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By Shelli Dodson CPA

Every year I work with clients who have been gifted or inherited small to large sums of money.  Some of these individuals have been married for years and some have been married only a brief time, but my advice is always the same.  Do not commingle it.  When you divorce in the state of Texas, the presumption is that anything you own at the date of marriage is considered community property. Community property is split between the spouses. The only way to overcome the presumption of community property is with clear and convincing evidence that the property is of separate nature. 

Gifted and inherited money should be treated with a special regard.  The money you receive from a loved one is generally intended to benefit you.  When that money is combined with other funds, specifically those of a community estate, they can quickly lose their character.  They can also be expended on items that never allow you to recoup the monies in the event of a divorce.

Whether you are the giver or the receiver, there are some very simple steps you can put in place to help protect the money that was intended to benefit you or your loved ones in the case of divorce.  These steps may not align perfectly with investment strategies so it’s imperative that you work with an investment advisor who is knowledgeable in the area of separate and community property or ask a CPA/attorney who is well-versed in those areas to help the investment advisor understand the rules. 

• Ask the giver or the person leaving you inherited money to be clear and concise about who the funds belong to.  If their intention is to gift you and your spouse, make sure that is known.  If their intention is to only gift you, make sure that is known as well.  Keep copies of checks or letters concerning the gifts in your file.
• Deposit gifts or inheritances into a separate account in your name.  Trying to avoid commingling of funds is the ultimate goal.
• Have any income that the account above earns (interest, dividends) transferred to a joint account instead of letting it sit in the inherited account causing commingled funds.  Since interest and dividends earned during marriage are considered to be community property in Texas, depositing them back into the account holding the money will cause comingling of the funds.
• Avoid investments that produce interest and dividend income if possible. Capital gains distributions retain their separate property character.  Ask your investment advisor for investments that meet this goal.
• Try to avoid using funds in a separate account to pay for community type expenses. (i.e. everyday living expenses).  You may not be able to recoup the expended funds.
• Revocable Trusts.  Revocable trust can be a great tool to help safeguard separate funds but have a set of rules all their own. Due to the legal complexities of these entities, they are beyond the scope of this article.  If you would like to discuss the use of a revocable trust to safeguard your gifted or inherited money, connect with our CPA firm so we can get the right attorney involved. 

The act of protecting your gifts or inheritance does not always match the goal of growing your money.  It’s important to work with a team of professionals to ensure your goals are accomplished. At Divorce Strategies Group we work with a multitude of attorneys and our sister forensic firm SHFD Forensics when forensic accounting is warranted.  If you would like more information schedule a consultation today.  

We at Divorce Strategies Group know how hard it can be to walk through a divorce. I went through a divorce myself, and it was a difficult process.  Many divorcing couples we work with face the difficult decision of what to do with the marital home.  It is often one of the most valuable assets a couple owns.    We hope to provide some pros and cons to this common divorce dilemma to help you make a decision you can feel good about.   

Keeping the House

Financial stability: Selling a home can be expensive, especially if the housing market is down. By keeping the home, you can avoid the costs of selling and buying a new home. Additionally, in the current environment we are finding the marital home is likely tied to a low interest rate which could potentially hurt one of the parties if sold, lost and a new home at more than double the interest rate is purchased.  Keeping the mortgage with a low interest rate may enable a lower earning spouse to be able to afford the home or a higher earning spouse the ability to pay child support or for children’s activities to the lower earning spouse who is primarily caring for the children’s day to day needs.    You will not typically be forced to refinance the home so you would be able to keep the current rate.

Emotional stability: Moving can been linked to one of the most stressful events we can have in our lives.  When you are in the midst of divorce, the last thing you need is to add stress to the situation. Keeping the home, even if for a year, enables you to take a breath and figure out what you want to do longer term.

Emotional attachment: The marital home may hold sentimental value for you.   It may be the place where you raised your children or have many happy memories. Keeping the home can provide a sense of stability and comfort during a difficult time for you. 

Stability for minor children: Children may feel more secure if they can remain in the same home and neighborhood, especially if they are already dealing with the stress of their parents’ divorce.  Allowing your children to keep the same routines, friends and neighbors can provide a sense of stability in this transition for them which may help them maintain their grades at school, stay out of trouble and keep up with their extracurricular activities.    

Selling the House

Consider your financial situation:  Can you afford to keep the house? Do you have enough money to pay the mortgage, taxes, and maintenance costs? If not, it may be better to sell the house and split the proceeds or sell the house and keep the proceeds while giving your soon-to-be-ex-spouse another asset.   The stress of being “house poor” can potentially add so much turmoil to your life, it’s better for you to sell and move.  If this is the case, consider renting a home where the maintenance and the taxes are paid by the owner for a certain period of time after your divorce. While renting may seem like throwing money away, sometimes it helps to give yourself a year to settle and regroup after a major life change.  Renting for a short period may mean a lower overall cost of living since you are not paying the homeowner taxes or paying for major repairs. 

