Financial Investigation Tips for Second Marriages

June 2, 2015

INTRODUCTION by ROBIN GRAINE, JD, Virginia Supreme Court Certified Mediator

As a divorce mediator, I am keenly aware that many of my clients will enter into second (and sometimes third and fourth) marriages. In fact, the U.S. Census Bureau reports that, within five years of a divorce from a first spouse, a whopping one in five Americans says “I do” a second time.  A two marriage record is OK . . . but a two-time personal divorce statistic is really hard to deal with for most people.

Hopefully, whatever mistakes you made in your first marriage will not be repeated in your second attempt. If some of the problems in your first marriage had to do with money, this article will help you with essential and necessary ways of determining what you are getting into the second time around.

Though it may be uncomfortable to do the investigation necessary to ensure “financial bliss,” successful remarriages need to start with openness, trust, and a mutual value system. If you are concerned about your financial future with your new bride or groom, you may need to open up your tax files as big as you open up your heart . . .  it really should not be a problem.  If it is, there’s your first warning that things might not be as perfect between you as you had thought.

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Graine Mediation’s guest blogger, Julian Block, who is a leading national tax professional and attorney, has this to say about protecting yourself financially before you say “yes” to a second marriage:

Tax Reminders for Couples Contemplating Tying the Knot—Again

As an attorney and author who has written and lectured extensively about the tax aspects of marriage and divorce, I frequently receive questions from couples contemplating marriage.

One of my standard recommendations is that they consider the tax consequences beforehand, especially when one of them or both of them are remarrying. My advice: Before they commit to a walk down the aisle, each should consider whether to ask the other for copies of tax returns. In my experience, it’s particularly important for women to do that.

To illustrate how I would advise them, let’s say it’s going to be a second or third marriage for both John and Marsha—something that’s not uncommon nowadays, judging from the SundayStyles Section of the New York Times.

Something else that’s no longer uncommon is that her holdings considerably exceed his. Possible reasons why she’s wealthier? Much-married and several-times-widowed Marsha inherited assets from her spouses; or a couple of divorces resulted in her receiving several sizable settlements; or she was one of the Facebook staffers who were enormously enriched by its IPO.

Both Marsha and John are old enough for membership in AARP. Their ages matter because the divorce rate is extremely high for people over age 50—particularly for those who remarry.

Mindful of those stats, Marsha had John assent to a prenuptial agreement (just as she did in advance of earlier marriages). What else might Marsha do? I counsel her to ask for copies of John’s federal and state returns. Depending on what they reveal, she might decide that it’s prudent to stay single or, if they do wed, to file separate returns.

Following are summaries of scenarios I created that, albeit unromantic, are based on actual events.

Fear of filing:  It turns out that John hasn’t filed returns, something that’s common across all levels of society. It’s vital that Marsha know his potential liability for back taxes, penalties and interest. Also, he must specify when he will file returns and arrange for installment payments that will square him with federal and state tax agencies.

My advice, should Marsha wed: She files separate returns and doesn’t mix her assets with his assets. Also, she asks John to fill her in on what other shoes might drop.

A less troubling scenario that’s nonetheless problematicWhile John has filed 1040s, he owes considerable amounts in back taxes, and interest charges continue to mount. Marsha’s tactics, assuming they wed: Again, file separately and not comingle assets until he has squared accounts with the IRS. There’s a snag if they file jointly and are due a refund; the IRS can apply the refund to his back taxes.

John has filed returns and owes no back taxes: Marsha should still scrutinize certain deductions and other items on his returns. Let’s focus on some of the easier ones.

 Alimony payments: John’s returns reveal that he makes alimony payments to his ex-wives that he didn’t mention to Marsha;

Dependency exemptions for children not living with John due to divorce or separation: A divorce settlement (or settlements) allows him as a noncustodial parent to claim such exemptions.  He never told Marsha about those children;

Gambling: John’s returns show substantial amounts of gambling winnings for “other income” on line 21 of the 1040 form. Those returns also show offsetting deductions for gambling losses on line 28 of Schedule A. Losses are deductible only up to the amount of winnings. Does he have nondeductible losses that far exceed winnings? Perhaps the amounts wagered indicate that John gambles compulsively;

Schedule C: John files a Schedule C for his dental practice. A cursory review of amounts entered for business receipts and expenses suggests he’s understating gross receipts and overstating expenses. Whereas dentists in his area typically claim expenses equal to about 50 percent of gross receipts, his expenses equal about 75 percent of gross receipts. A plausible explanation for the discrepancy is that John doesn’t deposit currency payments received from patients into the practice’s bank account, and he tells his accountant to use bank deposits to calculate gross receipts. Is John trying to pull one on the IRS?

