income reasonably comfortable. Your finances will spiral out of control if everything is too tight.”

Experts suggest deciding whether you can spend the same amount of money on your children after the divorce. “If [child support] plus your income isn’t enough to maintain your child’s lifestyle, you’ll have to make tradeoffs for your child or yourself,” says de Baca.

Financially Protect Your Children

Consider insurance polices. The parent paying child support should have a life insurance policy, as well as disability insurance, recommends Stewart. The life insurance beneficiary should be the children or structure the policy such that the money is used to raise the children. Disability insurance will replace lost income if the person paying child support becomes disabled.

Negotiate medical costs. “You’ll want to look to the working parent to put the children on their health insurance,” says Stewart. Decide which parent will pay out-of-pocket expenses and how you’re going to pay and reimburse each other.

Prepare for the Future and Begin to Co-Parent 

You’ll have to make joint decisions for your children years after the divorce, says Stewart. In the future, they may have to discuss whether to send a child to summer camp of if a child can get a car, cell phone or tattoo. “You want the parents to be able to come to an agreement on these things in the future years. You cannot predict some expenses at the time of the divorce because you won’t know what can occur in the future.”

“Depending on the divorce situation, your spouse may not want to talk and the judge may decide on guideline support,” says Stewart. Parents who aren’t talking during the divorce may not talk after, which makes for uncomfortable parenting.

Although divorce is enormously upsetting, Clements doesn’t suggest funneling your emotions into the battle over finances—everybody ends up worse in this situation. “You want a reservoir of goodwill because you’ll need to ask your ex to watch the kids. If you have a nasty divorce, a flexible parenting agreement is likely to be impossible.”

Source

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Welcome to money-issue Wednesday.

We aren’t tax experts, but we really like finding information related to the tax implications of divorce decrees. It’s something that many people don’t consider or, if they do, take too lightly. Read on to see what we mean.

Dependency Exemptions — Divorce Court Orders Not Binding on Tax Court

by Peter J. Reilly

Orders signed by probate court judges don’t cut a lot of ice with tax court judges.  That is what Dylan Moody learned in a memorandum decision last week.  He was representing himself, which is understandable given the relatively small stakes in the case, a deficiency of $3,737 for 2008.  The issue was dependency exemptions for two kids.  Mr. Moody presented a copy of his divorce decision from 1997:

[Petitioner] shall be entitled to claim the children as tax exemptions on * * * [petitioner’s] state and federal income tax returns for the present year and for all subsequent years so long as * * * [petitioner] is current in child support payments at the end of that year. If * * * [petitioner] is current in child support for the year claimed, * * * [Ms. Moody] shall execute IRS Form 8332 by January 10th of the following year to effectuate this agreement.

It really does seem like it should be enough unless you have read as many Tax Court decisions as I have.  The nuances of these cases can get a bit lawyerly, so if I just had those facts, I would have wavered a bit in my prediction of the outcome.  I’m not at all surprised that it turned out to be not enough.

The Forms 8332 attached to petitioner’s 2008 tax return were not signed by Ms. Moody. Clearly, therefore, petitioner did not satisfy the conditions articulated in section 152(e)(2). As an alternative position, petitioner during the pendency of this case introduced into evidence the divorce decree in an effort to demonstrate that he was entitled to the exemption deductions at issue. Petitioner has not argued that the divorce decree was “attached” to his return as mandated by section 152(e)(2)(B); however, even if the decree is relevant to our inquiry, it was signed only by the presiding judge in that case. Such a signature does not permit a taxpayer to circumvent the explicit “custodial parent” signature requirement.

So maybe if the agreement had been signed by Ms. Moody rather than just a probate judge, he might have gotten somewhere.

The Tax Court tends to be a little sympathetic to fellow like Mr. Moody:

We are sympathetic to petitioner’s plight; however, we are bound by the statute as written and the accompanying regulations when consistent therewith.

That and a nickel will get him – Can you get anything with a nickel anymore ?

Often these cases have a long story explaining why the Form 8332 was not signed.  That is missing here.  Assuming, for the sake of argument, that Ms. Moody was at fault for not signing the Form 8332, Mr. Moody might have recourse in probate court.

My own conclusion in this area is that if a non-custodial parent can get any concession at all for passing on dependency exemptions, he or she should take it.  An extension of that is that if both parties are reasonably situated and will most likely end up leaving their estates to the same kids, the noncustodial parent should be magnanimous and just pass on the exemptions.

If, however, they really want to make a big deal about it then the noncustodial parent’s attorney should demand an executed Form 8332 as part of the “closing package”.  The custodial parent can always revoke the Form 8332 if the noncustodial parent fails to meet child support obligations.  I can hear a legion of divorce attorneys yelling “Easier said than done.”  The dependency exemption seems to carry emotional significance far beyond its financial impact.

