Epstein Credits are most commonly incurred when one party pays community debts using their spearate property income.

If you are claiming the credit. – Keep your receipts, bank statements and other records. It is common to see divorce proceedings last years and create a long trail of records. Large bills pile up quickly for financial experts if they must recreate the paper trail.

Seek professional advice if you believe you need to consider this during your divorce.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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A CERTIFIED FINANCIAL PLANNER™ professional, or Certified Divorce Financial Analyst  may not be able to help you sort out what dishes and furniture to sell or give away, but he or she would make a good first stop in developing a complete downsizing strategy involving assets, investments, career and overall financial lifestyle planning.

Handled correctly, downsizing can save a lot of money. Selling a larger home – especially if it still has a mortgage – in favor of a smaller house or condo can potentially save tens of thousands of dollars in interest payments over time while still building equity. The earlier the process starts, the better.

Get advice first: Downsizing should be a holistic process, a chance for a check-up of your overall finances while identifying things, expenses and habits in your life that you can jettison. A CFP^® professional can give you a push by asking important questions that will get you to a better place financially. It’s helpful to set up a plan to extinguish debt in all of its forms and move on to a check-up of savings, investments and estate matters.

Start thinking about new places to live: Today’s divorcees don’t necessarily have to move to predictable local condominiums and apartments filled with the neighborhood’s recently divorce parents. Decide what kind of home you could see yourself living comfortably now and when your children are grown. To get you thinking and hone your expectations, start looking at local newspaper ads and visit websites like Realtor.com to seek information about current listings. Keep your finger on the pulse of the neighborhood so you can be sure to know when a good deal becomes available.

Talk to your family: It is important to discuss expectations with your children. Many parents use their children as a reason to place themselves under financial hardship in order to retain a family residence. Chances are good that those same children when given the choice, will choose to see their mother happy and comfortable in a smaller, more affordable home, over watching her rip up floor boards to heat the McMansion.

Start weeding: Physical downsizing isn’t something that’s done quickly. Give yourself some time to go through each room in your home and prioritize what you’re really going to need if you move to a smaller place. Make a list of what each party will take to their new residence, what you hope to give to friends and family members and what you’ll donate or trash. Time will give you more opportunities to put good, usable items in the hands of people who could really use them. Develop a recordkeeping system so you won’t forget any decisions you’ve made along the way. You might want to set up a separate area for family photos and other keepsakes that have high emotional value and an egalitarian system for who will get what.

Don’t start upsizing later: When you do move, chances are you will need to invest in some new household items or possibly furniture to match new surroundings. Try to avoid going overboard. Make a permanent life decision not to start re-using credit cards or mortgage debt.

Justin A. Reckers CFP®, CDFA™, AIF®

858.509.2329

jreckers@pacdivorce.com

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Create a budget with the goal of achieving the following results.

1. Detail all income and expenses

• Determine your net disposable income from employment, support and any other sources.
• Get your checkbook register, checking account statement and credit card receipts.
• Categorize your expenses into home, food, entertainment, etc. on a monthly basis.
• Create a separate budget for child related expenses
• Categorize your expenses between Fixed and Discretionary.
• Determine your Total Spending.

2. Create guidelines for your spending in each category. Remember these are just guidelines. If you treat them like rules you must follow you will miss the benefit associated with realizing you have made a positive change.

3. Create a snapshot of your financial world.

• Compare your Net Disposable Income to your Total Spending.
• Once you have the first snapshot of your income and expenses you can begin planning to make changes.
• Decide what constitutes a realistic budget.

a) Compare your children’s budget to the National Averages here http://www.cnpp.usda.gov/Publications/CRC/crc2008.pdf

b) Determine your debt to income ratio by determining what percentage of your monthly income goes to paying debts. If it exceeds 28%; consider trying to reduce your debt load.

• Find where you can cut discretionary expenses. Discretionary expenses include entertainment and dining out and offer the best source of budget cuts.

It will be helpful, even necessary for some folks, to work through this process with a Financial Planner. You are not alone in your dread for budgeting. Humans are built with the evolutionary skew towards surviving today at the expense of tomorrow.

