• Home
  • Divorce Mediation
  • Divorce Financial Advisor
  • Coaching
    ▲
    • Co-Parenting Coaching
  • All Services
    ▲
    • Divorce Mediation
    • Divorce Financial Advisor
    • Divorce Support Groups For Men
    • Divorce Support Groups For Women
    • Divorce Coaching
    • Co-Parenting Coaching
    • Post-Divorce Transition Support
    • For Attorneys
      ▲
      • Business Valuation Services
      • Forensic Accounting
      • Collaborative Divorce
      • Denise French
      • Shelli Dodson
  • Blog
  • About
  • Work With Us
    ▲
    • Contact
    • Schedule An Appointment
    • Pay Now
  • Post Divorce Transition Report
    ▲
    • Men’s Support Group
    • Women’s Support Group
    • Community Services
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

281-505-8177
CONTACT US

SCHEDULE A
FREE CONSULTATION

Contact Us: 281-505-8177

Divorce Strategies Group

Divorce Strategies Group

Denise French

  • Divorce Mediation
  • Divorce Financial Advisor
  • Coaching
    • Divorce Coaching
    • Co-Parenting Coaching
  • All Services
    • Divorce Mediation
    • Divorce Financial Advisor
    • Divorce Support Groups For Men
    • Divorce Support Groups For Women
    • Divorce Coaching
    • Co-Parenting Coaching
    • Post-Divorce Transition Support
    • For Attorneys
      • Business Valuation Services
      • Forensic Accounting
      • Collaborative Divorce
  • Work With Us
    • Contact
    • Schedule An Appointment
    • Pay Now
  • For Attorneys
    • Business Valuation Services
    • Collaborative Divorce
    • Forensic Accounting
    • Denise French
    • Shelli Dodson

divorce with children

Dividing Annuity Assets in Divorce

September 29, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

Dividing community property, or property jointly owned by a married couple, can often be a complicated process, with your financial options dictated by potential tax implications. While some things may be easy to divide, others are not. Some belongings are sentimental, while others — such as annuities — involve complicated financial calculations. Annuities not only involve moving ownership from one person to the other or joint title to single title, they often also involve moving or potentially deleting critical living benefits, guarantees and/or death benefits as well as surrender penalties on top of potential tax liabilities. That is a lot! Annuities in divorce are complex to say the least. We will attempt to unravel the complexities of annuities as they relate to divorce or at least guide you on what questions to ask.

Annuity Phase

While there are multiple types of annuities (fixed, fixed index, variable, immediate and deferred) all types of annuities are typically in either the accumulation phase or the distribution phase. The different phases will determine how value and divide the annuity in a divorce situation.

Accumulation Phase

If an annuity is in the accumulation phase, it is growing. The annuity may be growing by a simple fixed rate – aka a fixed annuity or by a variety of factors in the fixed index or variable space. The key take-away is there is only growth in this phase. Income has not yet started. This is a critical factor in divorce negotiations. In the accumulation phase the annuity can have three main parts – the actual cash value, the guaranteed benefit amount and the death benefit.

Cash Value

This is the actual cash value. This is real money and should be the value on the marital inventory. This value may have a surrender charge affiliated with it which should also be reflected on the marital inventory. If you do not see a surrender charge on the statement, it is wise to call the carrier and confirm no surrender fee exists. Also, if the contract is still under surrender charge penalties, ask the carrier if they will waive the surrender charge in the case of a divorce where the account is divided between the spouses. We have found quite often they do not waive any fees even though the division is pursuant to a divorce.

Guaranteed Value or Living Benefit Amount

In the accumulation phase, this is the living benefit amount. Many contracts offer a certain amount of guaranteed growth for future income. For example, some annuities may guarantee 7% growth, compounded annually with possibly even a high-water mark (meaning the annuity will capture the highest day of market gains in the annuity contract that year plus add the 7% guaranteed growth on top of this value). Sound too good to be true? What is the catch? This amount is not real money – it cannot be withdrawal in a lump sum. It is the value for which a future income stream is derived. In our same example, let’s say the contract grows by 7% guaranteed compounded annually, and when the client is age 65 a 5% income stream can be taken, guaranteed for life off the 7% compounded number. (In some cases, the income stream will also double for long term care needs for a certain amount of time.) In divorce, the guaranteed amount is often erased if the annuity is divided. This can cost the overall estate hundreds of thousands of dollars.

