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- Web Chapter A
Special Circumstances
Planning
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- Chapter Goals
Identify many common special planning situations.
Discuss divorce and remarriage requirements.
Distinguish between planning for traditional and
nontraditional households.
Present the needs of the affluent.
Describe business owner and corporate manager needs.
Isolate the requirements for people with health and aging
problems.
Determine important disability and dependent care
factors.
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Deal with elder care and terminal illness issues.
- Divorce Planning
Divorce planning: The scheduling of matters in
connection with the breakup of the household.
In many states the presumptive breakup will result in
an equal division of marital assets.
– Marital assets: Those that were generated or acquired
during marriage.
– Nonmarital assets: Those that were developed prior to
marriage or were a result of a gift or bequest during
marriage.
– In general, to be considered nonmarital, assets must be
kept in an individual’s name and not commingled.
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- Divorce Planning, cont.
Other relevant factors in a division of assets include:
– Amount of nonmarital assets: When considerable, the judge
may incorporate them to some degree in any ruling.
– Needs of the individual parties: The capabilities and desires
of each party may be included.
– Historical cost of living: While it is often not possible to
maintain the accustomed standard of living, in certain cases
it may be used as a benchmark to start from.
– Circumstances of Breakup: Length of marriage and
seemingly clear cut instances of flagrant nonmarital behavior
may be reflected in rulings.
– Human Assets: Earning ability, age, and health.
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- Property
Property usually refers to the tangible and financial
assets owned by household members.
– Generally consists of assets developed during the
marriage or commingled assets.
– The exact separation of assets may be determined by
negotiation with the 50-50 rule serving as a guideline.
– Under a Qualified Domestic Relations Order (QDRO) the
spouse is entitled to one-half the value of assets in a
pension, and transfer requires approval.
– Upon divorce the money may be divided and the usual 10
percent tax penalty on withdrawals before age 59 ½ is
waived. The money distributed from the pension may also
5 be transferred to a rollover IRA to escape taxation.
- Alimony
Alimony (maintenance) is the ongoing payment to
the former spouse upon divorce.
– Meant to provide support to the lower earning or non
earning person and to make it easier for the higher earner
to provide compensation when there are insufficient
tangible assets to fund a lump sum payment at the time of
the divorce.
– The amount paid is taxable to the recipient at ordinary
income rates and is tax-deductible by the payer.
– Alimony may be non-modifiable, which means it may
continue at the stated rate for the period of time indicated.
– On the other hand, it may be open-ended, which means
the amount and time span for payment may be subject to
review.
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- Child Support
Child support is the series of payments that are
made specifically for the support of the child.
– The payments often end when the child becomes 18, but
can be extended to provide resources while he or she is in
college.
– Payments for child support have no taxable impact on
either the payer or the recipient.
– Payments may be increased by petitioning the court or the
document may provide for higher costs such as those for
inflation over time.
– Because of the tax benefit, payers prefer alimony to child
support, and there are rules intended to uncover childcare
payment that has been disguised as alimony.
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- Risk Management
Risk management in divorce planning is intended to
assure that agreed-upon payments are actually
made.
– This is a particular problem in divorces because a large
number of payers default on their obligations, and even
court orders do not always rectify the problem.
– Life insurance is the most common form of risk
management.
A life insurance policy that is made payable to and
owned by the recipient can be established.
It can provide funds to replace those from the former
spouse upon an untimely death.
– Health insurance after divorce generally covers children
until age 21, even if they are not living at home.
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- Tax Issues
Being married rather than divorced carries tax
implications.
– Generally, being married and filing a joint return is
beneficial if both spouses earn about the same amount.
– It will be disadvantageous, as compared with being
divorced and filing two single returns, if one spouse earns
much more than the other.
– Your marital status is determined on the last day of the
calendar year or, under some conditions, when you and
your former spouse are living apart.
– Legal fees for tax advice in connection with divorce are
tax-deductible.
– The fees of financial planners, accountants, actuaries, and
appraisers may be tax-deductible as well.
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- Other Issues
A former spouse is entitled to a Social Security
benefit equal to 50 percent of the higher earning
spouse’s benefit, provided they were married for 10
years or more.
– The former spouse can select the greater of the amount
from their current marriage, any other previous marriage
of 10 years or more, or their own Social Security.
– If the former spouse dies before the age of eligibility for a
full pension and the remaining former spouse is at full
retirement age or above, he or she is entitled to 100
percent of the former spouse’s Social Security.
– Both parties are responsible for the debts of a spouse until
the divorce decree is final. Property settlement notes and
liabilities to third parties may be lifted upon bankruptcy.
Child support and alimony liabilities remain after
10 bankruptcy.
- Financial Planning for Divorce
There are a number of strategies and issues that
should be reviewed when divorce is contemplated.
– Inflation adjustments.