Justin A. Reckers CFP®, CDFA™, AIF®

858.509.2329

jreckers@pacdivorce.com

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One of the greatest challenges for attorneys, mediators, and judges in family law property division cases lies in the first step of that process; identifying the assets to be divided. We seek verification of and evidence to determine if assets are community, separate, or co-mingled property. Some assets are evident and some are concealed despite the best efforts of those responsible for uncovering them. Still another group of assets hides in plain sight simply because practitioners may not be looking for them. Losses in investment portfolios will bring an especially obscure type of community asset into play in coming years like we have not seen in decades.

From September 2007 to March 2009 the S&P 500 lost 57% resulting in a massive loss of American wealth. An unfortunate reality of market psychology is many of the people who lost money over that period locked in their losses during 2008 and 2009. Locking in those losses may have created a marital asset known as the capital loss carry-forward.

What is a Capital Loss Carry-Forward?

A capital loss carry-forward is a federal tax law that allows taxpayers to “carry forward” losses realized in one year to be used against income in later years. The rule exists because the IRS allows taxpayers to deduct capital losses only up to the level of their gains in any given year. The IRS does not believe this rule encourages investment in the growth of the American economy so it was decided taxpayers could spread the deductions over future years if necessary to recoup their realized losses. The reduction in future tax liability should be considered an asset for division to the extent the loss was incurred on a community asset.

Federal tax law states the reduction in future tax liability belongs to the person who realized the loss. From a titling perspective this means the capital loss carry-forward must follow title of the asset that created the loss. This rule does not always match with the goals of family courts. During a marriage the deduction would likely be taken on a joint tax return regardless of account title. In the years subsequent to divorce; losses related to an account held in the single name of a former spouse would escape the reach of the spouse not on title. There will be cases in the coming years where the value of these capital loss carry-forwards reaches six figures for high asset cases.

How Does This Apply To a Divorcing Couple?

Consider this example: An individual brokerage account titled in Husband’s name and funded entirely during marriage held $2,000,000 at the end of 2007. Between 2007 and March 2009 the account was invested entirely in the S&P 500 and realized capital losses of $1,140,000. The community had no other capital gains or losses in 2009 resulting in a capital loss carry-forward of $1,140,000. The couple was divorced on January 1st 2010. Over the next two years the stock markets rebound dramatically and both husband and wife, now divorced, realize capital gains in the amount of $500,000 each in 2011. Due to the fact the capital loss carry-forward follows title to the assets that create it, Husband would be entitled to the entire $1,140,000 of deductible losses to offset his gains resulting in $0 of taxes. Wife would have a federal income tax bill for $75,000 based on a generalized 15% effective federal tax bracket. Wife would need to realize $85,500 of federal income tax liability just to get back to where she started at the end of 2007. Based on the example the total estimated value of the capital loss carry-forward to the community was $171,000.

If the capital loss carry-forward is not treated as property in a divorce settlement it will be allocated under tax law according to title. This is likely not an equitable division. The capital loss carry-forward should be considered marital property when it arises from the sale of marital assets. Unfortunately, the family court lacks jurisdiction to change the title of the loss from one spouse to another. The only way to achieve an equitable division on this issue is to estimate the value of the tax benefit and award it to the titled spouse as part of the greater asset division. This would allow the non-titled spouse to receive an offset of other assets with similar value. Effective tax rates vary based on the specific circumstances of a taxpayer and are likely to change so the valuation should be performed by an experienced financial professional.

Justin A. Reckers CFP®, CDFA™, AIF®

858.509.2329

jreckers@pacdivorce.com

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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Social Security in the United States refers directly to a lesser known federal Old Age, Survivors and Disability Insurance program or OASDI. The program was originally rolled out in the 1930’s in an attempt to limit what were seen as dangers to the American way of life such as increased life expectancy, poverty, and fatherless children. So the Social Security Act, signed in 1935, created social insurance programs to provide benefits to retirees, the unemployed, and as well as a lump sum benefit to the family at death. Many amendments have been made since the original Social Security Act of 1935. Most importantly; Medicare was added in 1965. The Social Security Act of 1965 also recognized for the first time that divorce was becoming a common cause for the end of marriages and added divorcees to the beneficiary list.

