Nancy Hetrick 2013-09-19 00:34:02
Nancy Hetrick is the owner of Divorce Financial Strategies, LLC and a financial advisor with Clarity Financial LLC. As a certified divorce financial analyst [CDFA™], she assists clients and their attorneys to understand how the financial decisions he/she makes today will impact their financial future. She has over 13 years of experience in both investment management and financial planning. Nancy is also an accredited wealth management advisor (AWMA), an accredited asset management specialist (AAMS), a chartered mutual fund counselor (CMFC) and a trained mediator. For more information, see her website at www.nancyhetrick.com or contact her at 602-349-0164 or firstname.lastname@example.org. Your client, Dan, has provided you with an affidavit of financial information (AFI) and you’ve received the Afifrom the opposing party, Sue, and both seem pretty straight forward. Here is a list of their assets. Dan says that he wants to keep the primary home and he will let Sue keep the vacation home. Sue is in agreement with this plan and therefore, to provide a 50/50 split, Sue will get half of the checking and savings, $15,000 and $125,000 of the 401(k) for a total of $440,000 each. Ah, a perfect 50/50 split. No problem!! Dan plans to live in the primary home for two to three more years and then sell it and downsize. Sue plans to sell the vacation home and buy a new residence for herself. Since she’s only 50 years old, she is also going to take advantage of her one-time opportunity to withdraw $100,000 from the 401(k) subsequent to divorce with no penalty, although she will have to pay income tax on the money. Hmm, could these plans impact this settlement? Let’s take a new look at each party. About six months after the divorce, Dan realizes that the upkeep on the home is more than he can afford on his own and decides to go ahead and sell. He’s able to sell it for $775,000. He pays off the $350k mortgage and HELOC and has to pay 6 percent for sales fees or $46,500 leaving him with $378,500 in equity. The original price of the home, bought with his wife 25 years ago, was $150,000. That means he now has a capital gain of $228,500. As a single person, he can exempt $250,000 of gain on a principal residence, avoiding any capital gains tax. Let’s look at Sue. She moved into the vacation home for six months before putting it on the market. She was able to sell it for $325,000 with selling expenses of $19,500 leaving her with $305,500. The property had been in her family for generations and the basis was $60,000 so she assumed that her gain of $245,500 was well under her personal exemption and she sold the property and used the money to buy a new condominium. When tax time came around, her accountant looked at her with big eyes and broke the bad news. Th e exemption is only applicable to a primary residence. In order to use it, she would have had to have lived there for two years. Since she didn’t, the entire gain is taxable. She’s also a highly compensated individual so her rate is not 15 percent but 20 percent and oh, don’t forget to add the new Medicare surcharge which raises it to 23.8 percent so her tax bill is $58,429. Dan’s assets are worth $98,179 more than Sue’s. How likely do you think Sue will be to refer her friends to her divorce attorney? There were much better ways to structure this settlement that would have been more equitable. But as you know, once that decree is written, it’s pretty tough to go back and fix things. Do right by your clients and either take the time to really evaluate their settlement results or bring in an expert who can. At the very least, recommend your client review the plan with a CPA or CDFA™. Mistakes like these could turn you from being the counsel for this client to the defendant against her lawsuit against you.
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