Tax Advantage:  When looking at different assets in the marital estate – the house is one of the most tax advantaged assets you have.  A home which has been lived in as your primary residence for any two of the last five years is considered your primary residence.  When sold, any taxes are taxed as long-term capital gains rate (typically 15%) which is lower than taxes you would pay on distributions from a pre-tax 401k or traditional IRA.   The best part is, the first $250,000 of gain is tax free.  That is powerful when considering the same dollars lump sum from a pre-tax IRA could have a 25% – 38% or higher tax and penalty burden attached to it. For example, assume you purchased your home for $350,000 and you put in a pool a few years ago for $50,000.  That is a $400,000 “cost basis” in the home.  Assume you sell the house for $625,000 after selling costs.  You have made $225,000 in gains on the house ($625,000 – $400,000). Since $225,000 is less than $250,000, this transaction is completely tax free.  So taking this asset in the divorce and selling it after can provide you more net income than taking a pre-tax retirement account and cashing it out for cash flow needs after the divorce. 

Consider the emotional impact: Does keeping the marital home mean too much negativity for you? Are there too many bad memories in the home or possibly you know a paramour was in the home and you just want to put that behind you.  This can be a strong reason to sell the home. 

In conclusion, keeping the marital home can be a challenging decision to make during a divorce process. It is wise to consider your financial situation, consider the emotional impact, and be prepared for the future.   We feel it is critical to obtain legal advice prior to signing any documents or agreeing to any terms on your home!  A lawyer can help you understand your rights and obligations and negotiate with your spouse’s lawyer. 

We can help you understand how financial decisions you make during the divorce will affect your future.   We can also help you make wise financial decisions.  Schedule a complimentary consultation today if you have financial questions before, during or after your divorce.      

Are you facing divorce and trying to determine which assets to take?  This can be a daunting task!  This article is designed to help you understand the difference between Rollover/Traditional IRAs and Roth IRAs so you can make confident financial decisions during your divorce. There are two main types of IRAs: Rollover or Traditional and Roth. Let’s take a closer look at each.

Rollover or Traditional IRA

A Rollover IRA and a Traditional IRA are the same for tax purposes.  A Rollover IRA means these funds were formerly a qualified account like a 401k and the money at some point was “rolled” into the IRA – thus, a Rollover IRA.  A Traditional IRA is just an IRA, usually, which received direct contributions over the years.  They are really one in the same from a financial planning perspective – and a Traditional IRA may also receive “rollovers” from a qualified plan (right, I know it’s confusing). In summary – just consider them to be the same. 

With a Traditional IRA, you contribute pre- or after-tax dollars, and your money grows tax deferred. This means you won’t pay taxes on your contributions or earnings until you withdraw the money in retirement. However, when you do withdraw the money, you’ll pay taxes on the full amount as current income. Here are some key rules for traditional IRAs:

1. Contribution limit: For 2023, you can contribute up to $6,500 if you’re under age 50, or up to $7,500 if you’re age 50 or older.
2. Tax benefits: Depending on your income, you may be able to deduct your contributions on your taxes, which reduces your taxable income for the year. However, you’ll pay taxes on your withdrawals in retirement. 
3. Penalty for early withdrawals: If you withdraw money from your traditional IRA before age 59 1/2, you’ll generally owe a 10% federal penalty tax on the amount withdrawn.  There are exceptions to this rule but generally, the penalty will apply.   There is NO divorce exception to the 10% penalty on Traditional IRA’s – that only applies to QDRO funds from quailed plans which we will cover more in an article next week.
4. Required minimum distributions (RMDs): You must start taking RMDs from your Traditional IRA by age 72, which means you’ll have to withdraw a certain amount each year and pay taxes on it.

Roth IRA

With a Roth IRA, you contribute after-tax dollars, and your money grows tax-free. This means you won’t pay taxes on your contributions or earnings when you withdraw the money in retirement. Here are some key rules for Roth IRAs:

1. Contribution limit: For 2023, you can contribute up to $6,500 if you’re under age 50, or up to $7,500 if you’re age 50 or older. However, your limits could be lower based on your income. If you make $139,500 as a single person in 2023 your contribution limit will be reduced and if you make over $153,000 as a single person in 2023 you cannot contribute to a ROTH IRA directly and must do a  “backdoor” ROTH IRA to contribute to a ROTH IRA.    
2. Tax benefits: You won’t get an immediate tax deduction for your contributions, but you won’t pay taxes on your withdrawals in retirement
3. Penalty for early withdrawals: You can withdraw your contributions from your Roth IRA at any time without penalty no matter your age. However, if you withdraw earnings before age 59 1/2, you’ll generally owe a 10% federal penalty tax on the amount withdrawn.   There is no 10% exception for divorce for ROTH IRA earnings. 
4. Required minimum distributions (RMDs): Roth IRAs have no RMDs during your lifetime, which means you can leave the money in the account as long as you want.   You can even pass these funds onto your heirs, and they will have the same benefits of tax deferred growth and tax-free withdrawals. 

Which one should you take in the divorce? 