Schedule A: Line 4 shows he claims hefty itemized deductions for medical expenses (allowable to most persons only for the part above 10 percent of adjusted gross income). Deductions could be easily explained as attributable to payments for insurance premiums and expenses usually not covered by insurance—for instance, dental work, hearing aids, glasses, medically required home improvements or private duty nurses. Or the reason for substantial write-offs might be that, like Tony Soprano, John sees a shrink several times a week. Not to imply that there’s anything wrong with those visits; still—like the restorative powers of chicken soup—it can’t hurt and might help for Marsha to determine how much John has in common with Tony or, worse yet, Norman Bates.

Donations: John’s a chintzy contributor, whereas Marsha is a generous giver. This may not be a deal breaker, but they should discuss charitable donations before marriage.

Withholding: Each year, John receives big refunds, deliberately as a form of forced savings or simply by neglecting to claim enough exemptions on his W-4. But interest-free loans to the IRS are anathema for someone like Marsha, who meticulously monitors her withholding from wages and outlays for estimated payments. Her returns may show small balances due. It’s preferable that they discuss before marriage how they’ll handle withholding.

In the midst of all these thorns, there are some roses. Assume John has a substantial capital loss carry forward and no unrealized capital gains. At $3,000 a year, it will take many years to use up John’s carry forward. She, however, has a substantial unrealized capital gain. Marriage means Marsha can realize the gain and offset it against John’s carry forward.

Similarly, suppose he operates a business that’s unprofitable. He has a hefty net operating loss carry forward; but not enough other income to absorb the carry forward. Marsha has sizable income. Marriage enables him to apply his carry forward against her income.    

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Julian Block writes and practices law in Larchmont, N.Y. and was formerly with the IRS as a special agent (criminal investigator) and an attorney. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: “a leading tax professional” (New York Times); “an accomplished writer on taxes” (Wall Street Journal);and “an authority on tax planning” (Financial Planning Magazine). This article is excerpted from “Julian Block’s Tax Tips for Marriage and Divorce,” available as a Kindle at Amazon.com and as a print copy at julianblocktaxexpert.com. Law professor James E. Maule, a professor at Villanova University School of Law and Graduate Tax Program, praised the book as “An easy-to-read and well-organized explanation of the tax rules.”  The National Association of Personal Financial Advisers says it is “A terrific reference.”

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.


Separation & Divorce With a Millennial Child Still at Home

June 18, 2013

familiesMany young adult children – known as Millennials (those born between approximately 1982-2004) find themselves in the middle of their parents divorce in more ways than one. It not a new phenomenon that parents wait until their children are grown before they embark on a divorce, but today’s young adults are often still in the nest when this happens relying on their parents for both shelter and financial support.

Why do so many parents get divorced when their children are barely out of their teens or are just beginning their lives as independent adults?  In previous years, many parents have waited until their children left the nest because it was only then, when the intense focus on child rearing disappeared, that the couple realized the extent to which their relationship with one another had changed. Other times, parents notice the changes in their feelings for one another, but agree not to put their children through the emotional turmoil that often accompanies a divorce until after the children are “old enough to understand”.

This latest generation of children crossing the threshold into adulthood, the generation known as “Millennials” and “Generation Y”, is making these sorts of decisions a bit more complicated for parents than had been the case with previous generations. If you are considering a separation or divorce, and have children in their mid-teens to late twenties, here are some things to keep in mind about the way this generation differs from previous generations of young adults and the complications these differences may present in a divorce.

One of the most important factors affecting this generation, and how they go about the business of growing up, is the economic climate that Millennials have inherited.  As we all know, the marketplace is hardly ideal for these young people in terms of finding work. The Millennial Generation is the first generation, since the Great Depression, which, economists predict, will probably do worse, economically, than their parents.

As a result of this, Millennials enter adulthood slower than previous generations — sort of like a “delay” in growing up — because there is not a whole lot to grow up for when there are very few “adult” jobs available.  This means that they are delaying marriage, home-ownership and long-term employment longer than their parents or grandparents did. The Millennial Generation has less financial and job security than previous generations did in their twenties, but they are also the most educated generation in history.  This odd combination not only leads to tremendous frustration for these young people who were told, in no uncertain terms, to “get an education”, but has saddled many of them with tremendous student loan debt. This generation has more debt than any other generation before them due, mostly, to the sky rocketing costs of college and that fact that so many of them have taken their parents advice and gotten their degrees, only to have no where to put their newfound education to work.

