The Paskal - Hyman Team - RBC Wealth Management

The Paskal - Hyman Team

Frequently Asked Questions Regarding your Finances and Divorce

Will I still be able to receive Social Security?
Whose health insurance policy will cover the children?
How do I protect my assets in the event of a divorce?

What are the tax implications of child support payments?

Are alimony payments considered taxable income?
Should I sign a prenuptial agreement to protect my assets when I remarry?

My husband and I are divorcing after 30 years of marriage. Will I still be able to receive Social Security Retirement benefits based on his earnings record after our divorce?

Yes. If you already receive Social Security based on his earnings record, you'll continue to receive it as long as you live (or in some cases, until you remarry). If you don't receive Social Security yet, you can apply for a reduced benefit when you turn 62 or wait until your full retirement age if you want to receive an unreduced spousal retirement benefit. If you've been divorced for more than two years, you can apply as soon as your ex-husband becomes eligible for benefits, even if he hasn't started receiving them (assuming you're at least 62). However, if you've been divorced for less than two years, you must wait to apply for benefits based on your ex-husband's earnings record until he starts receiving his own benefits.

You don't have to worry about losing your benefit even if your ex-husband remarries. Benefits for a divorced spouse are calculated separately from those of a current spouse.

My husband and I are divorcing. Whose health insurance policy will cover the children?

As parents, both of you will want to keep the best interests of your children in mind. That means you should compare your health plan with your spouse's health plan and determine which one offers the most comprehensive health coverage and flexibility in choosing health-care providers.

Your ultimate decision will also involve other considerations, such as job security. If you and your spouse are eligible to participate in employer-sponsored group health insurance plans, which of you is more likely to remain employed? Expense is probably another issue you'll face. If your employer pays a larger portion of the premiums than your spouse's employer pays, your spouse may argue that you should cover the children under your health plan. If you have custody of the children, though, you may find the extra expense too burdensome.

The issues of child support and child custody are quite relevant when you discuss health insurance coverage of the children. For example, if you have custody of the children, receive child support, and need your spouse to provide health insurance coverage for the children, you may be able to obtain a court order (if necessary) to ensure his or her compliance. This is known as a qualified medical child support order.

You'll resolve the issue of health coverage--and many other issues--during your divorce settlement negotiations. Because state divorce laws may vary, you should seek advice from a divorce attorney before making any decisions.

How do I protect my assets in the event of a divorce?

If protecting your assets means that you want to keep all of your money, property, and possessions out of your soon-to-be ex-spouse's hands, you're probably out of luck. Any assets acquired during marriage are considered marital property and must be divided according to state law.

If you live in a community property state (i.e., California, Texas, or one of eight other states), you and your spouse must split any marital assets equally. However, in all other states, assets must be divided equitably (fairly) rather than equally. Your best protection is to make sure that your interests are represented. Hire an experienced attorney who will help you negotiate a fair settlement.

Don't shortchange yourself by overlooking hidden assets. For instance, you may know your joint savings account balance and what possessions you must divide, but do you know the balance of your spouse's pension plan? Does your spouse own a prepaid life insurance plan? Does your spouse have retirement funds (e.g., 401(k), IRAs) in his or her own name? These things will be considered marital assets as well.

Finally, don't forget about debt. In general, you'll be responsible for any debt acquired during the marriage, even if you didn't run up the debt yourself. Make sure that the divorce settlement states who will be responsible for paying off all debts, and close all joint accounts.

What are the tax implications of child support payments?

When a separation or divorce occurs and the couple involved has one or more children, the non-custodial parent is usually ordered to pay some child support to the custodial parent. The child's expenses over and above this sum are generally borne by the custodial parent. Whether you are paying or receiving child support, you should be aware of the federal income tax consequences. You are not taxed on child support that you receive, and you cannot deduct child support that you pay.

