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Personal Financial Planning for Divorce FPA MA-November 19, 2010 Jeffrey H. Rattiner, CPA, CFP®, Personal Financial Planning for Divorce FPA MA-November 19, 2010 Jeffrey H. Rattiner, CPA, CFP®, MBA, RFC Rattiner’s Financial Planning Fast Track® – CFP® education JR Financial Group, Inc. – Financial and Tax Planning 6410 South Quebec Street, Centennial, CO 80111 -4628 14850 N. Scottsdale Rd. ; Ste 355; Scottsdale, AZ 85254 Tel: (720)529 -1888; Fax: (720)529 -9888 [email protected] com www. jrfinancialgroup. com 1

Jeffrey H. Rattiner, CPA, CFP®, MBA, RFC Mr. Rattiner is president and chief executive Jeffrey H. Rattiner, CPA, CFP®, MBA, RFC Mr. Rattiner is president and chief executive office (CEO) of Rattiner’s Financial Planning Fast Track®, Inc. and The JR Financial Group, Inc. which is a multi-purpose holding company with offices in the Denver and Phoenix metro areas serving consumers and the financial services industry. 2

Training ¿ Rattiner runs the nationally acclaimed “Financial Planning Fast Track® which is a Training ¿ Rattiner runs the nationally acclaimed “Financial Planning Fast Track® which is a boot camp for financial advisors to take them through the education requirements mandated by the CFP Board of Standards within 7 months. His 22+ years of preparation experience demonstrates his longtime commitment to help advisors successfully complete the CFP ® Certification Examination. Rattiner teaches the following classes: ¿ ¿ ¿ ¿ “Personal Financial Planning” “Insurance Planning” “Investment Planning” “Income Tax Planning” “Retirement Planning” “Estate Planning” “CFP Examination Review Course” Rattiner was also rewarded the “ 1997 Distinguished Faculty Member. Teacher of the Year” by Community College of Denver. 3

Writing n n n n n Personal Financial Planning for Divorce: Real World Solutions Writing n n n n n Personal Financial Planning for Divorce: Real World Solutions – John Wiley & Sons “Rattiner’s Review for the CFP Certification Examination - Fast Track” – (3 nd ed. ) John Wiley & Sons “Rattiner’s Financial Planner’s Bible: The Advisor’s Advisor” – John Wiley & Sons “Financial Planning Answer Book” – CCH/Aspen “Getting Started as a Financial Planner” (2 nd ed. ) – Bloomberg Press “Adding Personal Financial Planning to Your Practice”-American Management Association “Personal Financial Planning Library” for Harcourt Professional Publishing. Co-authored “Practicing Financial Planning” textbook He has been a columnist for Financial Planning Magazine and Financial Advisor Magazine. 4

Background u Bachelor of Business Administration (BBA) with an emphasis in Marketing Management from Background u Bachelor of Business Administration (BBA) with an emphasis in Marketing Management from Bernard M. Baruch College of the City University of New York u Master of Business Administration (MBA) in Certified Public Accounting from Hofstra University u Certified Financial Planner education from New York University u Certified Financial Planner (CFP) Certificant with the CFP Board of Standards in Denver, Colorado u Certified Public Accountant in New York, Colorado, and Arizona u Insurance Broker 5

TABLE OF CONTENTS Chapter 1: WHAT IS MARRIAGE? Chapter 2: MINIMIZING THE DAMAGE Chapter TABLE OF CONTENTS Chapter 1: WHAT IS MARRIAGE? Chapter 2: MINIMIZING THE DAMAGE Chapter 3: PAYING FOR DIVORCE Chapter 4: PLAN OF ATTACK Chapter 5: ALIMONY AND CHILD SUPPORT ISSUES Chapter 6: INCOME TAXES Chapter 7: RETIREMENT PLANS Chapter 8: VALUATION ISSUES Chapter 9: REDESIGNING YOUR PERSONAL FINANCIAL PLAN AFTER THE DIVORCE Chapter 10: AFTERWARDS: THE 25 STEPS TO FUTURE SUCCESS Chapter 11: PLANNING FOR SAME SEX COUPLE DIVORCE slide # 7 slide # 17 slide # 20 slide # 31 slide # 40 slide # 52 slide # 75 slide # 90 slide # 100 slide # 154 slide # 162 6

Chapter 1: The Unthinkable n My wife and I were happy for twenty years. Chapter 1: The Unthinkable n My wife and I were happy for twenty years. Then we met. -- Rodney Dangerfield 7

Chapter 1: What is Marriage? Financial Contract n Business Deal n 8 Chapter 1: What is Marriage? Financial Contract n Business Deal n 8

What is Divorce? Emotional Nightmare n Irrational Process n 9 What is Divorce? Emotional Nightmare n Irrational Process n 9

Objectives of Divorce Minimize Damage n 50/50 Split of Assets to start with n Objectives of Divorce Minimize Damage n 50/50 Split of Assets to start with n Stay Focused on the End Result n Be Prepared n 10