We feel as if the Roth IRA is a “golden” asset.  If you have a Roth IRA in your estate this means you already paid tax on these funds and now have a future of tax deferred growth and tax-free distributions ahead of you. It makes sense to take as much of the Roth IRA as you can.   The ROTH IRA can also be a great negotiation tool to obtain more of the assets you may really want (such as the house) or a larger percent of the estate if you give the Roth IRA to a higher earning soon-to-be ex-spouse. 

Also, if you are worried about taxes and need cash in the divorce, you can always redeem the corpus or what you invested into the ROTH IRA tax and penalty free.  While we recommend you let your Roth IRA grow, if you are in a pinch and need to get through your divorce – this is an area to redeem funds without tax consequences. 

What do I do now?

If you have questions on what to do next as you navigate the financial waters of divorce schedule a complimentary 30-minute phone consultation today and we can help you move in the right direction.  

Going through a divorce can be a difficult and emotional time, but it’s important to take care of yourself and your finances during this process. One thing that you may need to consider is your spouse’s executive stock compensation. Here are some things to keep in mind:

1. Understand what executive stock compensation is: Executive stock compensation is a form of payment that is given to top executives in a company. It can come in the form of stock options, restricted stock units, or other types of equity-based compensation. These types of compensation can be very valuable, and they may be subject to division in a divorce. 
2. Determine if the compensation is marital property: In most states, property that is acquired during a marriage is considered marital property and is subject to division in a divorce – even if paid out after the divorce is final.   This includes executive stock compensation that was earned during the marriage. However, if the compensation was earned or accrued before the marriage or after divorce, that portion may be considered separate property and not subject to division.
3. Get a valuation of the compensation: In order to divide executive stock compensation, you will need to know its value. This can be difficult to determine, as the value of stock options and other equity-based compensation can fluctuate. You may need to hire a financial expert to help you determine the value of the compensation.  There is a formula per the Texas Family Code which a financial expert will utilize to determine the value and the portion which is marital property and the portion which is separate property. 
4. Consider tax implications: When dividing executive stock compensation, it’s important to consider the tax implications. Depending on how the compensation is divided, there may be tax consequences for both you and your spouse. You may need to consult with a tax professional or divorce financial expert to determine the best way to divide the compensation.
5. Negotiate a settlement: Once you have determined the value of the executive stock compensation and considered the tax implications, you will need to negotiate a settlement with your spouse. This can be a complex process, and you ideally, will work with a divorce attorney to ensure that your rights are protected.

Remember, going through a divorce can be a difficult and emotional time, but it’s important to take care of yourself and your finances. By understanding executive stock compensation and taking the necessary steps to divide it, you can ensure that you receive a fair settlement in your divorce.

Back to school is upon us, and for most parents, it can bring a whole new set of challenges not to mention new routines and managing schedule changes. For divorced parents, there are even more details to figure out such as who is responsible for back-to-school shopping or paying for school lunches? Are you going to follow a consistent schedule in both households?

Here are some tips that have worked for me when planning for back-to-school with my three kids and their co-parent.

Plan and Communicate Early
The earlier you can discuss your expectations, the better! The next few months can be terribly busy, and if you put off planning with your co-parent, issues may arise. If possible, I recommend sitting down face to face with your co-parent and going over what you both expect for the upcoming school year. If your kids are older, they can participate in this meeting too. The discussion should include school breaks and extracurricular activities, and any personal commitments each of you have. Planning early will also help you both easily see if there are any gaps in childcare that need to worked out.

Who’s Paying for What
School supplies, clothing, lunches, birthday party gifts, teacher gifts, and even yearbooks, all add up. Talking about which parent is financially responsible for each expenditure can save great deal aggravation, and at times, awkward conversations. Having a list of your financial responsibilities will result in everyone being on the same page, right from the start.

Check in with Your Kids
Kids may get excited about all the changes that back-to-school brings, but for other kids, the changes make them anxious and unsettled. You know your kids best so be sure to take their feelings into account when school starts. After the first week or two, check in with them. See if your arrangement needs to be tweaked and do your best to check in with your former spouse to make sure they are aware of your kids needs so that they can address them in their home as well.

Use a Shared Calendar
If you do not already use a shared calendar, now is a wonderful time to start. Kids and parents have so much going on. A shared calendar is a straightforward way to limit miscommunication when it comes to dates and times. It’s easy to create a free Google calendar or if you are on an apple device, share a joint calendar just for kid activities. Our Family Wizard is also an immensely helpful shared parenting communication app with a built-in calendar.

Communicate Changes
Schedule changes are bound to come up throughout the school year. When this happens, it is best to discuss these changes as soon as possible and make any adjustments to your agreed upon calendar. These times can be challenging when you are co-parenting, but by setting forth expectations, planning, and effective communication, you, your co-parent, and your kids can have an enjoyable start to the
school year!

If you would like help navigating this or other co-parenting issues, please call us to schedule a Discovery Session today with Melissa Provence, Mediator, CDC Certified Divorce Coach®, DCC.