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Recent Posts in Bifurcation of Marital Status Category
| March 30, 2011 |
| TAX TIME Advice for SEPARATED COUPLES About JOINT TAX RETURNS |
| Posted By Thurman Arnold |
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Q. I'm separated from my ex-husband, and we are in the process of a divorce. He has asked me to file jointly on a 2010 return, and I am wondering if this is a good idea. Any suggestions?
Trudy
Trudy:
I am neither a tax specialist or a CPA. As a family law attorney who is frequently asked this question, I can answer it generally (and do answer it specifically for my clients). I would need much more information in order for you to rely upon my suggestions in answer to the question you present to me. This question is highly fact/situation specific.
You refer to your husband as your "ex" which people commonly do even when they are still married but an action is pending, and I am assuming that there was no termination of your marital status in 2010 in answering this question. If your marital status was indeed terminated on or before 12/31/10, you cannot file jointly for that year.
The chief attribute of filing a joint tax return (for couples who remain married at the end of the tax year), besides potential tax savings from better tax treatment for married couples (who must be opposite-sex gendered under federal law), is something called "joint and several" liability for any amounts due and owing either based upon the return itself, or that may arise later if there is an audit and a deficiency is assessed against either/both of you - if jointly filed, the tax assessment will be joint.
If you file jointly and taxes were underpaid or under-reported, the Internal Revenue Service holds you each equally responsible for the entire amounts that should have been paid. In my experience the risk of these sort of deficiencies exists most frequently where one or both parties is self-employed, particularly in a business. People write off all kinds of expenses, and the IRS audits very few returns compared to the number that are filed. Some statistics (Kiplingers) say this one out of 150 personal tax returns. The risk of tax reporting abuse is high where the IRS is relying upon schedule C's. Perhaps obviously, business write-offs are much more susceptible to IRS attack than payrollees - depending upon what salaried employees claim as write-offs.
If you received spousal support in 2010 and you file jointly with the payor, he/she doesn't get that deduction and you pay no taxes on what you actually received. Depending upon the numbers, this may benefit you. There is no deduction for child support for the payor. For more information about "Family Support" please use my on-site search engine at the top upper right of this page.
It is common for me to see people who separated and/or filed for a dissolution in the final quarter of the prior year to then decide to file jointly for that year even where spousal support was paid, because the payor may be better off overall by electing to not deduct the alimony payments that would otherwise be deductible (and therefore taxable to you) in light of other deductions (particularly head of household). Often it is useful to have a tax preparer run the numbers both way - married filing separately and jointly. A major reason for this is the head of household deduction, which gets shared in a joint filing but is only otherwise available to the parent who had physical custody of 50.1 percent or better for six months and a day or more during the prior year (2010). The high earner gets an advantage from this. Again, I want you to check with your accountant.
There may be other benefits that accrue to a child or spousal support recipient where parties file jointly - if parties file jointly, because the California support guidelines are supposed to be "tax-effected" in the sense that people's actual filing status should be inputted into guideline support calculations (see Family Code section 4059), the payor has more "net disposable income" available to pay child or temporary spousal support when they file MFS (married filing separately) or joint. They pay the greatest taxes as "single", and so their support is lowered. However, these advantages only last so long as the marriage has not been legally terminated, whether by
bifurcation of marital status or otherwise.
I find that parties are better off cooperating about joint tax filings, when it is safe to do so. If you can file jointly because you are still married, and IF your soon to be ex-spouse gets a benefit from that joint filing (depending upon you receive spousal support or not) that is important to him (or her), I recommend that you negotiate a deal where he/she pays you a tad more support in exchange for helping him/her out on the joint filing. You will also want to agree how to divide any refunds - some or all of this refund may be community property depending on how late in the prior year you separated (monies paid to taxing authorities from community property sources remain community property).
Remember - we want to pay Uncle Sam as little as is legal. We want to make more money available to support children. Take advantage of the bias in favor of married couples when it makes economic sense for you. Cut a deal that benefits you too! This issue may give you important leverage that will help you to support the family in terms of net dollars. Otherwise, given the risks why file jointly at all?