11 11

Kinds of Divorce at a Glance Kind of Div orc e How It Works Kinds of Divorce at a Glance Kind of Div orc e How It Works Hassle and Expense Summary Spouses, who haven't been married long and don't have children or many assets or debts, file together Relatively simple paperwork; lawyer usually not necessary; often only one filing fee Default One spouse files for divorce, the other doesn't respond Relatively simple paperwork; lawyer may or may not be necessary Mediated Trained, neutral mediator helps spouses work out settlement agreement without court fight Not cheap - except compared to a contested divorce; can help spouses communicate Collaborat ive Each spouse hires lawyer, but everyone agrees to settle out of court using negotiation and four-way meetings Can take longer than mediation, but cheaper, nicer, and quicker than contested case Arbitrated Spouses hire private judge to hear evidence and decide contested issues outside of court faster and slightly less expensive than trial; can be more civil than court trial and provides greater privacy Contested Souses hire lawyers and fight out issues at trial Expensive, stressful for everyone (especially children), guaranteed to ruin chances of civil relationship in future 12

Representation Educating Yourself n Should You Go It Alone n Attorneys n 13 Representation Educating Yourself n Should You Go It Alone n Attorneys n 13

Blocking Out the Competition Playing Offense 14 Blocking Out the Competition Playing Offense 14

Becoming Too Passive What happens when you don’t take the initiative? 15 Becoming Too Passive What happens when you don’t take the initiative? 15

RATTINER’S PLANNING TIPS 1. BE COMFORTABLE WITH YOUR DECISION TOPURSUE THE DIVORCE (REGRDLESS OF RATTINER’S PLANNING TIPS 1. BE COMFORTABLE WITH YOUR DECISION TOPURSUE THE DIVORCE (REGRDLESS OF WHO INITIATED IT. ) 2. The divorce process is a business decision. Keep emotions in check and pursue it as you would any other business deal. Get a handle on your finances. Start with a budget so you can determine the assets, debt and income issues that need to be addressed. Trial, permanent and legal separation are geared towards the same thing, but demonstrate different ways of getting there. This goes back to answering the question, is divorce right for you? There are many different types of ways to approach divorce. Select the method that gives you the least amount of discomfort. A method that helps maintain your health is primary. If it is also easier and cheaper for both spouses to run, that is a major plus. In addition, it offers you the best chance of a complete and overall recovery in the shortest amount of time. The person you divorce is not the same person you married. Don’t sweat the small stuff. Pick and choose your battles carefully. Look at the big picture. Not everything is a major battle or a huge catastrophe. Don’t be a part of the blame game. Take it from a CPA, two wrongs don’t make a right. Work with and attorney always. Don’t go through the motions without any counsel walking you through the process. Even if your ex asks you not to work with one, you owe it to yourself and your ex to become as educated as possible. Rely on a close family member or friend to bounce ideas off. Don’t be too hasty. Step back from the situation, try to look in from the outside and act rationally. Remember, it’s ultimately all about the children! Don’t make waves with your children by trying to get revenge on your ex. Look at various scenarios including a best case and worst case picture. This will provide you with some boundaries as to what to expect. No matter how bad it seems now, just remember my mother’s saying, “this too shall pass. ” 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 16

Chapter 2: Minimizing the Damage n The secret of a happy marriage remains a Chapter 2: Minimizing the Damage n The secret of a happy marriage remains a secret. --Henny Youngman 17

Chapter 2: MINIMIZING THE DAMAGE In a lose-lose situation, the objective is to try Chapter 2: MINIMIZING THE DAMAGE In a lose-lose situation, the objective is to try and get out of the marriage with as little damage as possible. n Damage includes financial and emotional issues – Pick your battles – Stay focused n Staying out of court n Negotiating the deal n 18

Rattiner Damage Control Tips n n n n n Taking Care of yourself – Rattiner Damage Control Tips n n n n n Taking Care of yourself – It’s all about me! Protecting Your Mail Protecting Your Computer Open Your Own Credit card and Bank Account Close Joint Credit Accounts Protect Your Separate Property Filing a Tax Return Temporary Support Agreements Innocent Spouse Rule Re-enter the Workforce 19

Chapter 3: Paying for Divorce n Marriage is grand…divorce is about 100 grand. 20 Chapter 3: Paying for Divorce n Marriage is grand…divorce is about 100 grand. 20

Chapter 3: PAYING FOR DIVORCE n n n n n Costs Involved What Should Chapter 3: PAYING FOR DIVORCE n n n n n Costs Involved What Should You Pay for in the Divorce? How Long Will these Expenses Go On? Creating a Budget Litigation Budget Analyzing Your Income Keep Your Income Separate Going Solo Assets Separate Property Joint Assets Before Divorce Papers Have Been Filed After Divorce Papers Have Been Filed What is Truly Important How to Pay for It: Prevent Paying for Your Ex’s Legal Fees Your Monthly Budget Income Allocation for You and Your Ex Your Balance Sheet 21

Costs Involved: What Should You Pay For & For How Long? Everyday life n Costs Involved: What Should You Pay For & For How Long? Everyday life n New Temporary Costs – legal fees, valuation experts, mediators, therapists, arbitrators n Pay as you incur n 22

Creating a Budget Monthly Budget – the 3 C’s n Litigation Budget n 23 Creating a Budget Monthly Budget – the 3 C’s n Litigation Budget n 23

Analyzing Your Income n Include income from all sources 24 Analyzing Your Income n Include income from all sources 24

Keep Your Income Separate n Don’t Commingle! 25 Keep Your Income Separate n Don’t Commingle! 25

