Family Law Advisor®The Divorce, Alimony, and Custody Reporter
Volume 8, Issue 1
|
| Asset | Husband's Share | Wife's Share |
| Family Home | $1,000,000 | $0 |
| Family Business | $0 | $1,000,000 |
|
Retirement Accounts and Investments |
$250,000 | $250,000 |
| Total | $1,250,000 | $1,250,000 |
The wife's share of assets actually decreases in real dollars if we add an artificial premium to the value of the business she retains:
Inflated Value Division
| Asset | Husband's Share | Wife's Share |
| Family Home | $1,000,000 | $0 |
|
Family Business with Divorce Premium |
$0 | $1,500,000 |
|
Retirement Accounts and Investments |
$500,000 | $0 |
| Total | $1,500,000 | $1,500,000 |
Under certain circumstances the IRS allows a deduction for the payment of alimony. The deduction is granted in part because the recipient is taxed on alimony. The two spouses or former spouses end up paying less in taxes because alimony is deductible. The parties are shifting income from a higher to a lower tax bracket by transferring alimony from the higher income spouse to the lower income spouse. The high earner saves money that would otherwise be paid to the IRS. The recipient usually benefits because the payor is more generous because of the tax savings.
For example, if the higher earner makes $200,000 a year and pays the other spouse $80,000 a year, the higher earner is actually taxed on $120,000, not $200,000. The recipient might pay taxes of $16,000, but the payor would have paid $50,000 on $200,000 and now pays only $24,000 on $120,000. Between the two spouses, they are paying a total of $40,000 or $10,000 less than the higher earner would have paid before deducting the alimony payments.
Not all payments qualify as deductions. The IRS imposes seven requirements upon taxpayers seeking a deduction:
- Dollars. Do make payments in cash or by check to or for the benefit of a spouse or former spouse.
- Documents. Do make payments in accordance with a divorce document, such as a marital settlement agreement, separation agreement, court order or divorce judgment. Payments made pursuant to a temporary order or order pendente lite also qualify under Section 71 of the Internal Revenue Code.
- Designation. Do include a statement in the divorce document labeling the payments as deductible by the payor and taxable to the recipient. Spouses sometimes intentionally make those payments nondeductible and nontaxable if they have not had a chance to analyze the tax consequences.
- Distance. Do live apart. Payments must be made after a physical separation.
- Death. Do terminate payments on the death of the recipient and include that condition in the divorce document. Most payors also have the right to terminate alimony on the recipient's remarriage or the death of the payor.
- Dependents. Do maintain a clear division between alimony and child-related events. If you terminate alimony upon the emancipation of a child, you run the risk of the IRS reclassifying past alimony as nondeductible child support. Your past alimony deductions would be disallowed, and you end up owing back taxes.
- Declining. Do follow IRS rules against front-loading. Alimony should not be excessively high or front-loaded in the first three post-separation years. Excessive payments are subject to recapture or being taxed to the payor in the third post-separation year.
For more information see "How to Deduct Alimony Paid," Publication 17, http://www.irs.gov/forms/pubs.
Psychological Testing in Custody Cases
If you are fighting for custody of your children, chances are you have met with at least one mental health professional for an evaluation of your parenting skills and have undergone interviews and possibly psychological testing.
One of the most popular tests, the MMPI-2 or the Minnesota Multiphasic Personality Inventory was designed "to identify psychological disorders and to evaluate cognitive functioning…this test, by itself, cannot tell an evaluator who the better parent will be." (Attorney Alvah O. Smith, writing in "Psychological Testing in Custody Evaluations: Cross Examining the Court-Appointed Custodial Evaluator," published in "Family Law," Law Education Institute, Inc., Milwaukee, WI, 2004.) Smith also states in the same article that the Rorschach Inkblot Test is "highly subjective" and subject to heated debate, although frequently used in custody evaluations.
Other tests used by custody evaluators:
a. The Millon Clinical MultiAxial Inventory (MCMMI-3) is used to find personality disorders based on the respondent's answers to 175 true/false questions.b. The Thematic Apperception Test (TAT), similar to the Rorschach Test, asks the respondent to describe what he or she sees when viewing 31 black and white drawings of people. The responses supposedly reveal personality.c. The Bricklin Perceptual Scales (BPS) was designed specifically for custody evaluations and is made up of 64 questions for the child about the parents; picture-drawing by the child of the family, each parent and the child; the child completing a story about how the family resolves disputes; and finally questions for the parents. Smith states that the test's validity has been seriously questioned.d. The Ackerman-Schoedorf Scales for Parent Evaluation of Custody (ASPECT) includes a variety of tests, including the MMPI-2, IQ testing for the parents and child, a draw-a-person component and the TAT, as well as interviews of the parents. Like the BPS Test, ASPECT has also been sharply criticized.Testing is only one tool, often a short cut for gathering and assessing information. Evaluators may rely more heavily upon interviews with the parents, children and sometimes with teachers, pediatricians, babysitters and other important people in the lives of the family like stepparents, siblings and grandparents. If the evaluator feels friends and family are biased, they may skip those interviews.
