Understanding the Community ‘Pie’

It’s all in the Pie

In this video I want to talk a little bit about the ‘his’, ‘hers’, and ‘community’ and how all that works together in the realm of divorce. It is a common thing that I hear, “that was his account” and “that’s her account” and they get stuck in this fact that it’s not a community account. Texas is a Community Property state which means that everything that you own at the time of divorce is assumed that it is community, now I’m not going to talk in this video about the difference between community and separate property so for sake of argument let’s say that everything that you own today is in fact community. I want you to get out of the idea of thinking that there’s this ‘his account’ ‘her account’ mentality because it’ll confuse you and it forces people to get stuck in negotiation unnecessarily.

How to Divide the Pie

When you think about community you need to think of it like a pie; it could be any kind of pie that you want, I like apple pie so let’s assume it’s apple pie. Everything that we own is inside this apple pie and when you are negotiating your divorce it doesn’t matter if it’s his account in his name or her name or y’all’s name is on it, it’s all in the pie including all the debts. Everything is in this pie! When you are going through and negotiating things, you’re going to actually each cut out different pieces of the pie. You may have smaller pieces you may have bigger pieces but at the end of the day you’re going to get to a just and right division, now I did not say a 50/50. You have to be really careful because in the state of Texas it is common that there is not an actual 50/50 division, again that a discussion for another video on why that is, but it it’s not always 50/50 so there may be a slight variation. Now, I want to preface that with I have not seen, others might have, but I don’t believe that I’ve seen anything above a 60/40 division, so we are going be close to a 50/50. It’s going to be a ‘just and right’ division but you’re going to each have different pieces of that pie, different sizes, you may have a sliver of this account and a sliver of that account at the end of the day you’re each going to have your portions and you’re going to then have to retitle or transfer things so that everything goes into the proper name at the end of the day.

When you’re thinking about your property division think of everything in the pie, we’re going to put everything in the pie, don’t get stuck on ‘his account’ or ‘her account’ or ‘y’all’s’ account, everything is community. If you have additional questions or want to understand how this impacts your specific situation, give us a call at Next Step Divorce Solutions and we will be happy to explain it more to you. Have a good one!

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What is a CDFA®

What is a CDFA® a CDFA® is a Certified Divorce Financial Analyst®, they are a professional that helps parties of a divorce understand and educate them about the various options they have in negotiating their property division. As a CDFA® they can help each party either individually or as a neutral, working with both parties, to understand what post-divorce will look like from a property and income and cash flow situation. In another video we’ll actually talk about who would be appropriate to use CDFA® and how that might look.

Who Should Hire a CDFA®

In my last video I talked a little bit, very briefly, about what is a CDFA® or a Certified Divorce Financial Analyst®. In this video I want to deep dive a little bit into who can a CDFA® serve and who is best to hire a CDFA® as part of their divorce team.

The first question you have to ask yourself is ‘do you have property’, a CDFA® specifically is a part of the divorce when it comes to property being divided. So, if you do not have any property; don’t own a home, you don’t own a car, you have no bank accounts, maybe you’re newly married and it just didn’t work out and you don’t own anything together and you decide to separate, in those situations a CDFA® is really not beneficial to you. There’s not much we can do for you as far as being hired in the process. Now if you have some of those things and you’re saying ‘OK what level of those things do I need to have before CDFA® is beneficial to me’ in my opinion, in the years that I’ve had in both divorce and financial planning, in general anybody with some assets, whether it’s just a house, or just some cash, or just brokerage accounts, or a combination of all those things, it is always a good idea to at least have a consultation with a Certified Divorce Financial Analyst. The reason that I say that is because you’re going through a transition and it’s always helpful to have some level of information and education about the decisions that you’re making in the process. A Certified Divorce Financial Analyst® should be able to give you kind of a road map of whether or not it is valuable to hire them during the process or not. One of the things you have to be very careful about and just understand is that when you’re doing a negotiation, when you’re doing your divorce, when you sign an agreement whether it’s the final decree or it’s just that mediated settlement agreement, once you sign an agreement on property it is done you cannot go back and fix it. There are certain things in a divorce that are modifiable, child things typically are modifiable, but property division is not. So, you really have one chance to make sure that it is right. That is where CDFA® can come in to make sure that you’re making educated informed decisions about the property division.