Thurman W. Arnold, C.F.L.S. |
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| October 11, 2010 |
| What does "COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP" Mean? |
| Posted By Thurman Arnold |
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Q. I am considering a divorce. I have found the deed to our home, and I see that the grant deed by which we took title is held like this "to Jim ... and Mary ..., husband and wife, as Community Property, with Right of Survivorship." What does this mean for me?
A. There are several very important consequences that flow from this language. The way is which title is held (or "form of title") is also called "vesting." Everything I say here applies to title for any form of property - bank or brokerage accounts, for instance, as well as any kind of real estate and the types of personal property for which we use title documents.
First, a "right of survivorship" means that if one party dies - but only before a final judgment of termination of the marriage of domestic partnership, or where a termination of marital status or partnership status occurs before the rest of the case is resolved in judgment form, the party that survives them inherits 100% of the dying party's share of the community property. It does not matter that there exist a Will or Estate document that purports to create a different transfer upon death. Where a right of survivorship exists there is no need to probate an estate in order to obtain full title - all that is required is that a Affidavit of Death of Joint Tenant be recorded with the County Recorder for the County where the real property is located. A Death Certificate must be attached to it. The transfer is then complete.
For other forms of property, as with jointly held bank accounts, the same results occur. However instead of recording an Affidavit of Death with the County Recorder's Office, a Certified Copy of the Death Certificate is simply provided to the banking institution. As a practical matter vehicle titles are different in the sense (a) they are filed with any DMV office in California and (b) the title language rarely references "community property" or 'rights of survivorship', and instead titles the property to Jim "and" "or" Mary. I will have to discuss the rules relating to inheritances and surviving widows and widowers in a different blog.
Second, if a party dies after a Final Judgment dissolving a marriage or domestic partnership, or after a "status termination" before final judgment, but title to the property has never been changed for whatever reason then there is no automatic right of survivorship - in legal effect, the survivorship rights were terminated (severed) upon the by operation of law as a consequence of the Status Termination.
Likewise, if a party to a divorce proceeding dies before the termination of status then the survivorship right controls (see below). Since people don't expect this, something lawyers call a "Blair warning" based upon a particular appellate decision is set forth in the Family Law Summons Form FL-110 that no one ever seems to actually read (hopefully your lawyer told you about it).
This is one reason by marital bifurcations can have unforseen consequences and should be taken seriously when another spouse in the course of a divorce seeks to terminate status before the entire case is resolved by Final Judgment.
Third, in California when property is vested in both parties as "CP with right of survivorship" it is the equivalent of a "joint tenancy." All the same rules apply. Thus, what we are speaking to applies whether the "CP with right of survivorship" language was used for more common "to Jim and Mary as Joint Tenants is used."
Fourth, there does not need to be any reference to whether the parties are "husband and wife" for these rules to apply. Non-married people can be joint tenants as to any form of real (land) or personal property and the death of one vests the remaining title in the other - however, since there will be no termination of marital status since there is no marriage (assuming no domestic partnership either), there is only one way to destroy the right of survivorship: By transferring at least one party's interest as a "joint tenant" to themselves as a "tenant in common". The transfer of tenant in common interests after death follow the rules of testacy (a will exists and directs who gets what) and intestacy (no will exists, and specific legal rules declare who gets one depending upon their familial relationship to the decedent.
Fifth, many lawyers and savvy unrepresented parties will destroy the right of survivorship before the termination of marital status through the method outlined directly above. It only requires one party to accomplish this and it does not require the other party's consent. This has risks, however, since if you destroy a joint tenancy interest prematurely and other spouse dies then you will not inherit their interest but you will of course inherit you own 50%. If you are a child of a parent married to a nonparent or estranged parent and wish to protect your inheritance rights for an ailing father or mother - and they want you to inherit - you should consult a lawyer to assist in destroying the right of survivorship in a legally enforceable way. Note that a termination of this survivorship right violates the automatic temporary restraining orders that arise at the moment that every California dissolution or legal separation proceeding is filed, and that special rules exist for terminating joint tenancies which - if ignored - may not only render the attempt transfer void but further subject you to contempt or other penalties including attorney fees for trying to sever it improperly. Family Code section 2040(b)(c).
