“Research shows that there are conditions under which an individual is willing and quite happy to pay $28 for a $20 bill at auction. Some have written about how we can apply Einstein’s theory of relativity to human decision-making processes. The technology now exists to help us analyze the neurocognitive effect of receiving expert financial advice.”

The quote above has been excerpted from the most recent article in a series I am writing along with Robert A. Simon, Ph.D. discussing the application of Behavioral Finance to Financial Decision making processes. These articles are written specifically for the Financial Planning and Advisory community. Please click the picture below to be directed to MorningstarAdvisor.com and read the whole article.

Stay tuned for more information on upcoming articles planned for individuals, families and Family Law practitioners.   Feel free to comment on the MorningstarAdvisor.com website.

Justin A. Reckers can be reached at:

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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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 The general idea is that there is a growing need for Financial Advisers experienced in divorce to help individuals and couples navigating the difficult financial decisions necessary during the division of a marital estate. I agree with the premise but have real concerns with some of the statements included.

 The Premise

The economics of divorce have changed and will continue to do so. The decision of WHO gets to keep the home has never been easy. Now it is also difficult to carry out the agreed upon plan. Deteriorating real estate markets and nonexistent financing alternatives have left divorcing couples faced with decisions family law attorneys are not experienced in advising. Constantly changing tax law has created financial concerns such as the Capital Loss Carryforward, Dependency Exemption, Alimony Recapture, Child Contingency Rules and Section 1041 governing tax free transfer of assets pursuant to divorce. Attorneys and their clients ignore these at their peril as they have real economic value and consequences. Federal Tax Law supersedes state Family Law so relying upon family code for guidance will often lead to inappropriate and costly conclusions. There are many examples of the value of Divorce Financial Planning and a Financial Adviser in divorce proceedings throughout my website.

 My Concerns

The article interviews various Financial Advisers providing Divorce Financial Planning advice in various divorce processes. There are multiple options available to a divorcing couple as elucidated in the articles and on my website. They are Litigation, Collaborative Divorce, Mediation and Do-it Yourself. No matter which process is chosen, Divorce Financial Planning is valuable to the parties and the attorneys. In Collaborative Divorce or Mediation, a Financial Adviser may work as a Neutral adviser to the family. Here in lies my concern with the article. The Reuters article puts forward “Unlike in a collaborative divorce case, a financial neutral in a mediated divorce can take either party as a client after the divorce.” I disagree.

1. Let’s look at the definition of the word NEUTRAL –“belonging to, favoring, or assisting no side in a war, dispute, contest, or controversy”.

2. The following is an excerpt from the International Academy of Collaborative Professionals (IACP) ethical standards for practitioners. These are aspirational as the IACP does not have disciplinary authority of any kind. Key areas are underlined for emphasis.

                    10.1.  A Collaborative practitioner who serves on a Collaborative case in a neutral role shall adhere to that role, and shall not engage in any continuing client relationship that would compromise the Collaborative practitioner’s neutrality. Working with either or both client(s) or with their child(ren) outside of the Collaborative process is inconsistent with that neutral role.

                  A. A Collaborative practitioner serving as a neutral financial specialist in a Collaborative case shall not have an ongoing business relationship with a Collaborative client during or after the completion of the Collaborative case, but may assist the clients in completing the tasks specifically assigned to them by the clients’ written, final agreement. Such assistance may not include the sale of financial products or other services.”

3. Divorce Mediation remains completely unregulated at this time. There is no requirement for a professional to be trained in formal course work to be a mediator. You do not have to be an attorney, financial adviser or any other discipline. There is no expectation of competence in any specific practice. There are great resources for mediation training and a few organizations that again have aspirational guidelines for training. Since there are no guidelines for training there are no guidelines for the relationship a Mediator or Neutral should have with their clients.

4. The nature of divorce with the court’s continued jurisdiction over modification of various orders requires a professional to assume their relationship continues with the family even after a judgment of divorce has been entered.

Why does the article propose that the definition differs in the context of a Collaborative Divorce versus a Mediated Divorce? The Definition of NEUTRAL remains the same in either process. I suspect it is because there are no stringent guidelines available for a Financial Advisers acting as a Neutral in a mediation setting. In the absence of guidelines we must live with our personal ethics. I believe an adviser calling themselves a Neutral during a divorce or any dispute  resolution process must adhere strictly to the definition of Neutral and must always assume their job may never be done in that Neutral role.

The Certified Financial Planner Board of Standards defines a “conflict of interest” as when “a certificant’s financial, business, property and/or personal interests, relationships or circumstances reasonably may impair his/her ability to offer objective advice, recommendations or services.” Consider the case where the “Neutral” adviser anticipates a relationship with one party post divorce and that party must make a decision to keep the house or take a cash buy out. The adviser stands to profit from the client’s decision to take cash as the adviser can manage that cash and earn a fee for doing so. If they take the home the adviser’s opportunity to manage assets is depleted.

I have had various opportunities to work with individuals and families in a Neutral role. It is common for one party to seek post divorce relationships with an adviser so integral in the difficult transition of divorce. They are always disappointed when I re-iterate that I am precluded by my ethics as a Neutral adviser from working with either party post divorce. If advisers wish to be a part of the “Growing need for advisers in out-of-court divorces”; they need to develop clear ethical boundaries for themselves. Maintaining a relationship with one party after having held yourself out as a Neutral for a couple is the definition of Conflict of Interest in my book and runs counter to the Ethical standards of a CFP®, CDFA™, or any other discipline.

Justin A. Reckers can be reached at:

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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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Justin Reckers, Certified Financial Planner, Certified Divorce Financial Analyst and Managing Director of Pacific Divorce Management  has joined Licensed Marriage and Family Therapist, Nancy Fagan of The Divorce Help Clinic and attorney Shawn Weber of Brave, Weber and Mack to develop a monthly workshop/seminar to help Men prepare for and cope during the divorce process and thrive afterwards. Here Justin and Nancy are featured on San Diego Fox 5 Morning News speaking with Raoul Martinez about the “Walk Away Wife” trend, No-Fault Divorce in California and Divorce Financial Planning tips including Negotiating the Family Home and the “Marriage Severance Package”. Our interview highlights upcoming Men’s Divorce Seminars and Workshops we offer in San Diego.

Go to The Divorce Help Clinic website http://www.thedivorcehelpclinic.com/menonly.html to sign up for upcoming workshops.

Justin A. Reckers can be reached at:

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 can be reached at:

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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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 can be reached at:

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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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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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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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