The "Kitchen" Divorce

Clients are increasingly asking, “Can I afford a divorce?” or "Should I get a divorce?" Maybe, mediation is the way to go. If you've decided, a CDFA can help you plan for the new you.

The loss of alimony deductions puts more money into Uncle Sam’s pocket and leaves less cash for the recipient of spousal maintenance. With the inception of the Tax Cuts and Jobs Act (TCJA), alimony for divorce settlements drafted after 2018 are now taxable to the payor spouse who is often in a higher tax bracket than the recipient. So, how about utilizing an IRA asset to create a lump sum payment? Under the new law, IRAs provide new opportunities in alimony planning if certain conditions exist. Hypothetical Example: George and Harriet have been married for 25 years. They have completed the division of their assets. In addition, their marital settlement agreement requires George to pay spousal maintenance for 10-years at $10,000 per year. George’s income tax bracket is 35%. Harriet’s tax bracket is 12%. Consider the following: If George pays Harriet her $100,000 periodically over 10-years, his tax liability at 35% will be $35,000. His out-of-pocket increases to $135,000. Alternatively, George makes a lump-sum payment by rolling over $112,000 of his remaining IRA assets to Harriet. He’s covered his $100,000 alimony obligation plus added $12,000 to cover Harriet’s taxes for when she takes distributions under her separate name By transferring the income tax liability back to Harriet by means of an IRA Rollover, George potentially saves $23,000 as follows: $ 35,000 – Tax liability if George pays alimony overtime (12,000) – Advanced to Harriet to cover her taxes $ 23,000 – Potential Tax savings for George This strategy works best when the receiving spouse has time before taking withdrawals. This allows the continuation of possible tax-deferred growth on a retirement asset. A Certified Divorce Financial Planner (CDFA®) can assist you in determining your preferred settlement strategy, by walking you through 10 and 20-year projections. We can evaluate multiple options using advanced divorce financial planning techniques that are not available when solely working with an attorney or other professionals. Admittedly, there are pros and cons to consider when calculating lump sum marital support as part of your divorce planning. For example, what kind of IRA is it and can it be rolled over? Is this strategy appropriate for the case at hand? Also, what are the possibilities of the receiving spouse remarrying? Are there other conditions that may cause an early expiration of the payment term? I’ve also worked with divorcing clients who have a prevailing need for closure above all else. They’ve simply reached their limit and can go no further. When discussing marital settlements, funding a lump sum maintenance payment with an IRA may provide the financial support and emotional release these individuals require. About CDFAs: CDFA professionals often work as third-party neutrals during mediation, educating and enabling the client towards better decision making. We also team with attorneys who seek support for individuals in adversarial situations by requesting our divorce forensic services or investment product knowledge. Our training and certification are governed by the Institute of Divorce Financial Analysts (IDFA™) For further information or to request a complimentary strategy session, please contact Diana Longo, CDFA® at http://www.innovativedivorce.com About Diana Longo: Frustrated by the lack of insight and questionable distribution decisions made by financial clients facing divorce, Diana set her goals to become a CDFA professional and Mediator. In 2016, she founded Innovative Divorce Services LLC. Diana views her work as an opportunity for individuals to gain reconciliation and to prepare for their future. She is a continuing legal educator to attorneys with approved by the Superior Court of New Jersey. She is an active member and education presenter for the New Jersey Association of Professional Mediators. Diana also participates in the CFP® Board’s mentorship program, assisting aspiring certificants towards reaching their professional goals.

2019 will be the year of greatly anticipated Retirement Tax Reform. There have been multiple bills and proposals affecting Retirement Reform facing both houses in Congress. Among them are: • RSSA – Retirement Security and Savings Act of 2019 • RESA – Retirement Enhancement and Savings Act • SECURE – Setting Every Community Up for Retirement Enhancement Act of 2019 Each chamber (the Senate and the House of Representatives) will vote on their respective bills. After achieving affirmative votes, members from each house will form a conference committee to meet and work out the differences. A common theme in these Congressional Proposals is to delay retirement by allowing us to save for a longer period in order to meet the demands of our increased longevity and higher lifestyle expectations. Two very important proposals are: 1. To increase the RMD (Required Minimum Distribution) age from 70-1/2 to 72 (or possibly 75). 2. To remove of age limitations for Traditional IRA Contributions (allowing retirement contributions to continue as long as you wish beyond age 70) But how will these proposals affect our divorcing clients and how they mediate settlements? Splitting retirement assets and providing for retirement are primary drivers in divorce mediation, particularly for “Grey Divorces” (marriages lasting more than 20-years). I anticipate new expectations and discussions centering on later retirement ages and our ability to increase our savings that will become an important part of future divorce negotiations. Attorneys often use Social Security’s eligibility age as the benchmark for retirement. This is going to change. For example, 1. What will be final effect on a settlement agreement if the obligor or recipient is expected (or required) to continue full income for an additional 2-4 years as part of the agreement? 2. How will the increase in retirement savings affect taxation and net-income in future years when discussing the need for future support? 3. How much longer will the continuing employment, alimony or its savings allow the resident spouse to stay in the house? As a Certified Divorce Financial Analyst® and Divorce Mediator, I help my clients and their attorneys to find the most tax-efficient settlement. This often leaves them with more money in their pockets. While there are no specific answers to the questions I listed above, clients deserve to understand the increased options and choices that a divorce financial planner can provide.

As a Certified Divorce Financial Analyst® and Divorce Mediator, I ask every divorcing client the following question: Do you want your “almost” ex-spouse to be responsible for your medical decisions in the event of an emergency? Most clients resoundingly answer, “NO.” Yet, the task of completing of new estate documents often ends on the bottom of an overwhelming “To-Do” list. I understand why. Divorce is a crushing experience. However, I must emphasize the importance of creating new estate documentation in a timely manner. This includes your new Will, Power of Attorney, Healthcare Directive (aka Living Will) and if applicable, the formation of Trusts. Children also require completed guardianship designations. I’ll use myself as an example. I am a cancer survivor of 8 years. However, in July of 2011, I was called out of a business meeting to receive a call from my physician. Fast surgery was imminent. The one consolation I had during this emergency was that I had my wills, health directives and power of attorney already prepared. I had to prioritize other issues. I don’t know what I would have done if I had run around under that much pressure to deal with executing legal documents! I am one of the lucky ones! Surgery was successful. I look forward to good health and close relationships with my family and clients for many years to come. However, as a professional Mediator and Certified Divorce Financial Analyst®, I feel so passionately about this subject that I include a special requirement in every Memorandum of Understanding that I write. It states that both parties that must complete new estate documents within 90 days of marriage termination. Beneficiary changes are often forgotten or delayed, so I also include this type of information within my documentation according to the agreements reached by our mediation appointments. I thank you for your kind patience. Please seek an estate attorney for further legal advice.