Sixth, and most important for the average divorce and in answer to your question, important legal presumptions arise from the Form of Title that have a huge impact on whether property is considered as community or separate. Way simply put, title held as you describe will almost certainly be declared community property for purposes of divorce and each spouse will be entitled to an equal one-half equity interest. However, that outcome does not require the "community property" language to be present in order to apply - any form of title acquired in joint names (tenancies in common, joint tenancies, tenancies by the entirety) triggers the presumption. The relevant Family Code section here is 2581.
Seventh and last for this Blog article, title presumptions are a kind of "super presumption" under the law in the sense that generally in order to rebut (disprove) them, the evidence that you submit must be "clear and convincing." A garden variety presumption in comparison is the rule that property acquired during marriage in whatever form (including title) is presumed to belong to the community. Family Code section 760.
Although FC section 760 doesn't use the word "presumption" that is what it means, and this presumption is the ordinary "by a preponderance of the evidence" presumption - meaning 51% likely or better. Clearing and convincing can be considered as 75% or better - although that is a simplification. Take a look at FC section 2581(a) and (b).
Unfortunately, that is not the end of the analysis because even where property is titled jointly, a party who can trace separate property contributions to its acquisition or certain improvements to it can recover those (Family Code section 2640) if they can follow the money through written records in a legally sufficient way in the event of a divorce. In the event of a death, these reimbursements are extinguished. I discuss "tracings" on this Blog.
Different but similar rules apply to Living Trusts which are beyond the subject of today's Blog. I can see this is a good topic and "I'll be back."
T. Wesley Arnold
http://www.ThurmanArnold.com
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| May 21, 2010 |
| Must I file a JOINT TAX RETURN if we are not yet divorced? |
| Posted By Thurman Arnold |
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Q. My husband and I separated in 2009 but we are not divorced yet. We are currently on extension because he wanted me to sign a joint tax return with him, but I am nervous about doing it and keep stalling. He says if I don't sign he will ask the judge to make me. He has his own business and I suspect he is not reporting all his income. Am I required to file jointly and what happens if I do?
A. If you remain married as of December 31 of any year, you may - but you not required to - file jointly with your husband. It does not matter that you were separated during the tax year as long as your marital status has not been terminated, for instance by a Bifurcation application. You cannot be forced to file jointly, and no judge would order that you do so. Married people who are considering not filing jointly, however, should avoid signing the joint Form 4868 for the automatic extensions; depending upon other circumstances, the IRS might deem this is a consent to a joint return.
The chief problem with filing joint tax returns is that each spouse is "jointly and severally" liable for one hundred percent of any taxes due on either and both parties' income, and interest and penalties as well. If you suspect your husband is defrauding the IRS you are ill advised to file with him. Another problem is that absent an agreement otherwise, tax liabilities incurred between the date of marriage and the date of separation are community property debts, regardless which of you generated the income upon which the taxes are based. If it is not clear that you do not intend to take on any share of the liability, particularly the portion incurred after separation, by signing jointly an argument can be made you should be responsible for one-half of the full-amount. It is best to define your understanding in a writing signed and dated by both of you.
If you do file jointly anyway, at a minimum consider first getting him to sign an indemnification agreement; if there is a court proceeding pending between you, this should be in the form of a Stipulation and Order that is filed with the Court. You want a judge's signature on the agreement because agreements have to be converted into orders or judgments anyway to be later enforced if one party breaches their promises.
Indemnification agreements are only as good as the availability of a meaningful remedy, and they apply only as between the parties and do not bind the IRS or anyone else. Even if your husband promises to pay all the taxes, interest, and penalties, and even if his promise becomes a court order, as a practical matter if he later lacks the ability to meet his obligation (or refuses to do so) you may wind up with a money judgment against him that you cannot collect.
But there can be good reasons to file jointly, and it is much less a problem where your spouse is trustworthy. Taxes are usually but not always lower, and to the extent he paid you spousal support in 2009 if you file jointly you will not be charged with that as taxable income.
The issue of joint returns is something divorcing couples often barter over. You ought to have clear ideas of the pros and cons for you in your particular situation. If you are reluctant to sign, consider what you might trade for. It may be helpful to know how much money your spouse stands to save if you agree to file jointly, so you can evaluate the value to him of your cooperation.
