Pitfalls in divorce settlements
A recent episode of “The Good Wife” featured a story line about divorce. While the show is not intended to be a “how to” guide for legal issues, this episode highlighted the problems that arise during divorce. The husband and sole income earner has several legitimate businesses and is one of the biggest drug dealers in the city. The first settlement offer called for the husband to pay $100,000 per month in spousal support to the wife until their youngest child is 18.
The first issue centers around spousal support versus child support. When support payments change based on the age or other event related to the children, the payments must be treated as child support according to the IRS. Spousal support payments are tax deductible to the payor and taxable to the recipient. Child support, on the other hand, is not taxable or tax deductible. Reporting the payments as spousal support on the their tax returns will result in the husband under-reporting income and the wife paying more in taxes than she needs to.
Second, the wife will need to determine how she will maintain her standard of living after the youngest child is 18. The wife will need to start making plans now to create an income stream that will keep up with her current lifestyle. Short of becoming a doctor, what line of work will she go into to make that much money? Will she go back to school? Who will pay for her schooling? What school related expenses will be covered?
Third, the wife will need to make sure that the husband is able to maintain the payments. His “career” choice will make it very difficult to transfer that much money to her every month and let’s just say his life expectancy is shorter than average if he can stay out of prison. Can she get life insurance on him? Who will pay for it? Can she put a lien on his legitimate businesses?
There are other issues, including paying for college for the children and agreeing to who claims the children as dependents on their tax returns, etc.
The bottom line is that it is critical to deal with experts who have the specialized training that is necessary to fully analyze the long term impact of your divorce. Just like you would not have a patent attorney handle your divorce, your financial support person must have the expertise needed to understand the unique rules surrounding divorce and the insight to understand the long term impact of any decisions made.