Know if there is a living benefit and if so, what happens if the annuity is divided between the spouses? The living benefit number is often quite higher than the actual account value, but this is not the number to be listed on the marital inventory. It is a phantom number used to derive a set amount of income at a future date. However, because there is an account value it is the actual cash value which is listed on the estate spreadsheet. The annuities are designed to deplete the cash value over time when the income begins if you live long enough, so this number is not listed on the inventory when the annuity is still in the accumulation phase.

Death Benefit

Sometimes annuities have stand alone death benefits or death benefits attached to the living benefits. This means a certain amount is guaranteed at the death of the annuitant. In some cases, the death benefit is the reason an annuity is sold as life insurance was not an option or was too expensive. It is important to know if an enhanced death benefit exists and if so, know this and other relevant facts. Who is the annuitant? What is the death benefit exactly? What happens in the case of divorce if the contract is divided or moved to the non-annuitant spouse? Now that the couples are divorcing, is the death benefit still relevant or should other options be considered? The death benefit should be on the latest annuity contract statement. However, it is not listed as an asset on the marital inventory as it will only be pain in the event of the annuitant’s death.

Income Phase

If an annuity is in the income phase, it is in distribution. The distribution may be a systematic withdrawal stream on a guaranteed basis, a systematic withdrawal on a non-guaranteed basis or annuitized. This set of facts is vital to know in the case of a divorce.

Systematic Withdrawal – Guaranteed Basis

This should be the most common situation with an annuity. The income from the living benefit has been triggered. In the example above, the 5% income stream at age 65 has begun off the 7% compounded annual growth the annuity provided. If this is the case, the annuity may not be divisible without significantly hurting the amount of income the annuity provides on a guaranteed basis. Contact the carrier to determine how, if at all, the annuity can be divided, and the income stream kept intact. The income stream however may be divisible. The division of this works much like a pension on the estate spreadsheet where a net present value of the future income stream is calculated, and this is the number on the marital inventory.

You can also forego a net present value calculation of the income on the marital inventory and split the income 50/50. We recommend contacting the annuity carrier to determine if division can occur at the carrier level so there is little, if any, interaction between the parties. You will also want to ask the annuity carrier what happens if the annuitant dies. The wife may not receive any payout if the annuity is based only on the husband’s life and he dies or vice versa. Some payouts are based on joint life and some are on single life which were determined at the income stream’s inception. It is vital to understand what happens in the event of one spouse’s death.

Systematic Withdrawal – Nonguaranteed Basis

If this is the case, you can likely divide this annuity. It may not be attached to a living benefit guarantee. This is the least likely to exists and rarely seen, but it is a possibility. It is important to call the carrier and determine your options if this set of facts exists with your annuity. The issue will be mainly surrender charge penalties when this annuity is divided if it is still in the penalty period. We would also ask if there are any issues with the annuitant – is it joint annuitant or single annuitant and will this be possible if you change to the spouse who wants the asset or if you divide the contract in half.

Annuitized

If this is the case, the annuity cash value no longer exists – it is only an income stream. Older contracts typically have this. Most newer contracts do not require annuitization because the contract corpus is gone – it belongs to the annuity company. The valuation of this is now just like the valuation of a pension plan. The carrier may have the income based on joint life or single life. They may divide the income in half but when one spouse dies, the income stream may cease for all. The carrier must be contacted to determine what happens at the death of the owner and/or the death of the annuitant. These facts are important to know as they relate to the income stream after one spouse dies. If you do not want to divide the income, one can calculate a Net Present Value of the future income stream as one would a pension and this number should be indicated on the marital inventory as an asset to be offset with other assets.

Owners and Annuitants

Aside from the issues we stated above in valuing and dividing annuities in the accumulation and the income phases, the named owner and named annuitant could alter the course of the annuity division. It is vital to know who the owner is and who the annuitant is (they may not be the same). These set of facts may determine what happens to the contract when this is divided to the non-owner and/or non-annuitant. Some contracts are jointly owned the with joint annuitants or jointly owned with single annuitants – and each carrier can handle dividing these differently. A simple call to the carrier and a discussion with a member of client services advanced team should straighten out these issues, we just want you to know what to ask for.