Payments will be classified as child support for federal income tax purposes if the divorce decree or separation agreement:

Fixes a sum that is payable for the support of a child (this can be either a dollar amount or a specific fraction of a payment), or

Provides that the amount payable by the payor-spouse to the receiving spouse will be reduced when a contingency relating to a child actually happens, or at a time that can clearly be associated with a contingency relating to a child

For example, John agrees to pay his ex-wife, Carol, $2,500 per month until she dies. (Note that the words child support are not specifically mentioned.) Carol has custody of their child, Justin. The divorce agreement states that upon a certain date, John's required payment to Carol will decrease by $800. Because Justin will turn 18 within six months of the date on which the payment is scheduled to decrease, the payment reduction is assumed to be related to Justin's reaching 18 years old. Therefore, the $800 per month reduction is treated as child support, regardless of the parties' intent.

From a tax perspective, being a custodial parent can be advantageous in terms of claiming the child dependency exemption and the child-care credit. In addition, the custodial parent can potentially qualify for head of household filing status.

Are alimony payments considered taxable income?

Alimony is a support payment made to a former (or separated) spouse under a divorce decree or separation instrument in an attempt to maintain the pre-divorce lifestyle. Alimony is sometimes called maintenance. Simply stated, alimony is taxable income to the one who receives it and tax deductible to the one who pays it. To be considered alimony under present tax rules, however, the payments must meet several requirements.

These requirements include (but are not limited to) the following:

All payments must be made in cash, check, or money order

A written court order or separation agreement must exist regarding the alimony

The order or agreement must not designate the payment as not being alimony (i.e., it cannot be designated as child support)

The couple generally cannot live in the same household while alimony is being paid (although an exception applies in the case of payments to a separated spouse living in the same household if the payments are made under a written separation agreement, support decree, or other court order)

The obligation to pay alimony cannot continue past the death of the payor-spouse

The former spouses cannot file a joint tax return

You should also be aware of the alimony recapture rules. Because alimony is tax deductible, some spouses are tempted to disguise property settlement payments as alimony. They might accomplish this by front-loading alimony during the first couple of years. That is, one spouse might agree to pay high sums of alimony during the first two years after the divorce, and to continue with normal payments thereafter. According to the alimony recapture rules (which are fairly complex), deductible alimony payments will be re-characterized as nondeductible property settlement payments to the extent that payments made during the first two years are excessively front-loaded.

For more information, consult a tax professional.

Should I sign a prenuptial agreement to protect my assets when I remarry?

Even if you never thought about signing a prenuptial agreement the first time you married, it's wise to consider it now, because marriage is often more complicated the second (or third or fourth) time around. You may have more assets now, or you may own a business or have children to protect. And because you've been through it before, you may be worried about the financial consequences of divorce or widowhood.

A prenuptial agreement can ease your mind by spelling out what assets and liabilities each partner is bringing into the marriage and by determining how money or property brought into the marriage or acquired during the marriage will be divided if the marriage ends either in death or divorce.

A prenuptial agreement addresses some or all of these points:

Assets and liabilities: What assets are you each bringing into the marriage? How much are they worth, and who owns them? Which ones will become marital property, and which ones will continue to be owned individually? Will gifts and inheritances be shared or separate? What liabilities do you have (e.g., back taxes or other debt)?

Divorce: If you divorce, how will you divide assets brought into the marriage or acquired during the marriage? Will either spouse receive a lump-sum cash settlement or alimony?

Estate planning: What will go to your children from previous marriages? What will go to children you have together?

Special contributions of partners: If one spouse contributes to the marriage in a special way (e.g., limiting his or her career for the benefit of children or the other spouse), will that spouse be provided for? What if one spouse brings more liabilities to the marriage than the other?

Because it's difficult to write an ironclad prenuptial agreement, don't try doing it yourself. Instead, you and your future spouse should hire separate attorneys to help you negotiate an agreement that will protect your financial interests without causing mistrust between the two of you.