Divorce Consulting FAQ

 

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Divorce

Equitable Distribution

Taxes

Divorce

Below are some questions commonly asked by those who are facing the end of a marriage. While some of these questions may require a more detailed explanation, the answers represent a general response, and are not based on specific circumstances.

Will I be able to receive alimony?

The tests for alimony (or maintenance/spousal support) include several factors; however, keep in mind that no two cases are alike. You need to seek individual advice in order to determine how the specifics of your case may impact your ability to receive alimony. Some of the factors to be considered are:

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Will I lose my pension?

Pensions and retirement plans are considered marital assets. Depending on the state you live in, the portion that was earned before your marriage could also be considered a marital asset. However, it is possible to keep your pension and have it offset by other assets.
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Should the custodial parent keep the house?

This is one of the most important questions, and it is frequently overlooked. The answer is sometimes yes, sometimes no. It’s important to pinpoint exactly what it will cost to maintain the home, factoring in taxes and inflation. The next step is to analyze if there is enough money coming in to stay comfortable in the home (in other words, to pay the bills each month). Once that has been determined, the advisability of retaining the home must be compared to the advisability of giving up other assets (such as liquid accounts, retirement plans, etc.). Finally, all decisions need to be weighed against current economic and stock market conditions. Certified Divorce Financial Analysts are trained to help people answer this question before they commit to a settlement that cannot be changed.
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What if I brought a house into the marriage that is in my name only, and I added my spouse’s name to the deed?

In this case, the whole house could be considered marital property. You might have made a “presumptive gift” to the marriage and should consult with a family law attorney to discuss your options.
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Is my IRA considered marital property? It’s in my name.

Everything acquired during the marriage, no matter whose name it is in, is typically considered marital property. In some states, the increase in value of separate property could also be considered marital property. If you are going through a divorce, it is important to evaluate the financial drawbacks to having your IRA included in the list of your assets you retain, post-divorce. Remember, the funds in the IRA cannot be accessed before 59 ½ without paying a 10% penalty for early withdrawal.
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I have never worked. Can I get Social Security?

If your spouse has worked, and if you have been married for 10 years or more, then you are entitled to one-half of your spouse’s Social Security or your own, whichever is higher—even if you are divorced. Your spouse still retains 100% of his/her Social Security benefit. This is an automatic guarantee and therefore is not a negotiation point in a divorce.
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How do we figure how much child support should be paid?

Every state has Child Support Guidelines that are mandated by the State. However, the Guidelines get tricky when one (or both) spouses are an independent business owner who can control their wages. In this situation, it typically helps to bring in a financial expert who can help determine the true potential income of the parties.
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Do we have to go to court?

Only if you can’t reach an agreement. Then, a court date is set and a judge hears the case. Less than 5% of all divorce cases go to trial in the United States.
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What is a QDRO and why do I need one?

A QDRO (or Qualified Domestic Relations Order) is the legal document that divides up a qualified pension or retirement account (including 401(k) plans) pursuant to a divorce. The Judgment of Divorce is not sufficient to divide up qualified plans; therefore, a QDRO is needed. There are many nuances in QDROs that make them an advocating (rather than neutral) document. In order to protect your assets, be sure to obtain qualified advice in this area from a specialist.
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How are debts incurred during the marriage handled?

Debts that were obtained in the name of both spouses before a divorce (meaning both husband and wife signed a document or application saying that they were responsible for the debts) remain the obligations of both parties after a divorce, no matter what a divorce decree says. Creditors are not party to your separation and property settlement agreement. Therefore, if your ex-spouse does not pay a debt that he/she was assigned in a divorce decree, then YOU are responsible for it.
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Equitable Distribution

What is Equitable Distribution?

Equitable Distribution is the process by which the property (including assets and debts) of married people are distributed by a court of law if a claim for equitable distribution is filed.
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What does the term “property” include?

The term “property” includes all assets and debts, whether they are separate, marital, divisible, or a hybrid mix.
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What role does acquisition of property play in the classification of property?

Property is classified into one of three categories: separate, marital, and divisible. Thus, the date on which property is acquired plays a role in the classification of property. For instance, if the property was acquired before marriage, then it is considered the separate property of the person who acquired it. If the property was acquired during the course of the marriage, outside of a gift solely to one spouse or an inheritance, it is typically considered the marital property of both parties. If the property is acquired after the date of separation but before the date of distribution then it may be considered divisible property of the parties.
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Is the division of property always fifty-fifty? What factors are considered in an unequal distribution of property?

The division of property does not always occur on a 50/50 basis. Rather, after the Court has considered all of the evidence and the Equitable Distribution factors, the Court will determine what the proper division should be. For Example: At the conclusion of the trial you could find that property is divided 60/40 in your favor or it could be 55/45, etc.
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Is fault used in dividing marital property?

Fault is never used when dividing marital property. Fault or marital misconduct is only relevant as to claims for post-separation and alimony.
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How is separate property defined?

Separate property is defined as that property which you had prior to the date of marriage. You may also have separate property interests through gifts that only you and not your spouse received during the course of the marriage and through any inheritance you may have received.
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How is marital property defined?