Summary

We highly encourage you to reach out to a professional who not only understands annuities, but also understands divorce laws in your area. A Certified Divorce Financial Analyst is the perfect person to have on your team if you or your spouse own an annuity and you are walking through a divorce. We at Divorce Strategies Group understand annuities and divorce finance and can help as well. Contact us for your 30-minute free consultation today.

Filed Under: Dividing Property, Divorce Finance Tagged With: #divorce recovery group, #divorcemediation, #divorcesupport, alimony, co-parenting, custodial parent, divorce attorney, divorce lawyer, divorce mediation, divorce with children, mediation

What does Divorce Mediation Involve?

September 15, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

In Texas, divorce mediation is a confidential process where a neutral third person (the mediator) helps divorcing couples reach a divorce settlement. The mediator facilitates communication between the parties to promote settlement and understanding between them. Mediation addresses child custody, child support, visitation, spousal support, and property division. The mediator does not act as a judge, attorney, or financial advisor, but assists the spouses in reaching a voluntary agreement.

Denise French founded Divorce Strategies Group, LLC in 2014 and since that time we have continuously guided clients through the divorce and mediation process. We believe mediation is an excellent tool for divorcing couples, especially when there are contentious issues. Our goal is to help you reach a satisfactory agreement with your spouse, without having to endure a lengthy, costly trial.  Save time! Save money! Get on with your life.

How does Mediation work in a Texas Divorce?

The goal of mediation is to work through all the issues of your estate and the issues with minor children. An attempt at mediation is strongly recommended and often even required in many Texas counties.  In mediation, you will most likely be in separate rooms while your mediator(s) walk in between the rooms.  Sometimes, the parties will be in the same room, if they wish to be and it is productive.  Without minor children, expect to mediate for a half day. When minor children’s issues are involved, expect to spend an entire day in mediation.  At the end of mediation if agreements have been reached a binding, legal document called a Mediated Settlement Agreement or MSA will be signed by everyone.  This document is irrevocable and binds your agreements legally.  The fight is, in essence, over at this point which typically brings much peace and relief.  The MSA is also a tool used to push your agreements through the court system as a judge cannot typically overturn a property drafted MSA.

After the MSA is completed a divorce decree will be drafted by an attorney which reflects the agreements you made in mediation. The divorce decree (which you will review and also need to sign) along with the MSA are presented to the judge in court (or remotely due to COVID-19) and used to finalize your divorce.    The mediation document is usually 6 – 10 pages long while your actual divorce decree is 30 – 50 pages long.

Why Should I Use Mediation to Settle our Divorce Conflict?

  • Mediation is flexible – While we have a process, we acknowledge every family and every divorce is different.
  • Mediation is future oriented – We are going to focus on where you are headed, not where you have been. Everyone in divorce has some type of pain or fear. We understand and we are happy to listen and help you heal. However, in mediation we will focus on the future.
  • Mediation works – Mediation has a high success rate, especially when both spouses are open to compromise.
  • Your information is protected – Mediation is confidential.
  • You and your spouse are in control of the outcome – Your future in not the hands of a judge hearing only a tiny fraction of your life story.

What sets our firm apart?

The founder of Divorce Strategies Group, LLC, Denise French, has been divorced herself and understands what you are going through!  Her divorce was costly and long.  Sadly, it was also damaging to her family, her finances and her children.  She strives to help litigants avoid the heartache her family endured.  This is personal for her.  Denise is not a lawyer.  She is a financial expert in litigation and fully understands divorce finance in Texas.

Denise works alongside several family law attorney mediators.  These mediators, along with Denise, will walk you through every aspect of your child issues and your financial issues to help you achieve a win-win solution for your family.  Our partner attorney mediators are Denise Khoury of Guajardo, Khoury Family Law and Manny Caiati of Caiati Law & Mediation.

Denise is a Credentialed Advanced Mediator through the Texas Mediator Credentialing Association with hundreds of cases both as a mediator and as a financial expert in mediation.

The decisions you make in mediation will have lasting, lifelong ramifications for your children and/or your lifestyle and financial wellbeing. We have a proven, 7 step process which involves the help of a financial expert and a family lawyer – both of whom are also mediators. Together, this is a place where you can work through all the child custody issues as well as the financial issues without the fight in court and with proper guidance.