Source

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Welcome to money-issue Wednesday.

Today we’re posting an article we found on Forbes.com that addresses a big problem divorcing couples seem to have, no matter how big or small the asset. The examples given in the article happen to have assets that are worth a lot. But don’t stop reading thinking that this article doesn’t apply to you. The lessons learned apply to everyone.

How to Handle Difficult to Divide Assets
by Jeff Landers

Divorce involves the division of marital property.  From the imported porcelain vase Aunt Martha gave you and your husband on your second anniversary to the vacation condo you both bought while you were in Costa Rica just last year, it all must be split according to the rules in your state.

Naturally, some items will be easier to divide than others. Maybe you’ve decided you never want to vacation in Costa Rica again, and you’d rather have a larger portion of the stock portfolio, instead (provided you understand the cost basis of each asset and what the tax implications will be upon a sale, of course). Or, perhaps your husband has absolutely no interest in your family’s heirloom china.

With a qualified divorce team you’ll be able to work through all these nitty-gritty details, and in most cases, negotiations should proceed in a productive and timely fashion (for the most part).

However, every now and then, the division of marital property can become enormously complex. Some couples jointly own “priceless” art or huge, multi-faceted entities, such as professional sports teams. For them, divorce proceedings can take years  . . . and unfortunately, the process can get ugly.

Case in point: The divorce between Frank and Jamie McCourt, who co-owned the Los Angeles Dodgers –or, at least, at one point, the Courts decided they did. Read this excellent re-cap of the McCourt divorce debacle, and you’ll learn that alleged mistakes in the couple’s marital property agreement (signed during the marriage) left ownership of the Dodgers in question. Remarkably, even though it appears the original agreement was for Frank to own the baseball franchise and Jamie to own everything else, certain copies of the documents actually said otherwise. Ultimately, a California court awarded Jamie half of the Dodgers, but as is so often the case in disputes like this, that initial Court ruling was only the beginning of a long and bitter story. (See hereand here, e.g.)

In sharp contrast, the co-owners of the Philadelphia Eagles recentlyannounced they’re divorcing, but said they’re committed to a continued “team effort” both on and off the field. Likewise, it seems as though Julia Calhoun and retired Microsoft executive Christopher Larson had hoped for an amicable divorce –until  emotions flared  over their art collection, valued at a cool $102 million.

What lessons can be learned from these cases involving difficult-to-divide assets?

Here are the key points you need to consider:

 Your best offense is a good defense. Marital property and/or postnuptial agreements (including the establishment of trusts) signed during the marriage clarify who owns what.

Even though the thought of divorce may be the furthest thing from your mind while you are drafting an agreement, it’s essential that you consider “the possibility” of a future breakup while you are establishing the terms. Will your assets be protected from your husband (or other unanticipated recipient) if you divorce? Are the proper safeguards in place?

 “Selling it all” to split the proceeds is not always a viable option.As Ms. Calhoun and Mr. Larson discovered, sometimes the tax implications and/or other associated costs of selling certain assets outweigh the benefits of liquidation. Make sure you fully understand all potential financial consequences before you agree to “sell it all.”

 Not all assets that are valued the same are actually worth the same.  This point can be particularly relevant if you’re deciding whether or not you want to keep your marital residence. Here’s an example to illustrate my point:

Let’s say you’re trying to decide whether to keep a $600,000 bank account or a $600,000 house that’s completely paid off. You really love the house, and you’re leaning in that direction. Great idea? Maybe. But, you need to carefully assess how the house will impact your bottom line –both now and years down the road. Even mortgage-free home ownership involves expenses, such as real estate taxes that need to be paid every year, upkeep and maintenance, fuel costs, etc.

In addition, when you eventually sell your home you may be hit with a big capital gains tax bill. Let’s assume you bought the home for $200,000, and it’s now worth $600,000. Your capital gain is $400,000. Subtract your $250,000 capital gains exclusion as a single person, and you’ll have to pay capital gains tax on $150,000. At the current capital gains tax rate of 15 percent, that amounts to a $22,500 tax bill! (And chances are pretty good that those tax rates will increase in the near future.)

Once you complete this type of analysis, the cash may look like a much better option than the house.

● Thinking Financially, Not Emotionally® is always optimal. You may think you can’t possibly live without your beachfront getaway, that antique watch or the impressionist painting you see every evening in the dining room.  But the truth is this: You can. I’m not saying you have to; I’m saying you can.

I understand that maintaining emotional distance when it comes to negotiating certain assets may not be easy. But if you can successfully do so, you’ll put yourself in a better position to strategically manage your marital property and develop a comprehensive plan for financial stability and security in the future.

