Life insurance to cover alimony

Alimony stops upon the death of the payor. So it is extremely important to protect that stream of income with life insurance on the payor's life. It is also important to consider having the beneficiary be the owner of the policy.

Don't cancel insurance too soon

If all your cars are on one insurance policy and your car's insurance is cancelled because your spouse figures you will get your own, you are without insurance until you do get your own.

Suppose you are the beneficiary of your spouse's life insurance and it is cancelled. Two things may happen: (1) Your spouse may die before the divorce is final and there are no proceeds or (2) The court orders your spouse to carry insurance to cover alimony (see above paragraph) and now the spouse is older and to get new insurance will be much more costly.

Use of a QDRO

This stands for Qualified Domestic Relations Order. It is the legal document that is sent to the plan administrator which tells the administrator how much money from the retirement plan to send to the ex-spouse. It is the only way for the ex-spouse to get payout from a qualified plan such as a 401k. It is typically drawn up by your attorney or a specialist who drafts QDROs.

Some problems with QDROs

If your Qualified Domestic Relations Order is not properly drafted, you may be the loser.

What if your spouse dies after you start receiving your portion of the benefit? Will your portion continue to come to you?

What if your spouse dies before the benefit starts? Will you still get the portion you were entitled to?

What if your spouse takes early retirement with a large buyout package? Does your QDRO say you are entitled to a portion of it?

What if you are to receive half your spouse's 401k but before it is divided the market goes up sharply? Are you entitled to half the increase?

These are some of the many issues that are sometimes ignored when the QDRO is drafted. Be sure to talk to your attorney about these issues.

Don't pay the 10% penalty

There is a way to escape paying the 10% penalty when you have to withdraw cash from a qualified retirement plan such as a 401k before you are age 59 1/2. It has to be done before the money is transferred out of the 401k. (More on this subject next time!)

Value of household goods

Household goods are valued at garage sale value. that means all furniture, pots and pans, sheets, etc. The exceptions would be: antiques, art collections, etc. They may need to be appraised if you feel there is greater value to them. Autos are typically valued by the Blue Book value.

Use of property settlement note

Sometimes there isn't enough cash or other assets to 'buy out' the other spouse. One example would be the family business. In that case, you could do a property settlement note or equalization payment. It is like a note at the bank - you determine the number of months, amount of payment, interest rate, etc. These payments are considered a division of property and therefore are not taxable to the person receiving them, nor deductible by the person paying them.

Appraise family business

The family business is more complicated. It is sometimes difficult and costly, to appraise a business. But it is necessary. So, get out of that poverty mentality, and hire the experts who will help provide the best information for you to make an informed decision about your final settlement.

Capital gain on the house

The 1997 revised tax law says we can no longer roll over capital gain in the family home. The one-time exclusion of $125,000 is also gone. Instead, we have something even better. Now, each spouse can take up to $250,000 exclusion if they have lived in the house two of the past five years.

If your house has a very large capital gain, you should consult with a CPA or a financial divorce specialist to see how to handle this the best way. It is possible for both spouses to take the $250,000 exclusion for a total of $500,000 if it is handled properly.

Find out the basis in your home

If you receive the family home that has a low basis, you may be liable for capital gains taxes later. This would also apply to stock accounts and other real estate. Basis does not relate to the amount of the mortgage. It relates to the amount originally invested in the property adjusted by improvements, sales costs, etc.

Get real estate appraised

You may agree on the value of your home, but what if you receive the home and you agreed it was worth $360,000 but when you go to sell it, you can only get $250,000 for it? That means you may have left more than $55,000 on the settlement table! (One half of the difference of $110,000.)

Property settlement is a done deal

After the divorce is final, if you change your mind about how something was divided, or which property you got, it is too late to change it. The only exceptions would be if you found additional property that was not disclosed or if you feel fraud was involved.

Know the difference between separate and marital property

Separate property is everything you bring into the marrige and keep in your own name. It is also what you receive during the marriage as a gift or an inheritance.

Marital property is everything acquired during the marriage - no mattter whose name it is in. And in some states, but not all states, the increase in the value of separate property.

For instance, consider a $20,000 savings account brought into the marriage which earned $3,000 during the marriage and is now worth $23,000. The $20,000 would be set aside as separate property and the $3,000 would be included in the pot of marital assets to be divided.

Assume the wife adds $100 each month to her IRA which is in her name only. That is still considered to be a marital asset because it is "everything acquired during the marriage, no matter whose name it is in."

Consider cost of living increases for child support

We all know that children seem to get more expensive as they get older. They seem to have more expensive 'toys' such as computers, skis, orthodontics, etc. Many couples discuss including a cost of living increase each year for child support.

Child Support Guidelines

All states now have Child Support Guidelines. They are usually based on the incomes of both parents and the amount of time the children spend with each parent. As each state may vary widely in its calculations, consult with an expert in your state.

Child support is always modifiable

We discussed how alimony may or may not be modifiable. Well, child support is always modifiable. The courts will not allow us to take away the rights of the children.