Contact Divorce Strategies Group today!

Before you contact a divorce lawyer, call us.  Need more information about divorce and mediation? We invite you to contact our office for a complimentary consultation. We are here to help you in every way possible!

Filed Under: Alternative Dispute Resolutions Tagged With: #divorce recovery group, #divorcemediation, #divorcesupport, alimony, co-parenting, custodial parent, divorce attorney, divorce lawyer, divorce mediation, divorce with children, mediation

Good Things Can Come From Divorce

August 10, 2020 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

Let’s face it. Change is tough for many people and divorce changes just about every facet of your life.  Divorce can often test one’s ability to handle change to an extreme.   Some people struggle more than others with change. They fight it, avoid it, fear it, and sometimes feel guilty about it. These notions would make anyone want to keep things as normalized as possible. One would think only adrenaline junkies and dysfunctional people would want to disrupt what could be a perfectly normal situation.   However, change can be very positive and powerful, especially if you have been in an unhappy or abusive marriage.   Here are five truths in my life I’ve experienced with change.  Hopefully this will help readers cope with their own life changes.

1. Change is inevitable

While divorce may not be inevitable, relationships will evolve. Whether you cling to what you have or long for something more, change is unavoidable. Nothing can or will stay the same. You have power when it comes to change. Your actions or reactions to change will determine how positive or negative the change is. Get comfortable with the notion of change as part of the evolution of life and stop resisting.

My divorce meant not only losing a spouse, but losing his entire family, the life I had envisioned and dreams I had of being a stay at home mom.  Oddly, I have a relationship with my ex-spouses family today.  It’s different than it was, but it’s good.  I also had the chance to be a “stay at home” mom for a year, and I found I really didn’t like it.   I love to work and I’m a better mom because of it.  I own two businesses today which I never would have had the chance to own if I had stayed in my marriage – he would not have given me the freedom to explore these opportunities.  What was the absolutely worst thing in 2007 is a gift today.

2. Change helps your brain stay healthy

Science suggest our brains need new and varied problems to work on. When our minds aren’t working out problems, solving mysteries, or figuring things out we can become weak. Change is one of the best ways to keep our brains healthy. This means our lifespan will be healthier, and our mind will not be as susceptible to diseases like dementia. It’s good for your brain to embrace the change in your life as a puzzle you can solve.

I certainly fought the divorce in the beginning, and I went through the stages of grief for at least a year if not longer.  No doubt, there was a grieving process to walk through.  However, my divorce also brought about new changes which were fun and unexpected, like meeting new friends and having a fun, loving social environment.  I was also able to thrive with my career after the divorce which meant learning a lot of new things and experiencing new challenges.  When I was no longer subject to emotional abuse I was able to really thrive and grow.

3. Change creates maturity

Sometimes change comes with a price tag. Sometimes change comes with a penalty. Sometimes change requires risk, and sometimes change is forced on us. No matter how change occurs, it causes us to grow. From learning we are tougher than we realized and having to do some difficult things – change creates maturity.

When my divorce was over I made a list of gifts.  To my suprise, I had three pages of small, single spaced gifts.  Many of them had to do with personal strength and fortitude.  I’m so much stronger today.  While I certainly would not have chosen this path voluntarily, I’m so grateful today for it.

4. Change teaches you to overcome fear and anxiety

Whether stepping out towards change in doubt or being pushed into the unknown without your consent, change can be scary. The devil we know is easier to manage than the one we don’t. Once the fears are faced, they are often scarier in theory than reality. Change teaches you to overcome fear and anxiety as you learn new coping skills or how to talk yourself through fear.

I was a single mom of a 2 year old child when my divorce was final – that is big change.  It was scary.  Looking back I’m convinced there is no stronger force than a parent protecting their child.  Being a single mom of a young child drove me to bigger and better things with my career.  It also lead me to be a better mom and person.   I no longer fear financial insecurity (for the most part).  I no longer fear being alone. I no longer fear many things – all because of what I went through.