The final word, however, belongs to the court, and not to the evaluator, but a prudent parent will be forthcoming, sincere, and cooperative with the evaluator, because most judges carefully read the evaluator's report and recommendations.
The High Cost of Litigation or the Cost of Failing to Settle before Retaliation
The Family Law Advisor editors solicit advice and quotes from divorce professionals and litigants. The shortest and possibly the wisest is simply "Settle!" Jack Welch, former CEO of General Electric, should have followed that advice.
Jack Welch recently went through a highly publicized divorce from his second wife Jane. According to various published reports, Jack initially paid Jane $35,000 a month in alimony. Jane wanted more. She was also furious after Jack filed for divorce in Connecticut and watched while she was served with papers in the couple's home. Jack could have minimized the trauma by having papers delivered to Jane's attorney, but he was determined to file and serve papers in Connecticut before Jane had a chance to file in New York where the couple maintained a lavish apartment at GE's expense.
The parties married in 1991. It was Jack's second marriage. He had already served 8 years as CEO of GE when he married Jane. She was a corporate attorney, 17 years younger than Jack. After the parties married, Jane stopped working. There were no children.
The parties had a prenuptial agreement that spanned a 10-year period. At the time of the divorce the prenuptial agreement was no longer in force. Short-term or time-limited prenuptial agreements are used when parties are almost exclusively concerned about what they would lose if the marriage ended in the first few years.
After Jack announced his retirement, he stayed at GE to oversee another venture without consulting Jane. She became increasingly unhappy and began an affair with a chauffeur in Italy. The relationship lasted a few months.
Jack began his own with the editor of the Harvard Business Review. He hoped Jane would quietly leave the marriage so he would be free to remarry.
Jack asked his Connecticut divorce lawyer to give Jane a list of three divorce lawyers she might hire. Instead she hired New York counsel. Jane was not behaving like a GE underling taking orders from the boss.
After Jack served divorce papers, Jane retaliated. She filed a detailed affidavit describing all of the perks the couple enjoyed at GE's expense, including their Manhattan apartment, dry cleaning, flowers, expensive tickets to sports and cultural events, and even vitamins, according to the Wall Street Journal.
Jack was furious. He claimed he was entitled to all of the perks after a long and successful tenure at GE. He also argued that Jane had done nothing to help his career or to earn any of those benefits.
Jane's disclosures came at a bad time. People were reeling from the excesses of the executives at Enron and Tyco. Although the press contends GE is not in the same league, GE was probably worried about public perception.
Friends, including GE's top brass, urged Jack to settle quickly. Jack was too angry about Jane's affair to settle. He hired another lawyer who also advised him to settle.
Ultimately Jack and Jane did settle. According to published accounts, Jane received a great deal more than the $35,000 in monthly alimony, and also received a hefty property settlement in the neighborhood of $145 million.
Jack also gave up his lavish GE perks, probably to assure shareholders that GE was not another Enron or Tyco. The tardy settlement was a costly settlement that might have been less expensive earlier in the litigation.
Advice from Married People
We asked several married people what they do to keep their marriages alive. Here are some of their responses:
Daily Toast and Coffee: A Commitment
"I make coffee and toast every morning for my husband. It's not really about breakfast. It's about making a commitment each day to the marriage."--Texas homemaker married 32 years to a physician.Kissing
"I always kiss my wife like it's the first time I ever kissed her--big munchy kisses."--Colorado businessman married for over ten years to his fourth wife.Intellectual Attraction
"Sex fades, but we're still intellectually attracted to one another."--Maryland physician married over 30 years to an attorney.Faith and Impulse Control
"Faith helps. You need to see beyond the moment. Just because you have a problem doesn't mean you should end the marriage. Some people are too impulsive."--Martha's Vineyard artist married 40 years to a retired business executive.Believers, Non-believers and Long-Term Companions
"I know plenty of people who believe, but they're divorced. I also know people who don't believe who remain married. Marriage is about getting through the hard times together and enjoying the companionship of your long-time partner."--Federal District Court judge married over 30 years.The Right Choice
"I married the right woman."--Husband of the Martha's Vineyard artist.Marriage Classes
For couples that need a little extra help, marriage classes are proliferating, according to the February 5, 2004 edition of USA Today. Classes focus on:
- Communication
- Conflict Management
- Problem Solving
- Empathy Building
Fees range from modest charges for a short class to hundreds of dollars for classes that take several months. There are no uniform standards or certification of class leaders or course content, so beware when selecting teachers and classes.