The result?  Many Millennials are staying in their parents’ homes longer, or returning to live with them, after finishing undergraduate or graduate school. This is important information for parents considering a separation, because they will also have to take into account where the adult child, who plans on returning home after college or still resides at home (and can’t find work, and is saddled with debt) will go if the family residence is sold? Also, the parents will need to consider how the surmounting expenses that often appear as a result of divorce (e.g. two mortgages/rents, legal fees, etc.) will impact any promises made or expectations (based, perhaps, on what the parents did for an older sibling) regarding financial support, assistance with paying off debt, etc.

Many Boomer and X Generation commentators, (who are the parents of the Millennials), have stated that their progeny are the most coddled generation to date. This may be true, but the main reason for this “coddling” also needs to be pointed out: The parents of Millennial Generation children tended to have fewer children than their parents or grandparents did.  Their energies, focus and emotions were, therefore, all directed toward one or two children. The end result of this “coddling” is not all bad, however, as the Millennials tend to have stronger bonds with their parents which, research shows, leads to better relationship skills as adults.    Unfortunately, however, these stronger bonds may lead to more serious emotional consequences when these young adults have to deal with their parents’ separation and divorce. Parents, therefore, should not expect that, just because their son or daughter is now twenty something, that he or she will accept the news of the intent to separate or divorce lightly.  Divorcing parents with millennial-aged children should be prepared for any number of reactions and need to carefully choose their words when letting the kids know what is happening in terms of how a divorce may affect everyone in the family, both emotionally and financially, and what is expected of the children in terms of helping out financially, finding their own residence despite economic hard times, etc.

Primary Source:  “What It Means to Be a Millennial”, Presented by The Diane Rehm Show February 18, 2013. http://thedianerehmshow.org/shows/2013-02-18/what-it-means-be-millennial

Posted by Zia Meyer, Mediation Assistant (and a Millenial)

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.


Living Separate and Apart – What does that Mean?

November 14, 2011

With the tough current ecomonic times, many couples who are planning for a divorce are making the choice to remain under the same roof, in the marital residence, during their legally-mandated period of pre-divorce separation.  This is probably not what the Virginia legislature intended when they wrote the law about living “separate and apart” before divorce, but this is where we are at in these shaky financial times and the courts have found themselves having to creatively define what “separate and apart” means.

In Virginia, the law states that, before being granted a no-fault divorce, parties must “live separate and apart, without cohabitation and without interruption, for one year”.  If there are no minor children, and if the parties have a written and signed settlement agreement, their period of living separate and apart is just six months.

The reason for the one-year separation rule is public policy: The state wants married couples with children to be absolutely sure that divorce is what is best for their family.  In order to determine that, the legislature has forced families to go through all of the holidays, birthdays, seasons, etc. before they are even allowed to make that final decision to divorce.  Living under the same roof does not truly meet those public policy mandates, but if that is what you plan on doing (and many peope do, these days), here are some guidelines that may help you in determining how to live separate and apart while under the same roof:

  • One spouse should deliver a formal letter to the other stating the intention to live separate and apart as of a certain date.*
  • To establish separate households, you should not engage in the following activites:
    • Sexual Relations
    • Sharing of Food (keep food separate in pantry and refrigerator)
    • Sharing a Room
    • Shopping and Cooking for each other
    • Cleaning Up or doing each other’s Laundry
    • Giving Gifts to each other
    • Attending (arriving at) Social or Family Functions Together
    • Holding Yourselves Out as a Married Couple
  • Spouses should separate and secure Computer, Phones and Email Accounts*
  • Spouses should consider dividing Bank Accounts (close joint accounts)*
  • Spouses should consider paying off and closing Joint Credit Cards*
  • Spouses need to Agree On Division Of:
  • Household Expenses
  • Household Duties
  • Living Arrangements
  • Childcare
  • Other tips:
  • Let others know you are separated
  • Choose a friend of famly member, who visits frequently, as your independent witness.  In Virginia, you will need someone to testify as to your living separate and apart.
  • Be prepared to explain, in a way that is comfortable for you, the reasons for living separately in the same residence to your family, friends, neighbors and children.

*These are bold pre-divorce financial moves that should not be attempted without the advice of legal counsel.

This article is not intended to take the place for legal advice from an attorney.  This blog is for informaitonal purposes only and is not legal advice.

Source: From Virginia State Bar, Family Law News – Fall 2010 (Vol.30 No.3) with personalized comments and suggestions by the blogger, Robin Graine

 


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