5. Change gives you choices

Once the spirit of change is validated and embraced, change can become part of your normal routine.  If you choose something and don’t like it, that isn’t the end of the line. Change things again! From changing your coffee order to the brand of cereal your family eats this week, change can be fun. From picking a new wall color to a new genre of book to read, change can be exciting. From changing where you volunteer your time or which organization you donate to, change can matter to more people.

When my divorce was final I made big changes to my house – I repainted rooms, moved furniture around, rearranged the cabinets and made changes to the yard.  These small changes made a big difference.  Small things like which cabinet your plates are in can help facilitate change in your head and heart which can give you courage for more change.    In my first marriage I really wanted multiple children.  As a child I was much younger than my siblings and as a result raised as an only child.  I did not like it.  I decided very young I would have no children or multiple children – but not an only child!  Even though my first husband and I had decided on two or three children when we married, after our first (and only) child was born he decided he didn’t want any more.   Well, guess what.  When I remarried it was to someone with three young children, and now we have five!! Talk about an evolution of change.  It is a beautiful blended crazy mess which this extrovert absolutely loves.

There are many truths about change – some scary and some not so much. Embrace the concept of change, and it will lead to enjoying the realities of change.   We at Divorce Strategies Group are here to help you navigate changes from married to single.  Schedule a strategy session or call us at 281-210-0057 to schedule your first mediation session today.  No matter what your situation we strive to help our clients walk through divorce with confidence, strength and courage!

Filed Under: Divorce Support, Family & Children Tagged With: #divorce recovery group, #divorcesupport, alimony, attorney, co-parenting, divorce attorney, divorce mediation, divorce with children, family law, mediation, mediation in texas

Dividing 529 Plans in Divorce

May 8, 2020 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

Year after year, you and your spouse have been saving for college through a 529 savings account. Now that divorce is pending, it’s time to think about spending the money you’ve put aside for your children as a co-parent.  Who will be in control of how much is withdrawn and how it’ll be used?  What are the rules?  How do you put this in writing in a way that makes everyone feel secure about using these funds?   How will you handle contributing to the account going forward? Use the following to learn how dividing 529 plans in divorce works and what steps to take going forward.

CONTRIBUTIONS

You can save up to $15,000 per parent in a 529 account or $30,000 total.  Grandparents can also contribute up to $15,000 per person per year. Contributing more than $15,000 per person would need to be reported to the IRS as a gift. However, a 529 account can be “superfunded” with contributions of $75,000 per person or $150,000 per couple—which uses up your federal gift-tax exclusion for 5 years.  So each parent and the grandparents can still contribute a considerable amount to the 529 accounts.

DISTRIBUTIONS

What can you use this money for? Which expenses trigger taxes and penalties? If you do things right, no penalties or federal income tax—and, in many states, no state income tax—will be due on your withdrawals. But learning by trial and error can be costly at tax time, and more importantly, your child could lose out on financial aid if you’re not careful. So learn the ins and outs ahead of time.

Here’s a guide to help you make your 529 savings go as far as possible.

Plan for tax-free withdrawals

Qualified withdrawals are federal income tax-free so long as the total withdrawals for the year don’t exceed your child’s adjusted qualified higher education expenses (QHEEs), discussed in #3 below.   To calculate these, add up tuition and fees, room and board, books and supplies, any school-related special services, and computer costs, and then deduct any costs already covered by tax-free educational assistance. Examples include Pell grants, tax-free scholarships and fellowships, tuition discounts, the Veteran’s Educational Assistance Program and tax-free employer educational assistance programs.

You’ll also need to deduct costs used to claim or Lifetime Learning Credit. The basic rule: You can’t double up tax benefits for the same college expenses.

Know which expenses qualify

When you pay qualified education expenses from a 529 account, your withdrawals are tax- and penalty-free. As of 2019, qualified expenses include tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, only $10,000 total can be spent each year per beneficiary on elementary, middle, or high school tuition.

Money saved in a 529 plan can also be used to pay qualified expenses associated with college or other postsecondary training institutions. Eligible schools include any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

While funds from a 529 account can be used to pay for expenses required for college, not all expenses qualify. Tuition and fees are considered required expenses and are allowed, but when it comes to room and board, the costs can’t exceed the greater of the following 2 amounts:

  1. The allowance for room and board included in the school’s cost of attendance for federal financial aid calculations
  2. The actual amount charged if the student is living in housing operated by the educational institution

In other words, if your child is planning to live off campus in housing not owned or operated by the college, you can’t claim expenses in excess of the school’s estimates for room and board for attendance there. So it’s important to confirm room and board costs with the school’s financial aid office in advance so you know what to expect. Also, keep in mind that in order for room and board to qualify, your child must be enrolled half time or more.

