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Carol
Ann Wilson, Certified Financial Planner, is a recognized
specialist in marital financial issues and a pioneer
in the field of divorce financial planning. Her pre-divorce
financial consulting company, Quantum Financial, Inc.
has been in business since 1985. In 1993 she founded
the Institute for Certified Divorce Planners and in 2002
she founded the College for Divorce Specialists to train
attorneys, CPAs and financial professionals in the financial
issues in divorce. She is now the president of the Financial
Divorce Association. She designed software which is widely
used by lawyers and financial planners to calculate the
financial result of divorce settlements. She has also
served as an expert witness in court in over 100 divorce
cases nationwide.
Carol
Ann is the author of The Financial Guide to Divorce
Settlement, and 40 Tips for Surviving Your Divorce.
She is the co-author of The Survival Manual for Women
in Divorce, The Survival Manual for Men in Divorce, ABCs
of Divorce for Women and The Dollars and Sense
of Divorce.
She
frequently serves as a speaker and faculty member of
high-ranking legal and financial organizations and has
been published in many professional journals.
She
has appeared on the Regis Philbin Show, Geraldo, LifeTime
Live, CNBC Financial News and numerous radio programs.
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Tip of the Month:
Basis
in property is a big issue.
After being involved with over
600 divorce cases, I find that the one question most overlooked
by attorneys is,
What is the basis in the house (or stocks, other real estate,
or other investments in the couple’s portfolio)? Consider
the following case study.
After 18 years of marriage, June and Stan are getting divorced
and they have three assets: a cabin on a lake worth $190,000,
a 401(k) plan worth $90,000 and
a Certificate of Deposit worth $140,000. Stan said, “Why don’t you
take the cabin and sell it?” He had borrowed $140,000 against the cabin
the year before. “If you sell it, you will get $50,000. You take the 401(k)
worth $90,000, and I’ll take the CD, so we each end up with $140,000.”
June talked this over with her attorney and they thought that
this sounded fair.
| |
Assets |
June |
Stan |
| Cabin |
$190,000 |
|
|
| |
-140,000 |
|
|
| |
50,000 |
50,000 |
|
| 401(k) |
90,000 |
90,000 |
|
| CD |
140,000 |
|
140,000 |
| Total |
$280,000 |
$140,000 |
$140,000 |
What Stan did not talk about -- and what the attorney should
have asked about was the basis in the cabin. Stan had paid $20,000
for this cabin 15 years earlier. There was a $170,000 capital
gain, which created a tax of $42,500 (capital gains tax at 20%
plus state tax at 5%). June received $50,000 and had to pay out
$42,500, so she had only $7,500 left.
| Cabin |
$190,000 |
| Basis |
- 20,000 |
| Capital gain |
$170,000 |
| |
|
| Federal tax (20%) |
34,000 |
| State tax (5%) |
8,500 |
| Total capital gains tax |
42,500 |
If June would have to liquidate
the 401(k) to pay expenses, the after-tax value of the 401(k)
plan is approximately
$60,300, so June ends up with $67,800. The $140,000 that Stan
borrowed from the cabin and put in the CD was his, tax-free and
clear. He ends up with $140,000 and she ends up with $67,800,
because the question was not asked about the basis. Do you think
June’s attorney had some liability here? Absolutely!
| |
Assets |
June |
Stan |
| Cabin |
$7,500 |
7,500 |
|
| 401(k) |
60,300 |
60,300 |
|
| CD |
140,000 |
|
140,000 |
| Total |
$207,800 |
$67,800 |
$140,000 |
Be sure to investigate the basis in all assets. Then there will
be no surprises.
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