Separate Property n Keep separate! n Solo Assets – Those assets in Your Name Separate Property n Keep separate! n Solo Assets – Those assets in Your Name Only, such as retirement plans 26

Joint Assets n Before You File – use anyway you want n After you Joint Assets n Before You File – use anyway you want n After you File – you are legally prohibited from doing anything that would harm your jointly owned interests or spouse’s separately owned property 27

What is Truly Important n Have sufficient assets to feed and shelter each spouse What is Truly Important n Have sufficient assets to feed and shelter each spouse until the divorce is final n Divorced spouses find out too late that there are cheaper ways to go about this process 28

How to Pay for It: Prevent Paying for Your Ex’s Legal Fees n The How to Pay for It: Prevent Paying for Your Ex’s Legal Fees n The bigger wage earned generally loses here n Begin liquidating jointly owned assets n Put your attorney fees on a credit card n Take out a joint loan to pay bills n Use retirement assets n Sell assets, such as rental real estate THE BOTTOM LINE: IT ALL ENDS UP IN THE ATTORNEY’S POCKETS! 29

Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Many Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Many costs show up for the first time during the divorce process. Take an accounting of what each one represents before you act on it. Try to shorten the divorce process, where possible. The longer it goes, the more expensive it becomes When figuring out how much each spouse needs during the divorce process, the first thing you should do is to create a budget. Lawyers will provide you with a litigation budget if you request one. Once the divorce process is underway, keep your income separate from that of your ex. As long as separate property is not commingled, it should remain separate property after the divorce. Joint assets should be taken care of in a fiduciary capacity by each spouse during the divorce process. Your responsibility for using and caring for joint assets differ before and after divorce papers have been filed. Taking out a mortgage, home equity line of credit, liquidating assets in a joint account, credit cards, and retirement accounts are all sources for paying legal fees during the divorce Don’t forget the tax angles of your expenses, since this will truly determine what you have to spend during the divorce. 30

Chapter 4: Plan of Attack: Let the Games Begin n Love is the quest, Chapter 4: Plan of Attack: Let the Games Begin n Love is the quest, marriage the conquest and divorce. . . the inquest. 31

Chapter 4: PLAN OF ATTACK n n n Taking Your Ex Out 1 -800 Chapter 4: PLAN OF ATTACK n n n Taking Your Ex Out 1 -800 -MOBSTER Litigation Anything Other Than Litigation Mediation The Mediator The Mediation Process Collaborative Divorce Arbitration The Prelims – Gathering the Evidence Discovery ¨ ¨ n n n Releases Interrogatories Depositions Subpoenas Working Discovery’s Usefulness Going After Hidden Assets Personal Fault Issues 32

Taking Your Ex Out n I KNOW WHAT YOU’RE THINKING! 33 Taking Your Ex Out n I KNOW WHAT YOU’RE THINKING! 33

1 -800 -MOBSTER n Speak to me after this session for a direct contact! 1 -800 -MOBSTER n Speak to me after this session for a direct contact! 34

Litigation n Avoid at all costs! 35 Litigation n Avoid at all costs! 35

Anything Other Than Litigation n Mediation n Collaborative Divorce n Arbitration 36 Anything Other Than Litigation n Mediation n Collaborative Divorce n Arbitration 36

Going After Hidden Assets n Discovery n Interrogatories n Subpoenas 37 Going After Hidden Assets n Discovery n Interrogatories n Subpoenas 37

Checklist for Hiring a Mediator 1. 2. 3. 4. 5. 6. 7. 8. 9. Checklist for Hiring a Mediator 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is your style of mediation? Do you have a specialty? Do you see couples separately and/or together? How do you charge and what are your fees? How many mediations have you performed? Is this your full time job? What kind of background or training have you had? Are you a judge? How do you work with spouses who each have their own attorney? Are attorneys part of the process or do you refer legal issues to them directly? What do you do if you see the mediation process breaking down? Do you work with and refer spouses to other professionals, such as CPAs, CFPs, attorneys, therapists, etc. ? How is confidentiality handled? Are you willing to testify in court, if need be? 38

Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. It Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. It never pays to take your ex out. Be smart about the entire divorce process. Look at the big picture. Avoid litigation at all cost. It is too expensive, too demanding and will not enable you to get the result you are trying to achieve. You can’t control the ultimate outcome. Mediation is a better bet if you and your ex can agree to it. Having an independent person be the referee allows for a more equitable settlement. Remember, you’ll never be happy with the final outcome, but it will help minimize the damage and hopefully provide you with a settlement you both can live with. Hire a former judge as the mediator. That person has the experience necessary to understand the issues, close the gap and wrap up the case. You always want to employ a no nonsense approach to be implemented by a no nonsense judge. Make sure you understand the mediation process before moving forward. It puts both spouses on the same playing field looking for similarities between the parties rather than differences. Collaborative divorce is another good option because the whole goal is to avoid going to trial. You need both sides to be open, honest and cooperate with each other. And you need both attorneys to feel the same way. Arbitration is usually a winner take all scenario. If binding, you lose your right to challenge the decision. If non-binding, you’re probably not going to get from it what you should. Discovery is a necessary step because it helps gather all the information you need to make the right decisions about the final outcome of the case. If you have your doubts about things, it forces the other spouse to act. To go after hidden assets, make sure it is a worthwhile investment. It can be expensive if you get other people involved and not worth the cost. Trying to prove personal fault issues are not really necessary in the grand scheme of things. It doesn’t get you closer to your ultimate goal of settling the case and moving on with life. 39