Textbooks count as an education expense, but only those included on the required reading for the course.  Computers and related equipment and services are considered qualified expenses if they are used primarily by the beneficiary during any of the years that the beneficiary is enrolled at an eligible educational institution. Computer software for sports, games, or hobbies would be excluded unless the software is predominantly educational in nature.

It’s important to keep receipts and make sure that qualified items are purchased separately from nonqualified items. Be careful to avoid expenses that don’t qualify—for example, equipment used primarily for amusement or entertainment doesn’t qualify. These and other lifestyle expenses, like insurance, sports expenses, health club dues, and travel and transportation costs, will have to be funded through other resources. If you’re not sure whether a plan covers a particular college expense, the college’s financial aid office should be able to help.

Check with the school to find out exactly what’s required so you can avoid accidentally taking a nonqualified distribution. If you withdraw money for anything that doesn’t meet the qualified expense criteria, any part of the distribution that is made up of earnings on contributions will be taxed as ordinary income and could incur a 10% federal penalty. However, the penalty may be waived if there are extenuating circumstances, such as the disability or death of the beneficiary, or if the beneficiary receives a scholarship, veteran’s educational assistance, or other nontaxable education payment that isn’t a gift or inheritance.

If a distribution from a 529 plan is later refunded by an eligible educational institution, a recontribution can be made to the 529 plan. The recontribution must be made no more than 60 days after the date of the refund. The recontributed amount cannot exceed the amount of the refund.

Keep good records

Your 529 savings plan administrator will, in most cases, provide an annual statement that reports your contributions and earnings, including the amount you withdrew from the plan. But it’s you, not your program provider, who is responsible for accurately reporting to the IRS. If your withdrawals are equal to or less than your qualified higher education expenses (QHEEs), then your withdrawals including all your earnings are tax-free. If your withdrawals are higher than your QHEE, then taxes, and potentially a penalty, will be due on earnings that exceed your qualified expenses. For many people, keeping track is easy because large tuition bills use up most of their 529 savings. But if you are using your 529 plan for room and board expenses, it’s smart to keep those receipts.

When divorced, you’ll need to find a way to make sure the IRS receives the correct information. You’ll either need to work together with your spouse each year on what expenses each of you will turn into the IRS or you’ll want one only spouse to handle a particular child’s education costs and reporting needs.

Decide how to withdraw the funds

It’s important that withdrawals you take from your 529 savings account match the payment of qualifying expenses in the same tax year. Like some families, you may choose to pay the school directly from your 529 account for ease in recordkeeping and matching distributions to school expenses. In this situation, make sure you are aware of school payment deadlines and the time required to transfer funds from the 529 account to the school. It can take several days for investments to be sold out of your 529 account and mailed to the school and then a week or so for the payment to make it through the mail and then processed by the school.

Or you may choose to move money from your 529 account to your bank or brokerage account. Many colleges prefer payments to be made electronically through their website from a bank or brokerage account. You can choose to pay bills first and then reimburse yourself from the 529 account, or you can pull money from the 529 account and then use it to pay bills from your bank or brokerage account. This path also provides flexibility when paying smaller bills like those for books or off-campus room and board.

Keep in mind that you must submit your request for the cash within the same calendar year—not the same academic year—as you make the payment. If the timing is off, you risk owing tax because it’s considered a nonqualified withdrawal.

Prioritize which 529 accounts to spend from first

If your child has more than one 529 savings account, such as an additional account through a divorced co-parent or a grandparent, knowing which account to use first or how to take advantage of them concurrently could help. Don’t leave decisions to the last minute—instead, sit down with all plan owners and decide on a withdrawal strategy ahead of time to make sure the qualifying college costs are divvied up in the most beneficial way.

