HIDDEN COSTS OF DIVORCE
June 13, 2011 § 4 Comments
John and Marsha have decided that they are tired of living in their own, personal soap opera, and they have agreed to an irreconcilable differences divorce. It looks pretty simple:
Marsha will get the former marital residence. It’s paid for and Marsha intends to stay there. The house sustained some damage in a wind storm a couple of years ago, and the parties got $10,000 for repairs from insurance, but they spent it on a Hawaiian vacation, with a few days in Vegas on the way out, in an unsuccessful attempt at refreshing their marriage. Marsha says she can get the repairs done or not because they don’t affect its habitability. The roof needs replacing, but it’s been patched and doesn’t leak. She says she’ll fix it if and when it leaks or when she sells the house, but she does not have the $6,000 it will cost right now.
The parties own two adjoining commercial lots worth about $15,000 each. Marsha has agreed to take the lot they purchased in John’s name in 1990 for $1,500 before Wal-Mart located down the street. John will get the jointly-titled lot they purchased for $12,500 several years ago. A car lot is expanding and has expressed an interest. Marsha would like to settle the divorce as soon as possible so as to cash in. Marsha owes $14,000 on her credit cards, and she’s behind in her payments, so she needs as much cash as she can get out of sale of the lot.
The parties will split the 1,000 shares of Wal-Mart stock that they accumulated through the years. Marsha really doesn’t know much about stock, so John has generously agreed to divide the shares.
Marsha has enjoyed driving the 2008 Jaguar that John bought her several years ago in an attempt to make up after she caught him in a questionable situation with a waitress from the Waffle House. The car is paid for, and Marsha loves it because she has never had a nice car before. She will get it in the divorce.
John has agreed to pay Marsha $1,000 a month in rehabilitative alimony for 36 months. Even with the alimony, it will be a tight squeeze financially for Marsha, so she doesn’t need any unpleasant financial surprises after the divorce is final.
Marsha is in a hurry. She wants you to do up the papers and she will pick them up to go over with John tomorrow, so she can get them filed right away.
It’ll be a snap to prep the PSA, and you are tempted to just hand the notes over to your secretary so they can be done while you hit the golf course.
Before you jump on this, though, ask yourself whether Marsha will really be getting what she thinks she is bargaining for. Consider:
- The divorce will be a transaction effecting a change of ownership in the former marital residence, triggering a re-rating of the homeowner’s insurance. Because the hurricane repairs have never been done and approved by the insurance company, Marsha’s homeowner’s insurance premium is likely to skyrocket. Not only that, but there are other factors that can adversely affect Marsha’s insurance premium, including her credit rating, which is questionable due to the credit cards. In order to get her homeowner’s insurance premium back with a reasonable range, she will have to spend that $6,000 on the roof and complete the other repairs. How can she find out in advance whether she will have a problem? Marsha can get a free insurance C.L.U.E. (Comprehensive Loss Underwriting Exchange) report by writing CLUE, Inc. Consumer Disclosure Center, P. O. Box 105295, Atlanta, GA, 30348-5295, or by calling 1-866-312-8076. An insurance agent can help her decipher the report. And, as you probably know, she can get a free credit report once a year.
- When the commercial lots are sold, Marsha will be paying capital gains taxes, currenty 15%, on $13,500. John will be paying capital gains on just $2,500. Marsha’s tax bite will be $2,025, leaving her $12,975. John’s taxes will be a mere $375, allowing him to pocket $14,625, or $1,650 more than Marsha.
- Also, has Marsha gotten a title opinion on the commercial lot titled in John’s name? It would be a bitter pill indeed to discover when she goes to sell it that John borrowed money against it without her knowledge.
- The stock has the same pitfall as the commercial lots. Stock purchased for $25 a share years ago will carry a much heftier capital gains burden than will the shares purchased for $65 a few years ago. Moreover, John can allocate himself the shares that have sustained losses in the recent downturn. Yet the parties are treating all the shares the same, and, to make it worse, John will call the shots.
- As for her ride, Marsha needs to look at it as a cash drain. How much is she willing to let it drain her? The insurance alone is more than $1,500 a year, and this year’s tag, which is now due, is $862. Not only that, it uses exclusively premium gas, and has never gotten the 21 miles to the gallon that the dealer promised. Yes, it is paid for, but would she do better selling it and taking the cash to buy something more economical? Can she even afford this car?
- Finally, the alimony is taxable income to Marsha unless the parties agree that it will not be taxable. John will not likely agree due to the fact that he will get to claim it as a deduction. Is Marsha aware of this? Can you negotiate an extra $300 or so a month for Marsha to use to pay her income taxes?
You can do the papers exactly as Marsha dictated, or you can sit her down and bring all these matters to her attention. It’s the difference between acting as Marsha’s clerk-typist and acting as her lawyer. You get to decide.
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Insightful! The CLUE info especially.