I urge you to speak to a competent accountant or other tax specialist early on, and before signing an extension request. Most attorneys have a limited understanding of tax rules, and they will usually urge you to consult an expert. You should follow that advice. Unless a lawyer is herself a tax specialist, avoid relying just on an attorney's opinion. Besides, an accountant can examine how you might end up under your other options.
Thurman W. Arnold III
http://www.ThurmanArnold.com
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| March 06, 2010 |
| BIFURCATION of MARITAL STATUS |
| Posted By Thurman Arnold |
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Q. If I have a divorce case pending but there has been no final judgment, is it possible to terminate the marital status so that I can remarry?
A. California requries a period of at least six months elapse between the date that a Petition for Dissolution is filed and served upon the other party, and the earliest date when a marriage can be dissolved. All the remaining issues in cases involving marital breakup may not get resolved that quickly. Some divorce cases can take years to resolve. It is entirely possible to obtain a Judgment for Dissolution even though some or all other matters between the parties are still pending and have not yet been settled or decided by a court.
There are a number of reasons why people may wish to obtain an early status termination. Sometimes they wish to remarry and at other times the fact that the marital ties continue between the parties may itself be a source of friction where, for instance, one party is resisting the fact that the marriage is ending. Terminating status might help the parties to move and so come to agreement on other issues.
However, terminating marital status has some important legal consequences and should be considered carefully. Once the marriage itself is dissolved, the time for eligibililty for social security benefits ceases to run. In order to obtain Social Security benefits based upon a spouse's employment, federal law requires the marriage be of at least ten years duration - counted from the date of marriage to the actual termination date for marital status. It would be inadvisable therefor to seek or to agree to an early termination of marital status if it had the effect of terminating the marriage earlier than 10 years - if the case is otherwise unlikely to be completed within that ten years. The date of physical separation is irrelevant under federal law.
Whether this applies to you depends upon the length of marriage so far. For instance, if you are at the six year mark it is almost certain that the marriage will be dissolved before you reach ten years, and so an early bifurcation may not matter. If your marriage is already nine years old, chances are the case will not be complete before ten.
Keep in mind, neither party is hurt by allowing the ten years to accumulate because Social Security benefits are not paid from the pocket of either spouse, but from the taxpayers' pocketbook. Allowing social security rights to accrue hurts neither party but may be important to the interests of each - indeed, for a spouse paying alimony the receipt of social security benefits may actually decrease that obligation in the future since the receiving spouse has income.
Another common important consequence of bifurcating marital status is the likely termination of health coverage. Almost all health insurance coverage will terminate upon divorce although federal law requires a transitioning period of between 18 to 36 months under COBRA regulations.
There are other important consequences as well.
A party seeking a bifurcation of status will required to indemnify the non-requesting or resisting spouse from some of the consequences if either party requests it of the court. Often bifurcation requests are handled between lawyers by way of Stipulations to that there is never a need to have a judge rule on the question.
These stipulations track California Family Code section 2337. If your spouse is seeking a bifurcation to terminate the marriage, be sure these provisions are agreed upon or ordered by the Court.
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| December 29, 2009 |
| How Are SOCIAL SECURITY benefits Treated In DIVORCE? |
| Posted By Thurman Arnold |
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Q. How are Social Securities Benefits Divided in Divorce?
A. The Social Security Act of 1935, which as been amended numerous times over the years, is governed solely by the federal law. States are powerless to effect changes in its rules and procedures. Social Security benefits are not actually divided in divorce, and California courts do not divide social security rights. They are not the subject of divorce settlements. Social security benefits are considered the separate the property of the contributing spouse. This is odd, since all other retirement plans are considered as part of the marital estate. Government employees do not contribute to Social Security. It is wasteful because, as discussed below, multiple former spouses can collect benefits on the same worker's history. It is unfair because gays and lesbians who are domestic partners under state law gain no rights in the other's work history.
A spouse of a retired or disabled worker is entitled to derivative social security benefits IF the marriage was at least 10 years in duration. This is defined as the period between the date of marriage and the date of termination of marital status. It has nothing to do with periods of physical separation, and is not affected by a decree of legal separation. It has nothing to do with the filing of a divorce itself.