When Can I Collect Benefits?

The earliest age at which reduced benefits are payable is 62. The age at which full retirement benefits are available is dependent upon the taxpayers age. An increase of regular retirement age was enacted to reduce the amount of benefits payable. For those currently over age 70 the normal age was 65. Anyone born after will fall somewhere on increasing scale which climbs incrementally to age 67 depending upon birth date. Anyone born after 1960 must reach age 67 for normal retirement benefits. Delaying receipt of benefits will increase a taxpayer’s benefit until age 70.

As A Divorced Spouse What Do I Get?

Divorced spouses are eligible for benefits equal to one half of the worker’s benefit if they were married for 10 years have not remarried and are at least 62 years old. This is called a derivative benefit. A spousal applicant must wait until the worker has reached retirement age, 62, in order to apply for benefits. The worker is not required to have applied for benefits in order for the ex-spouse to apply for spousal benefits. They are not entitled to increases for benefits taken after normal retirement age. If a worker has died and the ex-spouse has reached full retirement age they can receive 100% of the worker’s benefit as survivor benefits.

If an applicant is between age 62 and their normal retirement age; the application for benefits will be based on the applicant’s earnings record. If one half of an ex-spouse’s benefit is greater than the applicant’s benefit on their own record; the applicant can choose to take whichever is greater. If you wait until your normal retirement age and file for spousal benefits you can continue to accrue benefits and enhancements for delaying your own retirement up until your age 70.

An ex-spouse’s receipt of derivative benefits on the worker’s record does not reduce the worker’s benefits. It is even possible for more than one ex-spouse to collect on the worker’s derivative benefits. This could lead to as much as 500% of the original benefit being claimed by the five ex-spouses.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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Retirement plans such as 401(k)’s, defined benefit pension plans, and other hybrid employer sponsored retirement savings vehicles are often among the largest assets to be divided during the division of a martial estate. Many of these plans are governed by a set of federal law known as the Employee Retirement Income Security Act of 1974 or ERISA. ERISA allows an Alternate Payee such as a former spouse to receive a portion of the employee’s benefits with a court order. A Qualified Domestic Relations Order (QDRO) is the court order required to give notice to a retirement plan administrator that an Alternate Payee is entitled to a portion of the plan. Without a QDRO the plan administrator cannot legally make payments to the Alternate Payee.

Who Should Draft My QDRO?

Drafting of QDRO’s is an important step in the divorce financial planning process. Financial planners have specific and far reaching knowledge of retirement plans and the underlying laws that govern them but are ill-equipped for drafting the actual Domestic Relations Orders. The drafting process is best left to a professional specializing in drafting such documents. These professionals often have experience working for the large plan administrators and have inside knowledge of the processes.

For a QDRO to be valid and accepted by both the court and the plan administrator it must contain specific requirements under the law as well as be tailored to that specific plan. Retirement plans may even reject court certified orders that were not pre-approved by their own staff. For this reason it is necessary for a draft to be sent to the plan administrator for pre-approval prior to seeking court certification.

How Will a Financial Planner Help Me?

Divorce financial planning will help each party to understand the process and be sure their rights are protected in the draft documents. The alternate payee and plan participant will need to consider their options for managing benefits from a defined contribution plan. Benefits should be invested in securities in order to earn returns. Tolerance for risk and time horizons may have changed for both parties and re-visiting these topics is vital to post divorce success. It may be worth discussing the options for distribution of benefits from a plan should cash be needed at the time of the division. It is also vital to understand the lump sum, annuity, and other options available for benefits under a defined benefit plan. These are ideal topics to pursue in discussions with your financial advisor during the divorce financial planning process.

The QDRO Process

The QDRO process can take many months to complete which makes it increasingly important that the process is started as soon as possible. Following is a timeline of the process you might expect when undertaking the filing of a Qualified Domestic Relations Order.