Chapter 5: Alimony and Child Support Issues n The definition of alimony: The screwing Chapter 5: Alimony and Child Support Issues n The definition of alimony: The screwing you get for the screwing you got! 40

Chapter 5: ALIMONY AND CHILD SUPPORT ISSUES n n n n Alimony (Maintenance and/or Chapter 5: ALIMONY AND CHILD SUPPORT ISSUES n n n n Alimony (Maintenance and/or Spousal Support) Calculation and Length of Alimony Can the Payee Spouse Receive an Extension for Alimony Payments? Remarriage Initial Payment of Alimony Modification of Alimony Payment Hiring a Vocational Expert Deductibility Alimony Requirements 41

Alimony (Maintenance and/or Spousal Support) n Definition - Alimony is designed to help the Alimony (Maintenance and/or Spousal Support) n Definition - Alimony is designed to help the spouse with the lesser earnings potential gain the necessary training to re-enter or advance in the workforce n Temporary award – Concerned with the future needs of that spouse n Factors Involved – Length of marriage, each spouse’s age, vocational skills of each spouse, standard of living during the marriage, conduct of each spouse, who will maintain the household for the children, liabilities of each spouse, previous sacrifice of of one’s earning potential 42

Calculation and Length of Alimony n Each spouse’s ability to earn income n Past Calculation and Length of Alimony n Each spouse’s ability to earn income n Past earnings and projected future earnings n Can both spouse’s support themselves individually – then maybe no alimony is awarded n Your age 43

Hiring a Vocational Expert n Absolutely necessary for the at-home spouse 44 Hiring a Vocational Expert n Absolutely necessary for the at-home spouse 44

Alimony Requirements n n n n Payments must be made under a divorce or Alimony Requirements n n n n Payments must be made under a divorce or separation instrument. Payments must be made in cash. No designation of the payment from one spouse to the other is considered to be alimony. If separated under a decree of divorce or separate maintenance, the spouses cannot live in the same household. Payments must end at the death of the payee spouse. Payments can not be considered child support. You and your ex cannot file a joint tax return with each other. 45

Alimony Recapture (Too Much Alimony Paid Too Soon) n If the spread of payments Alimony Recapture (Too Much Alimony Paid Too Soon) n If the spread of payments is greater than $15, 000 per years 1 and 2, or years 2 and 3, with payments going downward, alimony recapture may be an issue 46

Nick pays his ex-spouse, Carla, $60, 000 alimony during the first year, $35, 000 Nick pays his ex-spouse, Carla, $60, 000 alimony during the first year, $35, 000 during the second year, and $12, 000 during the third year. Calculate the amount of alimony recapture. Example: Recapture of Alimony Note. Do not enter less than -0 - on any line. 1. Alimony paid in 2 nd year 1. $35, 000 2. Alimony paid in 3 rd year 2. $12, 000_ 3. Floor 3. $15, 000_ 4. Add lines 2 and 3 4. _27, 000_ 5. Subtract line 4 from line 1 5. $8, 000 6. Alimony paid in 1 st year 6. 60, 000_ 7. Adjusted alimony paid in 2 nd year (line 1 less line 5)………… 7. 27, 000_ 8. Alimony paid in 3 rd year 8. 12, 000_ 9. Add lines 7 and 8 9. 39, 000_ 10. Divide line 9 by 2 10. 19, 500_ 11. Floor 11. $15, 000 12. Add lines 10 and 11 12. 34, 500_ 13. Subtract line 12 from line 6 13. 25, 500 14. Recaptured alimony. Add lines 5 and 13 *14. $33, 500 *If you deducted alimony paid, report this amount as income on Form 1040. line 11. If you reported alimony received, deduct this amount on Form 1040, line 31 a. IRS Publication 504 47

Child Support n Many states have a state calculator to help you figure out Child Support n Many states have a state calculator to help you figure out the amount yourselves n Modification can occur 48

Alimony and Child Support – Tax Summary Chart Alimony Child Support Deductible by Payor Alimony and Child Support – Tax Summary Chart Alimony Child Support Deductible by Payor Yes No Taxable to Payee Yes No 49

ALIMONY AND ITEMIZED DEDUCTIONS IF you must pay all of the… Mortgage payment (principal ALIMONY AND ITEMIZED DEDUCTIONS IF you must pay all of the… Mortgage payment (principal and interest) AND your home is … Jointly owned Real estate taxes and home insurance Held as tenants in common Real estate taxes and home insurance Held as tenants by the entirety or in joint tenancy THEN you can deduct and your spouse must include as alimony… AND you can claim as an itemized deduction… Half of the total payments Half of the interest as interest expense (if the home is a qualified home) Half of the total payments Half of the real estate taxes and none of the home insurance None of the payments All of the real estate taxes and none of the home insurance Source: Adapted from IRS Publication 504 Divorced or Separated Individuals (2007) p. 12 50