– Where there is some uncertainty, higher alimony payments
can provide greater net benefits than child care when tax
deductions and taxable income are combined.
– Negotiations for property settlements should include probable
tax treatment subsequent to divorce.
– Mediation, arbitration, and sometimes direct negotiations over
settlement terms.
– The ability of each party to financially maintain the assets
preferred should be taken into account.
– Planning for the period beyond divorce for the non earning
spouse or the one unfamiliar with financial and other
operating matters should begin as soon as it is feasible.
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– Property settlements should be emphasized where feasible.
- Financial Planning for Divorce, cont.
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- Remarriage
Second marriages often involve assets brought to
the marriage that remain in each person’s name
rather than being fully integrated, due to:
– Wariness after an unsuccessful or costly first marriage.
– Separate obligations from a previous marriage.
– A more cautious attitude as one gets older.
– Sizeable assets that have been accumulated.
By second marriages:
– One or both parties may bring to the new marriage
children from a previous one.
– An elderly man or woman whose spouse has died later
may remarry for companionship and sharing of household
duties. The children may lose part or all of the inheritance
to their parent’s new spouse.
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- Remarriage, cont.
The following planning strategies may be
considered:
– A frank discussion of the issues that are likely to cause
friction after the marriage. When the parties differ in how
they wish to use their capital, each may hold back assets
so that they can fund their obligations or wishes
separately.
– Postpone consideration of controversial issues. When a
marriage progresses well and the relationship deepens,
many issues can better be solved later on.
– Use a prenuptial agreement.
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- Prenuptial and Postnuptial Agreements
Prenuptial agreements provide, before marriage, for
financial and other terms upon the divorce or death of
the asset holder.
– Provides for permanent separation of assets when one or
more parties want to leave their money to someone else.
– Must be voluntary. Terms cannot be so one-sided that if there
is a divorce, there are insufficient funds for the second
spouse.
Postnuptial agreements are entered into after marriage
and provide the terms upon breakup due to death or
divorce.
– They can be used when both parties agree on what is a fair
settlement in the event of divorce.
– The judiciary may believe that a party, when married, can be
15 subject to intimidation, the courts may require a higher
- Nontraditional Families
Nontraditional families: Adults other than single or
married persons who live together in a relationship
intended to be permanent.
– Distinguished from traditional families by marriage.
– The rights and requirements of marriages are established by
federal and state regulations and judicial rulings, and are
statutory.
– The rights of unmarried cohabitants have grown in recent
years in many municipalities and corporations. But substantial
differences between marital and non marital couples remain in
this country with varying views by governmental and business
organizations.
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- Retirement Planning, Nontraditional
Families
An unmarried person who lives with a partner receives
no social security benefits, and does not receive death
benefits from the partner’s Social Security or from an
employer.
The cohabitants can purchase an insurance policy on
the working partner’s life, payable to the worker’s
cohabitant.
Unmarried couples who have retirement assets in joint
name would have to prove that they contributed their
monies.
Otherwise, assets received during their lifetime could
be considered a gift which could subject it to the
combined estate gift tax.
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- Insurance Planning, Nontraditional
Families
Some life insurance companies may reject a payee for
a life contract on the basis that he or she would not
suffer a financial loss if a partner died.
Homeowners insurance may only cover the individual
whose name is on the deed. Thus, a cohabitant who is
not so listed may want to take out separate renter’s
insurance.
Automobile insurance companies will not generally
issue joint coverage for unmarried couples. Therefore,
two policies should be obtained or, if applicable, the
second party should be added on as occasional driver.
An increasing number of companies provide medical
18 coverage for both parties in an unmarried relationship.
- Estate Planning, Nontraditional
Families
Unmarried couples are not entitled to a marital
exemption which, on the death of the first spouse,
eliminates estate taxes on assets that are transferred
to the surviving spouse.
Leaving IRA monies to a non spouse will allow that
person to inherit the money with mandatory taxable
withdrawals taken over time based on the beneficiary’s
life expectancy with the balance remaining in the IRA
compounding tax-free.
– Converting an IRA to a Roth will allow the beneficiary to inherit
the money income tax-free.
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- Estate Planning, Nontraditional
Families, cont.
The surviving spouse of a person who dies without a
legal will by law receives part or all of the proceeds.
An unmarried partner will often receive nothing.
– Even when the blood relatives who will, by law, receive the
proceeds recognize the unmarried spouse’s rights and
transfer the money to him or her, difficulties with the gift tax
arise.
A will may be contested by blood relatives, and in
some jurisdictions probate court may not be receptive.
– Placing assets into named beneficiary accounts like insurance
policies, IRAs, joint accounts, bypasses probate. Living trusts
bypass probate as well. You can name a cohabitant as
trustee as well as beneficiary.
– Under assets in joint name the presumption may be that all of
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the assets are in the estate of the first to die which can result
in higher estate taxation. Carefully kept records can overcome
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