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San Mateo California Family Law Blog

Property division can minimize taxes in a high asset divorce

Property division can be extremely complicated, especially when a California has complex assets to split. A divorcing couple might pay particular attention to the tax implications of any property settlement, but they may overlook another potential financial problem in a high asset divorce. Whereas a person paying alimony could once deduct the amount on his or her taxes, those payments are no longer deductible. Instead, individuals will need to explore other options for minimizing taxes after a divorce.

In order to replicate the past cost-saving measures of the old alimony tax deduction, couples should carefully focus on property division. Retirement accounts are an excellent place to start, especially if one spouse earns less than the other. When dividing retirement savings, the lower-earning spouse could receive more of the couple's retirement assets and agree to lower alimony payments. In this way, a person might make up the amount of alimony that was reduced while also minimizing tax consequences. However, this approach is usually best reserved for payers who can effectively rebuild their retirement savings.

Protecting your inheritance during property division

Inheritances are often deeply personal, and most have significant amounts of both financial and emotional wealth. For these reasons, protecting an inheritance during marriage and divorce is essential. It is not uncommon for a California resident to file for divorce and then discover that his or her inheritance is considered community property, and as such subject to property division.

Unlike other types of assets, if a person receives an inheritance during his or her marriage, it is not automatically considered community property. In most cases, it will be the heir's separate property. However, it is possible for an asset that is considered separate property to actually make the switch to community property. It is relatively easy for a person to treat his or her inheritance in a manner that causes it to become community property.

Protecting and dividing retirement savings in property division

Saving for retirement is a lifelong endeavor. Most people in California start out saving early in their careers with the goal of achieving a financially secure retirement. Unfortunately, no matter how well-considered a plan for retirement might be, it can be knocked off track by major life events, such as divorce. To avoid losing important milestones in the process of saving for retirement, it is essential to understand the various available options during property division.

Dividing up a retirement account can be a tedious task, and making early withdrawals usually requires a qualified domestic relations order -- QDRO -- in order to avoid penalties and taxes. In a marriage in which both spouses worked and had separate retirement savings, splitting up the funds in the separate accounts might not be necessary. If the amount in both retirement accounts is roughly similar, the couple may agree to divide their property along their individual accounts. This approach circumvents the need for a QDRO and can be simpler overall.

Will your credit survive a high asset divorce?

Credit scores have the ability to govern many aspects of a person's life. From securing an auto loan with a favorable interest rate to getting a mortgage, living with a low credit score can cut off access to a wide range of financial opportunities. In a high asset divorce, there are many factors that can affect a person's credit score. While filing for divorce does not show up on credit reports, actions taken during and after can certainly have a negative impact. 

For many people in California, joint debt divided during divorce proceedings is a serious problem. This is because creditors do not care about who a divorce decree says is responsible for repayment. If an ex-spouse is responsible for paying a certain debt per the divorce decree but fails to do so, creditors can come after the other person if his or her name is also on the debt. Nonpayment also negatively affects both people's credit scores. Making sure that both parties understand their responsibilities and refinancing loans into just one person's name are both effective strategies for protecting credit scores.

Addressing financial concerns in a high asset divorce

In certain situations, more money really does equal more problems. In the case of a high asset divorce, a California couple might have to divide money from multiple income streams, complicated investments, businesses and other complex financial assets. However, couples do not have to go into marriage blindly trusting that they will figure out money matters if they end up divorcing. Here are a few ways in which a person can protect his or her finances and interests during divorce.

Signing a prenup before marrying is a fairly obvious first step, but an important one that should not be overlooked. A couple can agree to what a division of marital assets would look like in the event of a divorce, and can also clearly define which property is marital and which is separate. These agreements can also address potential spousal support, particularly if one spouse plans to sacrifice his or her career, associated benefits and peak earning years in order to raise the couple's children.

Can I keep my individual bank account during property division?

The shape of marriage is changing, and decades-old norms are now becoming less and less common. Some of these changes are driven by generational differences, many of which are credited to millennials. These young adults are increasingly choosing to maintain separate bank accounts even after saying "I do," and while that might work well for them during marriage, it does raise some questions during property division.

A survey from Bank of America found that 28% of married millennials are refusing to combine bank accounts with their spouses. Some speculate that the reason these adults are maintaining separate accounts at more than twice the rate of Gen X and baby boomers is because of new technology. Apps such as Zelle and Venmo make it easy to quickly give a spouse money right away, a task that used to be much more complicated. For others in California who witnessed their baby boomer parents go through bitter divorces, separate accounts simply feel safer.

Tax implications of child custody

California parents typically understand how important it is to respect their children's best interests during divorce. However, these same parents often end up overlooking their own financial interests in the process. Things like child custody can significantly impact future taxes. While taxes should not be a driving force for any given custody arrangement, parents should still understand how their taxes might look.

The Tax Cuts and Jobs Act of 2017 eliminated the dependency exemption, which might lead some parents to mistakenly believe that it does not matter who ends up claiming their children. However, when claiming a dependent, a parent can also access other important benefits, such as a child tax credit as well as earned income credit. Knowing this, parents may be more eager to claim their child, but divorced parents cannot both claim their child in the same year.

Here's how the economy affects divorce

A strong economy is good for virtually everyone in California. As the economy improves, incomes generally rise and there are usually more jobs available overall. These improvements give people a much-needed sense of financial security. Since money is a significant source of stress in many relationships, it would make sense if a stronger economy also reduced the divorce rate. Instead, the opposite appears to be true.

A 2018 study by Northwestern Mutual that surveyed approximately 2,000 adults documented a widespread problem common to many relationships. Of respondents, 41% told researchers that their financial problems affected their relationship. Rather than alleviating money-related stress, adding more money through economic improvements makes things much more complicated. This can give already stressed out couples even more to butt heads over.

What if I lose my job during my high asset divorce?

Having the financial security of a well-paying job can be extremely reassuring during difficult periods of life. Unfortunately, jobs are not always as permanent as they may seem. Losing a job during a high asset divorce is not an easy situation for California residents to find themselves in, but here are a few ways to minimize any negative consequences.

Searching for new employment as soon as possible is important for more than one reason. Not only does securing a new job translate to less financial disruption, but actively searching for work also sets a positive tone for divorce proceedings. As such, it is important to make records of all activities related to a job search. This includes keeping track of things like time spent searching employment websites, submitted applications and resumes, interviews and more. It may be necessary to provide this type of documentation to the court.

Appeals court rules man must continue alimony payments

Money can be a serious point of contention during marriage, but for some people, it is an even bigger issue after divorce. California residents often have conflicted feelings about alimony. While some might acknowledge that it is an important part of divorce, others want to make sure that they are paying a reasonable amount. In such cases, a person paying alimony might try to take the matter back to court.

An out-of-state couple had been married for 29 years when they divorced in 2014. At the time, the man was ordered to pay his ex-wife $10,000 per month for a period of 10 years. If she remarried, he would no longer have to pay alimony. In 2015, the woman held what appeared to be a wedding ceremony, and her ex-husband brought the matter to court.

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