Rattiner Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alimony Rattiner Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alimony is deductible for the payor spouse and taxable to the payee spouse. Child support is neither taxable nor deductible by either spouse. Alimony is generally not awarded for short term marriages which have durations of less than five years. Make sure you call in a vocational expert to help assess the at home spouse’s ability to earn income after the divorce. If spouses agree to a lump sum award of an alimony payment, it cannot be altered in the future. Regular monthly payments of alimony can be modified by the courts in the future. Alimony payments always end at the death of the spouse and usually at remarriage. If you front load alimony to the tune of greater than $15, 000 between years one and two or between years two and three, some of the alimony may need to be recaptured. Child support payments can always be modified. Awarding temporary alimony may not always be a good idea because it can be used as a precedent for awarding permanent alimony. 51

Chapter 6: Divorce Can be Taxing (Income Tax Section) n Marriage is the only Chapter 6: Divorce Can be Taxing (Income Tax Section) n Marriage is the only war in which you sleep with the enemy. 52

Chapter 6: INCOME TAXES n n n Divorce Can Be taxing Property Settlements (IRC Chapter 6: INCOME TAXES n n n Divorce Can Be taxing Property Settlements (IRC Section 1041) Exceptions to IRC Section 1041 Purchases Between Spouses Transfers in Trust Passive Activity Loss Property Deferred Tax Liability Recordkeeping Requirements Gift Tax Issues Property Basis Filing Status 53

Divorce Can Be taxing n There are many things to consider. Attorneys are probably Divorce Can Be taxing n There are many things to consider. Attorneys are probably not the best source for this type of information 54

Property Settlements (IRC Section 1041) Transfers between spouses pursuant to a divorce are done Property Settlements (IRC Section 1041) Transfers between spouses pursuant to a divorce are done income tax free 55

Purchases Between Spouses n Original basis and holding period accompanies the transaction. Property basis Purchases Between Spouses n Original basis and holding period accompanies the transaction. Property basis is the original basis from the transferor spouse 56

Deferred Tax Liability n You may have future tax issues when you sell property. Deferred Tax Liability n You may have future tax issues when you sell property. Many times attorneys don’t facto in the net effect. Examples include depreciation recapture, capital gains, primary residence sale, and future tax rates 57

Filing Status (S/H) Single n (M/J) Married Filing Jointly n (M/S) Married Filing Separately Filing Status (S/H) Single n (M/J) Married Filing Jointly n (M/S) Married Filing Separately n (H/H) Head of Household n (Q/W)Qualifying Widow n 58

Exemptions n Have the divorce decree state clearly who is entitled to the dependent Exemptions n Have the divorce decree state clearly who is entitled to the dependent exemption n You’ll always get a deduction for yourself 59

Is there any way for the dependency exemption to be awarded to the non Is there any way for the dependency exemption to be awarded to the non custodial parent? The answer is yes if all of the following apply: 1. The parents a. Are divorced or legally separated under a decree of divorce or separate maintenance b. Are separated under a written separation agreement, or c. Lived apart at all times during the last six months of the year 2. The child is in the custody of one or both parents for more than half of the year 3. The divorce decree or separation agreement provides the noncustodial parent can claim the child as a dependent or the custodial parent signs a written declaration (Form 8332) that he or she will not claim the child. 60

Form 8332: Release of Claim to Exemption for Child of Divorced or Separated Parents Form 8332: Release of Claim to Exemption for Child of Divorced or Separated Parents n Custodial parent needs to sign n Can be released for one or more years 61

Sale of Principal Residence n Residency Requirements - Must live in the house for Sale of Principal Residence n Residency Requirements - Must live in the house for two of the last five years n $250, 000 – single n $500, 000 – married filing jointly 62

Co-Owning the House n NOOOOOOO! 63 Co-Owning the House n NOOOOOOO! 63

Remarriage n You can use the new spouse’s time in the house to meet Remarriage n You can use the new spouse’s time in the house to meet residency requirements 64

Single Spouse selling the house after the Divorce Sales Price Cost Gain on Sale Single Spouse selling the house after the Divorce Sales Price Cost Gain on Sale Exclusion Taxable Amount Tax Liability @ 20% $600, 000 $200, 000 $400, 000 $250, 000 $150, 000 $30, 000 65

Married Filing Joint Taxpayers Selling the House During the Divorce Process If you are Married Filing Joint Taxpayers Selling the House During the Divorce Process If you are not officially divorced, you are still considered married and can thus continue to file married filing jointly. In that case, the couple can still take the $500, 000 exclusion. In the next example, look what happens if the spouses sell the house while still legally married and filing jointly. Sales Price Cost Gain on Sale Exclusion Taxable Amount Tax Liability $600, 000 $200, 000 $400, 000 (can go as high as $500, 000) $0 $0 66

Exception to the Two Year Rule n An exception exists to the two year Exception to the Two Year Rule n An exception exists to the two year rule if the house is sold due to unforeseen circumstances. In these cases you can pro rate the gain on the house. 67

Unforeseen circumstances include moving for any of the following reasons: n n n job Unforeseen circumstances include moving for any of the following reasons: n n n job change health issues divorce 68

John and Jane Smith purchased a house for $300, 000. Six months later they John and Jane Smith purchased a house for $300, 000. Six months later they were legally divorced. Jane, who is now single, and is the sole owner of the house, decides to sell the house for $400, 000 after the sixth month. How much of the gain would be taxable to Jane? Step 1: Sales Price $400, 000 Cost $300, 000 Profit $100, 000 Step 2: $250, 000 single exclusion x 6/24 = $62, 500 can be excluded from the sale of the house Step 3: Profit $100, 000 Excluded Gain $62, 500 Taxable Gain $37, 500 Note 1: The 6/24 represents living in the house for 6 months out of 24 months (2 year requirement). Note 2: If Jane sold the house at the end of 2 years (instead of six months), then the entire gain (up to $250, 000) would have been excluded from capital gains tax. IRS Publication 523. 69

