Important considerations for the couple going through a divorce: Part 2

May 18, 2014
While we wish it weren’t true, divorce is a reality in our world. Divorce brings about tremendous and oftentimes hostile emotions. Theodore C. Schumann, CPA, CFP, concludes this two-part article series by discussing more tax and financial issues you must consider if you find yourself in this situation.

While we wish it weren’t true, divorce is a reality in our world. Divorce brings about tremendous and oftentimes hostile emotions. While this is a very trying time in a person’s life, there are a number of tax and financial issues to consider if you are in this situation.

Read Part 1 of this series.

Retirement plan and IRA issues

Similar to your life insurance policies, your Qualified Plan and IRA have beneficiary designations. You will need to revise the beneficiaries on each account. The Qualified Plan will require a signature from your spouse to change the beneficiary. You will also want to revisit the calculations made in retirement planning. This is especially true if your spouse had a retirement plan or if you were required to transfer retirement assets to your former spouse as part of the property distribution. A typical property settlement may include a Qualified Domestic Relations Order (QDRO), which transfers a portion of IRAs and Qualified Plans to a spouse.

Property settlements

Transfers of property between spouses or former spouses as a result of the marital relationship are not subject to income tax. No gain or loss is recognized for income tax purposes unless liabilities assumed by the recipient spouse exceed the donor spouse's adjusted basis in the property. Since the recipient spouse takes a carryover basis in the property transferred, he or she should consider this in negotiating the property settlement. The transfer of higher basis property will result in lower eventual gain recognition and, therefore, less tax to be paid on the gain. Additionally, the estimated future marginal tax rates of the individual spouses should be considered. Ideally, the spouse with the lower marginal tax rate should receive the property with the higher gain potential, i.e., the lower basis. Perhaps the greatest problems in resolving a divorce are found in the property settlement negotiations. Because emotions are understandably high at this time, many times spouses fail to give careful consideration to the choices and demands being made.

Credit and mortgage issues

Unfolding a marriage of any duration can be a complicated issue. Over the years, you may have established joint credit for a number of credit cards, revolving credit agreements, and mortgages. After the divorce, you should take great care to cancel any joint accounts and reopen them in your own name. This can be a problem if your personal credit alone will not qualify you for the credit. Generally, one or the other of the spouses will retain the family home and the attached mortgage. It is essential to have the mortgage rewritten in the name of the spouse who is now the owner of the home. Failure to handle these issues properly can have a great impact on your ability to obtain credit. It is a good idea to check your credit periodically after the divorce.

Revisit your estate plan

From an estate planning perspective, there is nothing more profound than a couple’s divorce. You will need to meet with your estate-planning attorney both before and after the divorce. You will want to discuss the impact of the divorce and the suggested property settlement prior to finalizing the divorce agreement. Your estate attorney can provide valuable insights and suggestions as they relate to your property settlement. After the divorce is final, your estate planning documents will all need to be revised.

Consider your personal budget and business cash flow

The divorce will make profound changes to your personal budget and may have an impact on your business cash flow. It is a good idea to meet with your accountant early in the process and determine how or if you will need to modify your personal spending. Accordingly, you may have to modify your business plan to support the change in your personal obligations.

Finally, there is no question as to the emotional toll a divorce places on both spouses. Do not be afraid to consider counseling to help you get through it and on with your life.ALSO BY THEODORE C. SCHUMANN, CPA, CFP ...Special considerations when selling your dental practice to your son or daughter10 steps to creating a vision for your dental practiceThe gift of love: putting together a plan in the event of a death or disability in the dental practice
Theodore C. Schumann, CPA, CFP, is the CEO of The DBS Companies. The DBS Companies is a full-service financial services firm providing accounting, tax, financial and estate planning, practice transitions, practice management, and leadership coaching for dentists. Ted has been helping dentists reach their financial and personal goals for more than 30 years.