financial neutral Archives | Collaborative Law Institute

May 20, 2014

During and after a divorce, tax matters take on new importance since your financial circumstances have probably changed, as has your filing status. If you were in charge of tax returns during your marriage — and especially if you were not — keep these tips in mind to support the best possible outcome when filing your annual returns. Some legal fees are deductible. While most court costs and legal fees for obtaining a divorce are not deductible, some are, including:

Fees paid for tax advice related to a divorce
Fees paid to determine or collect spousal maintenance
Fees paid to determine estate tax consequences of a property settlement
Fees paid to professionals if the services were completed to verify the accurate amount of tax or to assist in obtaining spousal maintenance (appraiser, actuary, etc.)

These deductible costs are usually claimed as a miscellaneous itemized deduction on Schedule A of your income tax forms, but are subject to the 2 percent of adjusted gross income floor. Talk to your tax advisor to see if you qualify. You may be held liable for past unfiled joint tax returns or audited returns. Even if you were not involved in the preparation of your taxes during your marriage, you may still be held liable for unfiled returns or inaccurate returns. You can request copies of past federal and Minnesota state tax returns from your tax advisor or from the IRS and Minnesota Department of Revenue (Federal Form 4506-T and Minnesota Form M100). Plan ahead for filing of future tax returns. Your marital status on December 31 of a calendar year determines your filing status for that year. If you were married most of the year, but your divorce is finalized on December 31, you cannot file as married joint, but would instead file as either head of household or single. If you are in the process of getting divorced, consider working with your spouse, your attorney and a tax professional to determine which filing status would best suit your financial situation. Also, keep in mind during the divorce process that it helps to spell out the following in the divorce decree:

Who will itemize mortgage interest, real estate tax, charitable contributions and other itemized deductions?
Who will claim any dependent children’s exemption and tax credit?
Who will take any long-term capital loss carryover?
Who will claim any quarterly estimated tax payments made during the year?
Who will report investment income from joint accounts?

If this is not clearly spelled out in your divorce decree, consult with your tax professional or attorney for guidance. Review your tax situation to determine withholding, estimated tax payments, cost basis of assets and taxable retirement benefit distributions. Your W-4 withholding may need adjustment after your divorce to ensure that enough tax is deducted from your wages — or less tax, depending on your situation. You should also determine if you need to make additional estimated quarterly tax payments to cover spousal maintenance or personal investment income (which does not have taxes withheld like wages). You’ll need to know the cost basis of your personal investments, real estate and any life insurance with a cash value. If you sell these assets in the future, the cost basis will determine if you have taxable income from the sale. Finally, if you take a distribution from a retirement account during the divorce process, you may have to pay taxes on that income. Plan ahead for your taxes during the divorce process and prior to filing that first post-divorce return. You’ll reduce the time, cost and potential frustration of this necessary part of your new life.

January 10, 2014

In a recent collaborative divorce case, we learned from the clients that a tax liability of about $60,000 would be owed if they did not get their divorce by the end of the year. It was only a few days before Christmas and past the informal deadline set by the court for submitting final documents for a 2013 divorce. Adding to the challenge, my client had just changed her mind about a key provision in the financial settlement. I had already prepared and circulated a draft of the agreement which had been reviewed by our clients and an expert who had helped them with planning and financial issues concerning their special needs child. Now it all seemed to be unraveling and I fought against the urge to find someone to blame and prove it wasn’t me (I bet these thoughts crossed the minds of the clients and others on the team). Instead, we got to work on the problems as a team. The attorneys met with the expert concerning the special needs child and reviewed her suggested changes, made phone calls to our clients for approval, and drafted the new changes into the agreement. The child specialist who had worked with the clients during the collaborative process reviewed the suggested changes and made adjustments in the parenting plan which would be part of the final legal document. We also had some preliminary conversations with our clients about the proposed change my client wanted in the financial settlement and shared our clients’ views. The proposed change concerned the timing of the sale of real estate and the neutral financial expert who had worked with us during the collaborative process had been contacted about this issue. We checked calendars with the clients and the financial neutral and scheduled a meeting–unfortunately, the husband’s attorney was not available at the only time which worked for the rest of the team and the clients. We agreed to meet and the attorney for the husband would be available during the meeting by phone and email. We also needed to get a judge assigned to our case. The Joint Petition, which had been prepared in the beginning of the collaborative process, was filed with the court, which got us an assigned judge. The attorneys discussed strategy and we agreed that the husband’s attorney would take the lead in the calls requesting an expedited court process. There were a number of complications, including the fact that the judge was leaving on vacation that day. I listened in on the calls and was happy to hear that the judge’s clerk, after consulting with the judge, agreed to email the agreement to the judge once it was filed and the judge agreed to review it while on vacation. We still needed a final agreement on the financial settlement. At the meeting the next day, the financial neutral took the lead and discussed the consequences of the proposed change, which would also affect the funding for education for their children. Options were considered and discussed. I was present at the meeting but had agreed on a ground rule with the other attorney that I would refer to her all questions of substance from her client. As we developed the terms of the final agreement, the substance was shared with that attorney in phone calls and emails. I prepared the final draft of the agreement with the new terms, the clients and attorneys (one by email) signed, and it was filed with the court that day after an all morning meeting. The judge signed the final document and the clients were divorced in 2013. The key reasons for our success in working through the challenges: 1) The clients and professionals focused on solving the problems rather than assigning blame for the problems. 2) Clients and professionals relied on the strengths and expertise of different members of the team. 3) Trust among professionals allowed for flexibility and candor in the process. 4) Clients kept uppermost in mind the big picture goals for the family as a whole.

October 28, 2013

Part 6: Selecting the right team for your family may be essential to the success of your Collaborative Divorce. Collaborative Divorce is often a team process, in which you work with mental health professionals and financial neutrals, as well as with attorneys, to help you achieve the best outcome for your family. One of the keys to your success is selecting a team that can best meet the unique needs of your family. Some divorcing couples and professionals prefer the standardized process in which the full team is assembled at the beginning of the case. In Minnesota, a full team generally consists of two attorneys, (one for each party); a child specialist (if there are minor children); a financial neutral and a divorce coach. The advantage of assembling a full team (often described as the “Cadillac” of the Collaborative Divorce Process) at the very beginning is that you know that you have all of the necessary professionals on board, so that all of your family needs can be immediately addressed. While you may be concerned about keeping your professional costs down, the full team process, if used efficiently, will not necessarily be more expensive. Working with the right professionals at the right time may actually reduce the conflict and, therefore, your overall costs. Perhaps more importantly, even if it does cost you a little more, getting a better outcome for your family may have incalculable benefits and may save you financial and emotional costs down the road. Other families and professionals prefer what I will call the “customized team” model. In this model you and your spouse work together to decide exactly which team members you need to help address the unique needs of your family. This option allows you to put your dollars where they are most needed. For example, if you believe that you and your spouse need the most help in creating a parenting plan, you may wish to spend more of your money working with a child specialist. Similarly, if your difficulties lie primarily with finances or communication, you may wish to spend more time with a financial neutral or a divorce coach. To learn more about the role of each professional and to get assistance in selecting the right team of professionals for your family, go to www.collaborativelaw.org or www.ousky.com .