Tax Deductibility of Divorce Costs Deductible if: n In connection with the collection or Tax Deductibility of Divorce Costs Deductible if: n In connection with the collection or refund of any tax n For the production or collection of income (i. e. , alimony) Aggressive position, but probably doable. n Itemized bill from the attorney specifying investment and/or tax advice Where: Schedule A: Itemized Deduction, Miscellaneous 2% 70

Like Kind Exchanges Under IRC Section 1031 n n n Like kind does not Like Kind Exchanges Under IRC Section 1031 n n n Like kind does not mean “identical”. It means “similar” Sell property first Identify up to 3 properties to purchase within 45 days Close on any of the 3 within 180 days (both from the date of escrow) Can be multiple properties What happens if that doesn’t work? – reverse like kind exchange 71

Nonstatutory Stock Options (NSO) n n NSOs do not meet specific IRC requirements for Nonstatutory Stock Options (NSO) n n NSOs do not meet specific IRC requirements for special tax treatment. Who is entitled? Employees and Independent Contractors Difficult to value because of future market valuations Restricted Stock Options – Section 83(b) Election 72

Tax Credits Regarding Children Child Tax Credit n Dependent tax Credit n Adoption Expenses Tax Credits Regarding Children Child Tax Credit n Dependent tax Credit n Adoption Expenses Credit n Education Tax Credits n ¨ American Opportunity Credit ¨ Lifetime Learning Credit 73

Rattiner’s Tax Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Rattiner’s Tax Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. A transfer of property between spouses pursuant to a divorce does not create a taxable event for either spouse. The recipient spouse keeps the same tax basis for property transferred from the transferor spouse. Filing status is determined as of the last day of the calendar year (December 31 st) Filing married filing separate keeps the liability issue separate between the spouses. Head of household should be used as a filing status for a divorced spouse who maintains a household for dependent children. If you are planning on selling your house as the recipient spouse, you may want to do it during the divorce process in order to take advantage of the $500, 000 exclusion. Divorce qualifies as unforeseen circumstance. That means if you sell the house within a two year period, you may be able to exclude part of the capital gain. You don’t have to worry about the capital gain exclusion from a home sale where you transfer the sale to the other spouse as part of the divorce. If you retain a rental property from the divorce and wish to exchange it for another more expense property, you can do it under IRC Section 1031 and defer the capital gain. If you claim a child under the age of 17 as your dependent, you may qualify for the $1, 000 per year child tax credit. 74

Chapter 7: Retirement Plans: (Rules, Types and Valuation) n The secret to successful investing Chapter 7: Retirement Plans: (Rules, Types and Valuation) n The secret to successful investing for retirement is to keep your first spouse!!! 75

Chapter 7: RETIREMENT PLANS 8 Critical Elements To Think About n n n n Chapter 7: RETIREMENT PLANS 8 Critical Elements To Think About n n n n What the employee spouse is entitled to due to vesting schedules and other issues Type of retirement plans to divide QDROs Valuation of retirement benefits How much of the valuation are you entitled to receive? Whether to accept the retirement benefits or an equivalent amount of other assets Protection of your retirement benefits if your spouse remarries or dies Discovery of overlooked or hidden assets 76

Vesting Rules Qualified Plans Defined Benefit: 5 year cliff n 3 -7 year graded Vesting Rules Qualified Plans Defined Benefit: 5 year cliff n 3 -7 year graded Defined Contribution Plans n 3 year cliff n 2 -6 year graded Personal Retirement and Nonqualified Plans n Immediate vesting n 77

Types of Retirement Plans Qualified Plans n Defined Benefit n Defined Contribution – includes Types of Retirement Plans Qualified Plans n Defined Benefit n Defined Contribution – includes 401(k) plans hybrid - 403(b) plans Personal Retirement Plans n SEPS n SIMPLEs n IRAS Nonqualified Plans n Deferred Compensation n Supplemental Executive Retirement Plans 78

Qualified Plans Defined Benefit Plans n Defined Contribution Plans n 79 Qualified Plans Defined Benefit Plans n Defined Contribution Plans n 79

Personal Retirement Plans IRAs n SEPs n SIMPLEs n 80 Personal Retirement Plans IRAs n SEPs n SIMPLEs n 80

Nonqualified Plans n Deferred Compensation ¨ Rabbi Trusts ¨ 457 Plans 81 Nonqualified Plans n Deferred Compensation ¨ Rabbi Trusts ¨ 457 Plans 81

Qualified Domestic Relations Orders (QDROs) n Method of dividing up retirement assets 82 Qualified Domestic Relations Orders (QDROs) n Method of dividing up retirement assets 82

Inquiries to the Plan Administrator Participant's account or benefit statements from the date of Inquiries to the Plan Administrator Participant's account or benefit statements from the date of the marriage n Summary plan description n Current QDRO procedures n Distribution policy and forms n 83