Also, if financial aid is in the picture, a distribution from a grandparent-owned 529 account may be considered income to the child on the next financial aid application, which could significantly affect aid. To avoid any problems, grandparents can take distributions from 529s as early as the spring of the student’s sophomore year—right after the last tax year on the student’s last undergraduate Free Application for Federal Student Aid (FAFSA), assuming the student finishes college within 4 years. Wait until the following spring to employ this strategy if it looks like your child will take 5 years to graduate.

Money left over in your 529 plan?

With careful planning, you can avoid having money left over in your 529 account once your child graduates. But if funds remain, there are several options available. You can let the money sit in the account in anticipation of your child continuing on to graduate school or another post-secondary institution. If so, you’ll want to rethink your investment strategy depending on how soon the funds will be needed so you can take full advantage of the potential for growth over time.

You also have the ability to change beneficiaries without incurring tax consequences. Here are 2 different options for maintaining your tax advantage and avoiding any penalty:

  1. Change the designated beneficiary to another member of the original beneficiary’s family. IRS Publication 970 has a lengthy list detailing which relatives count as family.  This can be done for any reason, but is an option particularly if your child receives a scholarship or decides not to attend college.
  2. Roll over funds from the 529 account to the 529 plan of one of your other children of the marriage without penalty. This is a good option if there are funds left over after graduation.

Either way, we encourage you to draft in your divorce decree what you will do if your children don’t use all of the 529 account funds.  Each child has until the age of 30 to use the funds.  At that point, you can either withdraw the funds and gift it to the child or the parents can divide the remaining funds 50/50 at the end of the time period.

Regardless of which option you choose, you will want to spell it out in your divorce decree today.  Also, each state has different restrictions on 529 accounts, so check with your financial advisor or ask your plan provider for the specific requirements of your plan.

What if the beneficiary gets a scholarship?

You’ll be happy to learn that there is a scholarship exception to the 10% penalty. You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won’t pay the additional 10% penalty that’s imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records.

Consider how college savings affect student aid and loans

While individual colleges may treat assets held in a 529 plan differently, in general these assets have a relatively small effect on federal financial aid eligibility. Because 529 plan assets are considered assets of the parent, they tend to have a small effect when the government calculates your financial aid eligibility, whereas accounts that are considered assets of the child, such as an UGMA or UTMA account, tend to have a greater effect on federal financial aid eligibility. (This does not affect 529 accounts that are owned by a grandparent.) For more information, read about financial aid planning.

If you’re thinking of taking out loans that start incurring interest immediately, you may want to spend 529 funds first, deferring these loans until later. Another situation that would call for using 529 plan funds first would be if there’s a chance your child may graduate earlier or receive some other funding down the road, such as a scholarship.

Create a Plan for Dividing 529 Plans in Divorce

At some point, you’ll actually need to start spending the money you’ve set aside. You will need to think about preserving gains you may have made so that funds will be there when they’re needed. If your plan relies on an age-based investment strategy, this process is already in place and your asset mix has slowly evolved toward more conservative investments like money market funds and short-term bonds.

Now’s the time to sit down with your divorce team and decide the best ways of dividing 529 plans in divorce, how to use these funds and who will be in control of the funds going forward.  The more you decide today, the less you have to decide in the future when the safety of your divorce attorney in negotiations with your spouse is gone.

Filed Under: Dividing Property Tagged With: 529 plans, dividing 529 plan in divorce, dividing assets in divorce, divorce with children

Tax Stimulus Checks for Divorcing Couples

April 19, 2020 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

On March 30, 2020, the Treasury Department and the Internal Revenue Service announced the distribution of stimulus package payments to account for the coronavirus pandemic. When it comes to this tax stimulus and divorce – there are often some questions.

What is the Tax Stimulus?

Payments are intended for taxpayers only, therefore, most qualifying recipients must have a social security number. There may be a minimal exception for members of the military.

Qualifying single adults who have an adjusted gross income of $75,000 or less will receive $1,200. Married couples with no children earning $150,000 or less will receive a total payment of $2,400. Taxpayers filing as head of household will receive full payment if they earned $112,500 or less. Those with dependents age 16 and younger will receive an additional $500 per dependent.

If your income is higher than the thresholds listed, then your payment will be reduced $5 for each $100 over the threshold until it stops altogether for single people earning $99,000 or more, or married couples without children who earn $198,000 or more.

You will not receive payment if someone claims you as a dependent, even if you’re an adult.