So, who can a CDFA® help? They really can help anybody with property. I would encourage you to reach out to your local CDFA® and talk with them to find out if it’s necessary to have them brought into the overall process. Thanks, and if you have more questions, you can always reach out to us at Next Step Divorce Solutions.

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Taxes and Divorce

Understanding the tax code is a full-time job, but it’s imperative that you understand how your divorce decree impacts your tax situation. There are a few main things you should be familiar with as you negotiate.  

Tax Filing Status 

Your tax filing status is dependent on your marital status on December 31st of each year. If you are mid-divorce you will need to file your taxes as Married Filing Jointly or Married Filing Separate. If you finalize your divorce on December 30th you will have to file as either Single or Head of Household.  Each one of these filing statuses comes with its own breakdown of income for each of the tax brackets and some nuanced rules around credits and deductions allowed and to what level. If you are in the process of getting a divorce and there are children involved, make sure you understand the difference between Head of Household and Single filing status. You can speak with a Certified Divorce Financial Analyst® for a high-level overview, but your CPA or accountant can guide you in the specifics. As you change tax filing status’ make sure to adjust the withholdings on your paystub by updating your W-4 so that you are withholding the proper amount for taxes.  

Tax Credits 

There are a few important tax credits to highlight in divorce, especially for the 2021 tax year. The Child Tax Credit and Child and Dependent Care Credit are two credits that often come up in divorce if children from the marriage are involved. Typically, the primary parent, usually the one claiming Head of Household, would claim both credits if they qualify however the non-custodial parents (or the one that has the child(ren) less time) could negotiate that the child tax credit be transferred or alternate. Why is this valuable? A credit is a dollar-for-dollar reduction in your tax bill. The maximum child tax credit is $2,000 per child up to certain income limits. In 2021, thanks to the American Rescue Plan passed by the Biden Administration in early 2021, there is an additional $1,000 per child ages 6-17 and an additional $1,600 per child ages 0-5. The 2021 additional credits are limited to lower tax brackets than the standard child tax credit, and your tax filing status matters in determining what that threshold is. This could be quite substantial! Be aware that these additional tax credits are also getting partially paid out in the second half of 2021. They are not stimulus payments so you need to understand how you will file for 2021 to determine whether you may have to repay those credits. There were also major increases to the Child and Dependent Care Credit, for some, it could be as much as an $8,000 credit! For more information contact your local Certified Divorce Financial Analyst® or CPA to understand how these changes may be impacted by your decree.  

Ordinary Income vs Capital Gains 

When you divide investment assets in lieu of a divorce the transfers themselves don’t normally cause any tax implications, but if you need to begin accessing funds from those assets to live on or make a large purchase then tax implications will come into play. As you negotiate your settlement make sure you are aware of your short- and long-term needs because it may adjust how you should approach the property division. There are two types of tax that could come into play if you sell an asset, the first is capital gains. Currently, most people fall in the 15% capital gains bracket however it can be higher if you are in the top tax brackets. This tax comes into play in the sale of a home or investment property or if you sell from a non-retirement investment account. You pay the tax on the amount of the gain, which is the difference between the value at the time of sale and what you paid for the asset. The second type of tax is ordinary income. Ordinary income is the tax you pay on all income including any distributions from pre-tax retirement accounts, like a 401(k), IRA, or annuity.  

As you can see taxes are complex and have a lot of moving parts. As you negotiate your divorce settlement be sure to understand how your decisions will impact your tax situations now and in the future. For more guidance contact your local Certified Divorce Financial Analyst® and CPA for guidance.  

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How A Pre-Nuptial Agreement Can Save Your Marriage

This guest post is offered by former Family Law student Rachel E. Barron of Bloodworth Law Firm, PLLC, and was originally posted on the Regent Family Restoration blog.

Pre-Nuptial Agreements, or “prenups” have a bad reputation for being a document that people only get before marriage because they either: assume the marriage will not last, or, because they do not fully trust their future spouse. Unfortunately, this bad reputation has placed such a stigma on prenups that many people believe that it is better to not get married than to marry someone who is asking for a prenup. This is not only a potentially bad decision financially, but it can also spell disaster for the potential relationship quality of a couple. This blog will go through two myths and misconceptions people have about prenuptial agreements.