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We posted a similar article, by the same author, about a month ago. But since posts get lost in blogs and the subject resurfaced again, we thought that we would post this version for those new to our blog.

Divorce is usually painful, and it can be a career killer or booster, experts say.

Besides the stress potentially hurting their work, those going through divorce may find their employers subpoenaed for information, their businesses in jeopardy or their chances for a promotion disappearing.

“You put a catastrophic or significant stumbling block in someone’s life and it affects their job,” said Ken Gordon, a partner in Brinkley Morgan in Fort Lauderdale, which specializes in family law.

Divorce often is compared to a death.

“But it’s the life that they knew or the dream that they had, which is what’s dying. It feels like a real death,” Gordon said.

Phillip Lytle, a Hollywood, Fla., police officer, went through a divorce two years ago.

“It was tiring and stressful,” said Lytle, 54, who was married for 20 years.

From separation to a final settlement, the divorce took about 18 months. Lytle took refuge in the support of co-workers and friends.

“That whole process is draining,” he said.

Jill Scott was a 19-year-old nurse when she met her future husband, a doctor. Twenty years later, with four children, she was facing divorce.

But Scott, 50, followed her passion for pets and now owns several businesses, including Animal Hospital at the Market in Wellington, Fla. She struggled with reinventing herself, but now “I’m going after my career gangbusters.”

Elinor Robin, a family mediator in Boca Raton, Fla., said people often do better in their careers after divorce.

“In the long run, divorce may ultimately prove to be a career booster. — When the focus is off the marriage, the focus can be on the career,” she said.

But family lawyer Stacy Beaulieu, in Delray Beach, Fla., said some clients find that divorce restrictions can hurt their careers, like being unable to move out of state because of children.

 Written by
Marcia Heroux Pounds
Sun Sentinel (Ft. Lauderdale, Florida)
Related articles

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Welcome to money-issue Wednesday.

Maybe this post should fall under the “don’t try this at home”category. We’re posting it anyway because if nothing else, it shows how critical it is that you get the right wording in your divorce decree.

Are Divorce Attorneys Trying to Wipsaw the IRS?

By Peter J. Reilly

Broadly speaking there are three types of payments connected to divorce. They are property settlements, child support and alimony. The first two do not create taxable income or deductions. Alimony, on the other hand, is deductible against adjusted gross income to the payer and includable in the income of the payee. If the payer is in a higher tax bracket than the payee, characterizing payments as alimony can be a win-win, provided the net tax savings are shared. There are rules to prevent payments that are, in essence, child support payments or property settlements from being characterized as alimony. Suffice it to say, that the rules are a little complicated.

The rules are not so complicated that divorce attorney should not understand them. There are enough Tax Court cases, where people are blind-sided, though, to make me think there are quite a few divorce attorneys who don’t understand them or even have a vague idea that the rules exist. On the other hand, cases like that of Sharon Schilling make me wonder whether there might be divorce attorneys, who are playing the rules to draft deliberately ambiguous agreements to whipsaw the IRS.  Wouldn’t it be great if the payer could deduct without the payee including in income ?  Talk about a win-win.  Here is the story:

Neither the separation agreement nor the divorce decree specified that petitioner’s ex-husband’s monthly support payments to her would terminate upon her death.

On her 2006 Federal income tax return petitioner reported zero taxable alimony income.

The agreement specified zero child support, which as you might expect is less than the guidelines.  The long term spousal support accounted for the variation from the guidelines.  Now the portion of the spousal support that turns off when a child turns eighteen is clearly disguised child support.  So the IRS went along with Ms. Schilling only being taxed on $1,925 per month.  How did she get to zero though ?

She got to zero because there was no specification that the payments cease in the event of her death.  That makes the payment stream look like a property settlement.  Former Major League baseball player, Dave LaPoint was denied alimony deductions under that theory.  The lack of a death termination clause is not determinative, though.  Under the law of the state of Ohio, spousal support payments terminate on death, which is good enough to preserve alimony treatment.

I think somewhere deep in my heart there is a natural naivete that makes me think that people want to have clear and unambiguous agreements.  That inner good doobie thinks that the divorce attorneys should be drafting an agreement that has a single unambiguous number that is deductible to the payer and taxable to the payee.  Much of my time is spent on partnerships, which can have rather challenging agreements to interpret, but I know when I am done, that all the income and deductions will be allocated to somebody. 

 The individual returns of divorced couples are usually not prepared by the same person though.  Closing a deal where one could arguably deduct payments that the other might arguably not report might not seem like such a bad result.  Maybe those divorce attorneys are smarter than I thought.

Original Article

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