In a nutshell, marital property is defined as all property that has been earned, accumulated, incurred, or received during the course of the marriage and which is not separate property. Furthermore, in the state of North Carolina, it is presumed that everything incurred, accumulated, earned, and received during the course of the marriage is marital property.
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How does death affect an unresolved equitable distribution claim?

If the death of one of the parties happens after an absolute divorce but before the order of Equitable Distribution, then your claim for Equitable Distribution will survive. However, because it is intended that Equitable Distribution actions be available only when there is the anticipation of a divorce being granted, your Equitable Distribution claim will not survive if you or your spouse die before the process is completed.
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What is the identification of property in the equitable distribution process?

The identification of property in the Equitable Distribution process simply entails identifying the property, including assets and debts that were in existence as of the date of separation.
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What is the dual classification of property as partly marital and partly separate?

When you refer to partly marital and partly separate property, you are recognizing the fact that there is a marital interest in the property at issue and a separate property interest. For example, if you come into a marriage with a vehicle that is only partially paid for, you would certainly have a separate property interest in that vehicle, a separate component if you will. However, as you move into the marriage and payments are made towards that vehicle, a marital property interest in that vehicle will be created as well. If property can be classified as marital in any manner, then both parties have claim to it.
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Can qualified plans, such as pension plans, profit-sharing plans, and 401(k) plans be divided? What is a QDRO?

Yes. Pension plans, retirement plans, 401(k) plans and profit sharing plans may be divided pursuant to the Court’s Equitable Distribution determination and the final order. Specifically, the Court will order that a Qualified Domestic Relations Order be drafted which will direct the plan administrator for a pension or retirement account to distribute a certain portion of the account to the non-employee spouse.
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Taxes

Do I have to pay tax on money and property I receive in a divorce settlement? Is money I pay to my ex-spouse tax deductible?

If a payment qualifies as alimony under federal tax rules, the paying spouse deducts it and the receiving spouse reports it as income. If a payment is child support, it is not deductible by the payor and is not taxable to the payee. If a payment is property settlement, there is no immediate tax consequence on the payment. If the payment isn’t money, though, there may be a capital gains tax later when the property is sold. For example, the recipient of the home generally wouldn’t pay tax on that right away but might have to pay tax when the house is later sold.
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Can I deduct my legal and accounting expenses for the divorce?

Generally, you can’t deduct these expenses. But the part of the fees related to obtaining a payment of alimony is deductible. Your accountant and attorney should break this down for you.
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I get a payment from my spouse’s pension plan at retirement. Is that taxable?

Generally there is no tax right away, but when you do receive the payments, they will be taxable just as if they were your own pension.
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I am getting a payment from my former spouse’s IRA. Is that taxable?

If you are less than 59 and you don’t “roll the payment over” into your own IRA, it will be taxable. If you roll it over into your own IRA, it’s only taxable when you start to withdraw it under the normal rules. If you are 59 or older, this is also generally true, but the rules get more complicated.
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As a result of the divorce decree, I’m making payments for my ex-spouse for items like medical expenses, rent, and tuition. Are these deductible?

If these payments meet all of the other rules to qualify as alimony, they are deductible by the paying spouse and income to the receiving spouse.
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I’m making payments on a life insurance policy & my ex-spouse is the beneficiary. Is that deductible?

If the ex-spouse owns the policy, it is considered alimony – deductible by the paying spouse and income to the receiving spouse. This isn’t true if the ex-spouse doesn’t own the policy, though.
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What is my filing status and why do I care?

A filing status is an important factor in determining how much tax you pay. Joint is better than Head of Household, and Head of Household is better than Single. Generally, divorced people who are not remarried file as single; however, if a dependent lives with you most of the year, and you provide most of the support, you may qualify as Head of Household.
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I’m making house payments on the house my ex-spouse lives in. Are these deductible?

If your spouse owns the home and you are making the payments, the payments are deductible by you and they are income to the recipient provided they otherwise qualify as alimony.

If you and your ex-spouse still own the home jointly, it gets even more complicated. Half of the mortgage payments can be deductible as alimony if they otherwise qualify. The other half is treated as a regular mortgage payment, and you might be able to deduct a portion if you are itemizing deductions. Property tax and insurance deductibility depend on the legal form of the ownership.
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Can I claim a dependency deduction for my child?

Usually, claiming a dependency deduction reduces your taxes. As a general rule, the parent with custody can claim the deduction. Almost all of the time, though, this issue is specifically addressed in the divorce decree to allow shifting of the exemption from year to year or to allow the non-custody spouse to claim the exemption.
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Should I be concerned about keeping records on property I get from the divorce?

If you get property in a property settlement as a result of the divorce, you might later have to pay a capital gains tax when you sell the property. You have to know what the tax cost is to figure that tax. It is very important that you get the necessary records to compute the tax cost for any item you might later sell. This is usually an issue for the house and investments like mutual funds, stocks, and bonds, as well as collectible items and valuable art work.
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