1. QDRO Specialist drafts the Domestic Relations Order in accordance with specific plan provisions and the agreements reached by parties to the proceedings.
2. The Draft Qualified Domestic Relations Order is submitted to the Plan Administrator for pre-approval.
3. The Plan Administrator responds to the drafter with any necessary revisions.
4. Requested revisions are made to the QDRO and the revised copy is sent to parties and attorneys for review and signature.
5. The approved QDRO is signed by both parties and sent to the court for the judge’s signature.
6. A copy of the singed and court certified QDRO is sent to attorneys or parties.
7. The certified singed copy of the QDRO must be sent to the Plan Administrator for processing.
8. The Plan Administrator will send a letter to the participant and alternate payee with instructions on how to access the plan and a timeline for completion of the division. It may be necessary for the Alternate Payee to stipulate an outside account for benefits to be rolled to.
9. The Plan Administrator calculates the division of the plan pursuant to the QDRO and creates a separate account for the Alternate Payee.
10. The Alternate Payee will receive confirmation that their benefits have been partitioned into a separate account or rolled over into the account previously stipulated.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

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How do I get the credit?

The American Opportunity Credit offers a credit of 100% on the first $2,000 of tuition, fees and course materials paid during the taxable year plus 25% of the next $2,000. To be eligible for the credit the taxpayer filing married jointly must have modified adjusted gross income of less than $180,000. Between $160,000 and $180,000 a phase-out will apply. Cut the dollar amount in half for single filers. The Hope Credit was completely phased out at $116,000 for a married taxpayer and $58,000 for single.

How does the tax credit work?

A tax credit is a dollar for dollar reduction in total tax in a given year. The American Opportunity Tax Credit is also a refundable tax credit. This is not true for many credits, meaning that if the credit results in an overpayment of tax, up to $1,000 can be refunded directly to you. The credit is available per student.

Keep in mind…

As of today, the American Opportunity Tax Credit is only set to apply for tax years 2009 and 2010. We can only speculate whether it will be extended or revert back to the original Hope Credit. The Hope Credit was available only to those who claimed the student as a dependent on their income taxes regardless of who paid the fees. This leaves “non-custodial” parents out in the cold as far as the credit is concerned. A parent who paid $4,000 of tuition and fees for their child and met the AGI limits would be entitled to a $2,500 credit. If that same parent were divorced and agreed to allow their former spouse to claim the child as dependent for tax purposes; they forfeit the tax credit. It is unclear to me at this time if the dependency requirement remains for the American Opportunity Credit as all published material I have found leaves the question un-answered.

Divorce Financial Planning

Planning for Dependency Exemptions and other tax issues is a regular part of financial planning for divorce. The IRS allows the transfer of dependency exemptions to a “non-custodial” parent via form 8332 but has not allowed a “non-custodial” parent to claim other child related tax credits to date. This makes a conversation on the topic necessary in any case where children are involved. Understanding tax credits and deductions and the planning that can maximize the value to your family is part of the divorce financial planning process. Failing to consider the American Opportunity Tax Credit alone could leave $5,000 per child on the table and potentially more if extended beyond 2010.

Consider the Following Family

Twin sons age 18 are both full-time students. They just started freshman year of college in September of 2009, one at University A, the other at the University B. Parents are currently working through divorce proceedings and plan to split the cost of the children’s undergraduate college education equally.

Assume each dependency exemption is worth $3,650 in 2009, 2010, 2011 and 2012.

Assume the American Opportunity Tax Credit is worth $2,500 per student in 2009 and 2010.

Assume the Lifetime Learning Credit is not valuable to either party because they exceed phase-out limits in 2011 and 2012 and the Hope Credit remains available for the first two years of college only.

Assuming that each parent is in a 28% effective tax rate; the value of the dependency exemption and American Opportunity Tax Credit together over the four year period is $18,176. Failing to negotiate these points in your divorce proceedings leaves this money on the table.

Additional credits and deductions subject to child custody arrangements include the Child Tax Credit, Tuition and Fee Deductions, and Earned Income Credit. I have not considered these in the analysis above.