Valuation of Retirement Plans Defined Benefit Plans – employer master plan Methods for Dividing Valuation of Retirement Plans Defined Benefit Plans – employer master plan Methods for Dividing a Pension n Buyout method (immediate offset method with other assets) n Wait and see method – split at date of retirement n Reserved jurisdiction method – ask the court to wait and value later because of too many unknown variables; i. e. stock options, bonuses to be paid on dependent factors, and other sources of compensation that can’t be determined until later on) 84

Valuation of Retirement Plans Defined Contribution Plans Personal Retirement Plans n Participant knows the Valuation of Retirement Plans Defined Contribution Plans Personal Retirement Plans n Participant knows the value in each of these accounts 85

Using Retirement Assets to Balance Out Equity n Very effective tool 86 Using Retirement Assets to Balance Out Equity n Very effective tool 86

Overlooked Plans n Past plans n Frozen plans 87 Overlooked Plans n Past plans n Frozen plans 87

Rattiner’s Retirement Plan Mistakes Checklist 1. Has the attorney identified all past and present Rattiner’s Retirement Plan Mistakes Checklist 1. Has the attorney identified all past and present retirement plans? 2. Does the attorney understand the differences among all the types of retirement plans that you or your ex possesses (i. e. qualified vs. personal vs. nonqualified plans and/or corporate vs. government plans)? 3. Was a QDRO obtained during the divorce process and not afterwards? 4. Has your attorney stepped up to the plate and either prepared the QDRO or is on top of someone else preparing the QDRO? 5. Has an outside party been hired to help value the retirement accounts? 6. Does the value of the retirement plans ask for accrued benefits as opposed to vested benefits? 7. Does the value of the retirement plans include all the activity within the retirement account, such as gains and losses, interest and dividends received? 8. Has the attorney noted what will happen if the parties die during the process? 9. Has the attorney acknowledged and completed the issues necessary for continuation of medical care coverage for the non-participant spouse? 10. Did you walk away from the divorce comfortable with the approach used by the attorney and others as to the way the calculations were made in the division of retirement plan assets? Yes No Yes Yes No No Yes No Yes No 88

Valuation of Retirement Plan Assets Name of Asset Current Value Rate of Return (%) Valuation of Retirement Plan Assets Name of Asset Current Value Rate of Return (%) Date Full Benefits Begin Defined Benefit Plans: Company Ret Plan-Yours Company Ret Plan-Ex: Defined Contribution Plans: Company Ret Plan-Yours Company Ret Plan-Ex: Personal Retirement Plans: IRA #1 - Yours IRA #2 - Yours IRA #1 – Ex: IRA #2 – Ex: SEP – Yours SEP – Ex: SIMPLE-Yours SIMPLE – Ex: Nonqualified Plans: Yours: Ex: Other: Yours Ex: 89

Chapter 8: Valuation Issues: (Property Division and Business Concerns) n I was married by Chapter 8: Valuation Issues: (Property Division and Business Concerns) n I was married by a judge. I should have asked for a jury. -- George Burns 90

Chapter 8: VALUATION ISSUES Valuation issues are always tricky and seldom accurate! And they Chapter 8: VALUATION ISSUES Valuation issues are always tricky and seldom accurate! And they certainly don’t measure what will happen in the future (i. e. the economy or your profession) when you are valuing assets to pay for future debt! 91

Property Division n Common Law n Community Property 92 Property Division n Common Law n Community Property 92

Common Law n Equitable distribution n 41 states plus Alaska 93 Common Law n Equitable distribution n 41 states plus Alaska 93

Community Property n Equal Distribution n 9 states plus Alaska TWIN CLAN W n Community Property n Equal Distribution n 9 states plus Alaska TWIN CLAN W n Texas n Wisconsin n Idaho n Nevada n California n Louisiana n Arizona n New Mexico n Washington State 94

Closely Held Business Valuation To consider if the business is marital property, you’ll need Closely Held Business Valuation To consider if the business is marital property, you’ll need to address these issues: n Was the business established before or after the marriage? n Did it grow substantially during the marriage? n If the business did grow, was it due to the fact that your ex was a stay-at-home spouse who did not work full-time in the business? n Was separate property from either spouse invested in the business? n Was it a joint business run by both spouses? 95

Business Valuation Documents Needed 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Business Valuation Documents Needed 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Last five years of individual tax returns and documents (Form 1040) Last five years of business tax returns and documents [Form 1120 S (S Corporations); 1120 (C Corporations); 1065 (partnerships, limited liability companies, limited liability partnerships)] K-1 s for 1065 or 1120 S Income (Profit and Loss) statement Balance sheet Listing of shareholders or partners who own a piece of the company Capital accounts of the partners if the business is a partnership Retained earnings statement List of cash accounts and any investments List of aged accounts receivable (money due the business) List of aged accounts payable (money the business owes others) Business plan and projections Key officers compensation Key officers life insurance List of existing contracts List of partnership agreements in affect 96

Valuation Report The business valuation report should include n Full description of the business Valuation Report The business valuation report should include n Full description of the business n Method of valuation n Name and qualifications of the evaluator n Names of relevant documents that were reviewed n Full explanation for the rationale for the evaluation n Date the business was valued n Reason for the valuation n Relevant industry standards 97

