March 4th, 2010
Epstein credits are rights to reimbursement to which a party may be entitled as a result of the payment of community obligations since the date of separation. (In re Marriage of Epstein (1979) 24 Cal.3d 76)
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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March 1st, 2010
Priorities change as people move on with their lives after divorce. Many parents are faced with the need to downsize their lifestyle including the family home. The hours spent on home improvements and maintenance for a full-sized home are more of a burden. As kids move on, there’s all that unneeded space. The monthly bills may simply be more than one parent can handle alone.
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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March 1st, 2010
Finding ways to stretch the family dollar is often the most difficult task in adjusting to life post divorce. Here is the start of a guide for beginning the process of adjusting to a new cash flow reality.
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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January 4th, 2010
The Hidden Asset In Plain Sight
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
_________________________________________________________
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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November 25th, 2009
Social Security, Retirement Benefits, and Divorce
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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Tags: Divorce Financial Planning, Financial Life After Divorce, Justin Reckers, Pacific Divorce Management, Post divorce financial planning, post divorce wealth management, Retirement Planning and divorce, Social Security
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