The Social Security Act originally only covered certain job categories which reinforced traditional stereotyped views of family systems. Women generally qualified for insurance only through their husbands or children. Amendments in 1939 added women, who became eligible to collect on their own earnings' record and became entitled to collect that or 50% of their husband's. It was not until 1950 that benefits were extended to former spouses with children. In 1965, former spouses without children were added but they had to have been married at least 20 years. In 1977 this time period was reduced to 10 years.
Former spouses married for at least 10 years are now entitled to receive 50% of the Social Security beneficiary's benefits (as either derivative or dependent benefits) without reducing the worker's 100% benefit - in order words, in divorce the working spouse who contributed does not divide or share their retirement benefits and so the derivative benefits for former spouses do not cost either spouse. They certainly, however, cost the taxpayers. If the worker spouse dies, a former spouse(s) receives 100% of the benefits of the worker as a surviving former spouse.
This has many strange consequences. One is that since spouses and state courts cannot divide the benefits, and it costs the working former spouse nothing to allow the other spouse to claim these benefits. Imagine what hardship this might cause to a spouse whose marriage is terminated 9 years, 11 months, and 355 days after the date of marriage. They would receive no derivative benefits, period. It would cost the worker spouse nothing to delay dissolving the marriage one more day. Many spouses who anticipate a future divorce strategically hold off filing until they are assured this time has passed or will pass, for good reason. In California marital status cannot be terminated earlier than 6 months after the dissolution is filed and served. I always alert clients to this area of the law, and have many times recommended patience; it would be attorney malpractice not to. Sometimes raging working spouses want an earlier divorce just to deprive the other of this benefit. This can be most unfortunate and downright ugly. There is a procedure in California for dissolving marital status before a divorce case is completely finished (e.g., where property rights have not been determined) called bifurcation of marital status. Sometimes a spouse wishes to get divorced immediately so that they can remarry, and this can interrupt the 10 years if the Court approves it. Courts can order that the bifurcating party indemnify the other out of their own pocket for the loss of benefits, but as a practical matter there is no way for this indemnification to occur.
Another consequence illustrates a major waste within the Social Security system. Imagine that Fred marries Nancy the homemaker when they are 19. After 10 years, they divorce. and Fred marries Jennifer. After 10 years he moves on, dissolving that marriage and marrying Diane next. He is now 49 years of age. With his record, he still may have a couple of more marriages in him. At this point, assuming that none of these three women have remarried or that they remarry after age 60 (a new marriage before age 60 terminates the right to derivative benefits), each of them are eligible to receive 50% of Fred's benefits while he continues to be entitled to 100%. This means that 250% worth of benefits will be paid upon Fred's earning history alone. Even better, if Fred dies before them, each ex-wife is thereupon entitled to receive Fred's 100% - which means 300% will be paid out and, since Fred is a serial monogamist, he will probably leave a widow (Tara) who likewise receives 100%.
Also, note the risks to the women. If Nancy or Jennifer remarry before age 60 they lose any claims to the benefits generated by Fred and the count begins at zero with their new spouse and are based on the new spouse's earnings record with Social Security (assuming this person is not a government worker). If their new marriage does not make the 10 year mark, they receive nothing from Social Security from either spouse. This makes you want to reconsider a second marriage doesn't it - at least if you are a non wage earning wife! Of course, few people ever think about this because they don't know about it; this is one goal of my website as an informational tool.
California has two state pension plans for government workers which exist outside of Social Security. These are the Public Employees' Retirement System (PERS) and the California State Teachers' Retirement System (CalSTRS). There are a number of city and county pension plans. California teachers, state public safety officers (police and firefighters), and other workers who don't pay into the retirement portion of the Federal Insurance Contributions Act (FICA), do not receive social security benefits once they retire.
They only may be eligible for some SS benefits based upon their spouse's record or their own earnings from private sector jobs. However, even these benefits may be reduced under the Windful Elimination Provision (WEP) or the Government Pension Offset (GPO). These are complicated rules and formulas which are beyond the scope of this answer.
http://www.DesertDivorceandFamilyLawyer.com
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