What If I Was Married For The Applicable Tax Filing, But I Am Separated From My Spouse Now?

Funds will be direct deposited based on the bank information from your 2019 tax filing. If you have not filed for 2019, then your 2018 filing will apply.

If you filed “jointly” with your spouse for the 2018 tax year, but have separated from your spouse since filing, then it is best to file your 2019 taxes as soon as possible. You will need to notify the IRS of your updated status of “separated” or “single”.

It is not likely that the IRS will have updated information for couples who have separated since their 2019 tax filing. Couples who filed jointly for the 2019 tax year but separated after filing, may need to coordinate division of the stimulus funds. If you cannot coordinate with your spouse, then seek an attorney to divide the funds appropriately. The IRS will be sending a paper notice in the mail detailing information about where your payment ended up and in what form it was made.

How Are The Payments For Children Allocated To Co-Parents?

For each qualifying child age 16 or under, there will be an additional payment of $500. The stimulus payments are based upon the 2019 tax filing. This means that if you claimed your child on your taxes in 2019, then you are likely to receive the $500 benefit for each child that you claimed as a dependent. If you have not filed taxes for 2019, then you should refer to your 2018 tax return.

The $500 stimulus payment for each child will go to the parent who claimed the child as a dependent in the most recent tax return.

Will I Receive Payment If I Am Behind On My Child Support Payments?

No. The Coronavirus Stimulus Bill has not waived offsets for past due child support. This means that if you owe back child support, then you may receive a decreased stimulus check or no check at all. If your payment is intercepted by the department of the treasury, then the funds will be given to the child’s custodial parent.

What if I was married with a high income in 2019 but didn’t qualify, but I will be single in 2020 and likely qualify for the credit?

The law says the rebate is technically an advance credit against your 2020 taxes (the return you’ll file in early 2021). Thus, it eventually will be based on your adjusted gross income, filing status, and kids under the age of 17 for 2020. That is as it should be—the financial situations of millions of people will be worse this year due to the unprecedented pandemic shock to the world economy.

But here is the win/win: If your tax year 2020 rebate turns out to be bigger than the amount you received this year, you will get the excess, which can generate a larger refund when you file next year.

However, you will not have to give back the payment if your rebate based on 2020 income turns out to be smaller than the amount you get this year. Thus, some filers may have an opportunity to strategically time their 2019 returns–if they have not filed already.

Tax Stimulus and Divorce: Stay in the Know

To check on the status of your stimulus check, visit the IRS website. If you believe that your spouse has inappropriately withheld your portion of the stimulus funds or you need more assistance regarding the tax stimulus and divorce, discuss options with your attorney. Need help with your divorce finances? Contact us today!

Filed Under: Divorce Finance Tagged With: divorce finance, divorce with children, tax stimulus

Primary Sidebar

Recent Posts

  • Back to School Basics for Busy Co-Parents
  • A Child Centered Divorce
  • Confidence in Conflict: Three Methods to Resolving Conflict Without Losing Your Cool
  • What is a Divorce Coach and How Can they Help You?
  • Ending a marriage? Don’t get divorced from financial reality in the process.

Recent Comments

    Archives

    • August 2022
    • June 2022
    • May 2022
    • January 2022
    • June 2021
    • May 2021
    • April 2021
    • March 2021
    • February 2021
    • January 2021
    • December 2020
    • November 2020
    • October 2020
    • September 2020
    • August 2020
    • July 2020
    • June 2020
    • May 2020
    • April 2020
    • March 2020
    • February 2020
    • January 2020
    • December 2019
    • November 2019
    • October 2019
    • September 2019
    • August 2019
    • July 2019
    • June 2019
    • May 2019
    • April 2019
    • March 2019
    • February 2019
    • January 2019
    • November 2018
    • August 2018
    • July 2018
    • June 2018
    • April 2018
    • February 2018
    • January 2018

    Categories

    • Alternative Dispute Resolutions
    • Dividing Property
    • Divorce Coaching
    • Divorce Finance
    • Divorce Support
    • Family & Children
    • Uncategorized

    Meta

    • Log in
    • Entries feed
    • Comments feed
    • WordPress.org

    Footer

    Copyright © 2022 - All Rights Reserved | Web Design by The Crouch Group | Log in