Conclusion

This kind of planning is valuable to anyone with children not just those in divorce proceedings. Our sister company, Pacific Wealth Management, offers comprehensive financial planning services including college funding strategies for individuals and families.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

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Previously, the Service allowed a non-custodial parent to claim an exemption for a child if the custodial parent signed a written declaration releasing claim to the exemption and the non-custodial parent attached that declaration to their return. IRS Form 8332 is available to document this release.  In Publication 501, Exemptions, Standard Deduction, and Filing Information, the Service has stated that a non-custodial parent may attach certain pages of a divorce decree or separation agreement, instead of Form 8332, if the attached pages include the information required on the form.

A problem arose in the ambiguous language of the actual code.  It stated the release of a claim must be on Form 8332 or, if not on such form, must “conform to the substance of such form.” The ambiguity begat creativity and family law attorneys began drafting the declarations into settlement agreements. Taxpayers would then simply need to attach a copy of their divorce decree. This eliminated the need for Form 8332 and therefore, the need to speak to your ex-spouse every year requesting a signature.

The recent memorandum was directed specifically at the question whether it was allowable for a non-custodial parent to prove their right to the exemption by submitting proof of satisfaction of a condition in a divorce decree. The condition was that the non-custodial parent may only claim the exemption if current in his or her support obligation. This raises the problem of substantiation.

In the June 19 memo, the Service concluded the release must be on Form 8332 or must be a document conforming to the substance of Form 8332 and has as its only purpose the release of a claim to exemption. A divorce decree, separation agreement or parenting plan allowing a non-custodial parent to claim an exemption for a child, only if a condition is met, does not conform to the substance of Form 8332.  For tax years beginning after July 2, 2008, a settlement agreement, decree or judgment may not be used by a non-custodial parent to substantiate a dependency exemption for a child, even if accompanied by a statement intending to show the condition in the decree or agreement was met.

These regulations reflect the Service’s concern about substantiating a claim to a dependency exemption for a child and are intended to avoid problems of proof, minimize controversy, and minimize costs to parents.  The change does not preclude a non-custodial parent from claiming the exemption; it simply requires more care be made to make sure this is accomplished.

It may be helpful to include language stipulating the custodial parent will execute Form 8332 on a yearly basis. This follow up challenge can be alleviated by insuring the newly single parents consult a financial advisor with specific experience in the field of divorce financial planning. Two parents claiming an exemption for the same child will end in IRS audits for both and possibly bring a settled case back into the courtroom.  The Service has clearly stated it is not permissible to include any language that could require substantiation.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

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In January 2009; the U.S. Supreme Court ruled (Kennedy v. DuPont Plan Administrator) against a woman suing her late father’s pension plan for money her mother received, even thought the mother had forfeited her rights to the pension in their 1994 divorce. The Supreme Court determined the beneficiary designation form and the procedures set under the plan were sole determinants of benefit distribution.

Employers are required to pay benefits as stated in the original beneficiary designation form, in spite of a divorce decree.

It is important for all divorcing individuals to revisit their estate planning, including beneficiary designations, wills and trusts.  Changes must be made to retirement plans in accordance with the rules set forth by respective employers.  Otherwise, children and/or new spouses may not be eligible to receive benefits.

Remember the following points:

1.  Wills have no precedence/jurisdiction over the beneficiary designations of IRAs, 401(k)s, insurance policies and annuities.

2.  It is always important to designate a contingent beneficiary for these accounts. Otherwise, if a  primary beneficiary predeceases the owner, the account will need to be probated.

3.  Naming a minor as a beneficiary sends estates straight to probate.  Probate courts must supervise distributions left to minors.  Establishing trusts in the children’s name will bypass probate.

4. Changing beneficiaries can often be done online or with the assistance of a financial advisor.

If you do not have a financial advisor with expertise in divorce, please consider obtaining one. Divorce is likely to be the most difficult financial transition you will ever experience. Professional guidance and support during and after this emotionally charged time will prove invaluable.

Justin A. Reckers CFP®, CDFA™, AIF^®
858.509.2329
jreckers@pacdivorce.com

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