Myth One: “I don’t have significant assets, so a prenup would be a waste of money.” Financially speaking, prenups are well-known to be a common method of protection for individuals who are well-off financially prior to marriage. A prenup is generally a good idea, even if you do not have significant financial assets, and especially if you live in a “community property” state. In Texas for example, there is a presumption that any property acquired during a marriage is “community property,” regardless of the source of funding used to acquire the property.[1] This presents a problem, because it requires someone claiming separate property to prove the property is separate by tracing its origins, and that generally requires litigation. I can affirm that this process is expensive, and litigants sometimes spend more money proving their separate property, than they would have paid for a prenup. If you have any property that carries a license, title, or deed before getting married, including bank accounts, investment funds, a vehicle, or real estate, you need to speak to a licensed attorney, and probably a financial advisor about how a prenup can protect your assets. Prenups can also minimize litigation over issues like spousal maintenance, or alimony, and division of liabilities. Here’s the bottom line: no one buys insurance expecting to actually use it, but it is a huge relief when it is needed, because you’re covered. Prenups work much like insurance; for a relatively low “premium,” you can save a small fortune if litigation is needed. In fact, speaking from someone who has spent the better part of the last decade composing invoices for divorce litigation, prenups can be the wisest “insurance” available.

Myth Two: “A prenup means I don’t trust my future spouse.” A prenup is not about a lack of trust.  Rather, it is about being a good steward of what you have. Stewardship is not simply about finances or property; it is also about your relationship. A prenup by nature is a contract. The beauty of the contractual nature of a prenup is that, barring state rules, you can put almost anything into the document you want, provided that it is not illegal. The reality of marriage is that it is not only one of the most beautiful gifts God gave humanity, but it is also hard work. There are no two, perfect people, and there is no perfect marriage. It is not a question of “if” hard times will hit, it is a question of “when.”  A prenup can help prepare you for when those hard times come up. Every human has a pre-disposition towards “fight” or “flight.” Personally, I have a “flight” response. I despise confrontation (ironic for a future family law attorney, I know!) My husband is also, very anti-confrontational. Despite how well we balance one-another out, that’s a bad combination. In fact, Psychology Today™ argues that until we “do the work,” we are doomed to “recycle” our bad habits.[2] For my husband and I, a propensity to flight, nearly ended our marriage. We had to lower our own egos to allow ourselves to be humble enough to do the work. My husband and I do not have a prenup; but we both think that a prenup is a good idea for any couple who is considering marriage, and it is precisely because of our own experience, and how easy it was for both of us to ignore the problems until they exploded, after which a divorce was an easy solution.

Counseling can also minimize your chances of divorce, so a pre-divorce counseling requirement written into your prenup can be most helpful. I don’t mean simply saying “We agree to go to counseling before filing for divorce.” I mean, a detailed, spelled-out disaster response plan. Meet with your pastor, or current couples’ therapist. If you don’t have a couples’ therapist, get one! If you need a recommendation, contact your pastor to find a therapist who has the same belief-system as you and your future spouse. If you are not religious, find a therapist who specializes in couples’ counseling and who has good reviews from current, and former patients. The professional you choose can help you jointly craft a plan that works for your relationship.

Another consideration is to add a requirement that prior to filing for divorce, you both must attend, and successfully complete a Marriage Intensive Program through The Smalley Institute. The Smalley Institute provides a 3-to-5-day Marriage Intensive Program, that is designed to identify issues, and help you and your spouse communicate in a safe space and learn the tools to communicate well at home. The program is usually booked at least 8 weeks out, and it is not cheap, but it is worth the price, and the wait. I do not receive any referral payment, endorsement monies, or other incentive for referring you to this company, but I have seen them save several couples that I know from what even I believed to be an irreparable situation.

By carefully planning how you will resolve potentially detrimental conflicts before you say “I do,” both you and your future spouse can ensure that your marriage has the best chance for survival, and that your relationship actually survives “until death do[es] you part.”

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