It is very easy for divorcing parties to get confused about the treatment of property division and alimony as separate issues in divorce. Divorce settlement is a 3 step process in Florida.
Step 1, is division of assets. It is important to note that this is completely separate from alimony. Often we will hear from a client that “he/she is getting that money in the settlement, therefore they don’t need alimony. ” It simply does not work that way. The marital property accumulated during a marriage is usually divided in half. Unless there is a request for special consideration or “special equity” by one party, the norm is a 50/50 split.
When an asset cannot be divided or when the parties don’t want to physically divide an asset, (like a house), then there is an equalization payment by one party to the other to adjust the assets they are taking from the marriage. The most common example of this is a payment made from one spouse to the other to “buy out” his or her portion of the house.
The tax consequences in a divorce are very subtle and mistakes are often made. I won’t go into detail here, but determining the tax issues in divorce and planning for them is a major role of a CDFA.
Step 2, is alimony or spousal support. This is based on a variety of factors including the ability to pay of one party, the needs of the other, the length of the marriage, age, health and a variety of other criteria.
Although the assets received in the divorce are not considered alimony, they do come into consideration on the issue of need. If a wife, for example, receives $1,000,000 in liquid assets that produce $50,000 in income, then that $50,000 in income is used in determining her need as far as alimony is concerned. She will not however be required to use her principal to support her lifestyle.
Alimony is usually taxable, but not necessarily so. There are rare occasions when the parties agree that the alimony is neither tax deductible by the party paying nor taxable to the recipient.
Step 3, is child support. Child support is usually the guideline number from the state worksheet based on the party’s monthly income. There are cases when a different number is negotiated and both parties agree.
It is important to note that Child Support usually ends upon the emancipation of the child (June of the year they graduate from high school).
All of the above are the issues that need to be forecast and planned in a divorce. If you are relying solely on an attorney to plan your financial future you could be making a serious mistake. Divorce planning is forward looking and attorneys are just too busy to do financial planning for their clients. Many divorcing women, even today, do not understand the finances of their marriage and tend to make the following mistakes:
- Keeping the house at all costs, even though it is not liquid and may not be the best long term choice, and making the wrong mortgage choice when they refinance after the divorce.
- Keeping too much cash in the bank after a divorce rather than prudently investing it to produce additional income.
- Not setting aside money for taxes from their alimony payments each month to pay the IRS.
- Listening to non qualified individuals on financial planning matters is one of our concerns for you. Real estate agents and mortgage brokers are not necessarily financial planners and you should ask them for their credentials before accepting any financial planning advice.
Using the services of a CDFA is crucial to your long term success after divorce. Our fees are minimal compared to an attorney. Don’t let the opportunity pass you by.