Professional Practices - States that consider professional practices part of the marital estate at Professional Practices - States that consider professional practices part of the marital estate at this time include: n n n n n Arizona California Colorado Connecticut Indiana Kentucky Maryland Michigan Montana n n n n n Nevada New Jersey New Mexico New York North Carolina Ohio Oregon Virginia Washington 98

Key Stock Option Questions 1. 2. 3. 4. Is the stock option part of Key Stock Option Questions 1. 2. 3. 4. Is the stock option part of marital property? In other words, was it earned and received during the marriage? How is the option valued? When is the option valued? What are the tax consequences when the option is exercised? 99

Chapter 9: Redesigning Your Personal Financial Plan After the Divorce n Americans divorce so Chapter 9: Redesigning Your Personal Financial Plan After the Divorce n Americans divorce so much we are called the land of the free, and we get married so often that we are called home of the brave. 100

Chapter 9: REDESIGNING YOUR PERSONAL FINANCIAL PLAN AFTER THE DIVORCE n You are ready Chapter 9: REDESIGNING YOUR PERSONAL FINANCIAL PLAN AFTER THE DIVORCE n You are ready for Stage 2 of Your Life. You will need to re-examine all the prior aspects of your life and then start anew. 101

The New and Improved Game of Life n n n Start with a budget The New and Improved Game of Life n n n Start with a budget Save 10% of your gross income Establish an emergency fund of 3 -6 months of gross living expenses Purchase essential insurances Revise your legal documents All of this can be accomplished through a financial plan 102

Planning for Life’s Uncertainties n n n n Job change/unemployed Revise your cash flow Planning for Life’s Uncertainties n n n n Job change/unemployed Revise your cash flow Remarriage Protecting the kids from a prior marriage – QTIP plan Withdrawing money from your retirement accounts. Develop a retirement needs analysis Ownership designations on invested assets and disposition of closely held business interests Changed tax filing status Constant monitoring of life events 103

GOING THROUGH THE PERSONAL FINANCIAL PLANNING PROCESS 1. 2. 3. 4. 5. 6. Gather GOING THROUGH THE PERSONAL FINANCIAL PLANNING PROCESS 1. 2. 3. 4. 5. 6. Gather all Necessary Data Objectives need to be set Process all the information into meaningful financial statements Develop recommendations Implement those recommendations Monitor your situation annually 104

LIFE CYCLE ANALYSIS Based on following the previous discussion of the personal financial process LIFE CYCLE ANALYSIS Based on following the previous discussion of the personal financial process that you need to follow very closely, and where you want to end up, the following chart shows you what you should be doing at the appropriate time in our life. 105

Ages 20 -29; and 30 -39: n n n n Have an emergency fund Ages 20 -29; and 30 -39: n n n n Have an emergency fund equal to six months of gross living expenses Make sure you always have adequate and continuous insurance coverage for life, disability, health, homeowners, automobile, and umbrella. Be careful if moving between jobs and short changing your pension benefits or other deferred compensation arrangements. Roll over any retirement benefits into an IRA or to your next 401(k). Minimize your income tax bite buy maxing out your deductions. Contribute regularly to your 401(k) and/or IRA, and any other retirement fund. Purchase a home with a 15 year mortgage so that by the time you retire, your housing costs will be under control. Write a will. Discuss retirement plan benefits with your human resource personnel. 106

Ages 40 -49: n n n contribute regularly to your 401(k) and/or IRA, and Ages 40 -49: n n n contribute regularly to your 401(k) and/or IRA, and any other retirement fund. Check your social security statement annually to ensure that all your wages have been credited correctly. If not, contact them immediately. Analyze personal assets, and work out a plan for funding an adequate retirement income. Actively manage your IRA and other retirement funds with appropriate emphasis on capital gains oriented investments. Review your will every three years or when moving to another state. Review it with an experienced attorney. 107

Ages 50 -59: n n n n contribute regularly to your 401(k) and/or IRA, Ages 50 -59: n n n n contribute regularly to your 401(k) and/or IRA, and any other retirement fund. Check your social security statement annually to ensure that all your wages have been credited correctly. If not, contact them immediately. Analyze personal assets, and work out a plan for funding an adequate retirement income. Review your retirement income an expense projection staking inflation into consideration. Confirm the beneficiary designations on life insurance policies, annuities and retirement plans. Join AARP (American Association of retired Persons). Review your will every three years or when moving to another state. Review it with an experienced attorney. 108

Ages 60 -64 n n n n n Discuss early retirement offers with a Ages 60 -64 n n n n n Discuss early retirement offers with a financial planner Collect the documents necessary to process social security benefits Determine whether it makes sense to sell your primary residence and take the tax consequences into effect. Prepare detailed cash flow projections from estimated year of retirement until age 90, taking inflation into consideration. Practice living for a month under your new retirement income Determine the status and duration of ongoing loans and mortgage commitments. Determine which activities will keep you active during retirement. Consider different retirement locations Inquire about possible retirement entitlements from previous employers Consider long-term care insurance 109

Ages 65+ Live and enjoy life! n Take care of your health n Be Ages 65+ Live and enjoy life! n Take care of your health n Be active, if health permits n 110

1. Cash Flow Management: It All Begins Here Tips Improving Your Cash Flow for 1. Cash Flow Management: It All Begins Here Tips Improving Your Cash Flow for n Organize Yourself Better. n Dedication. n Leave home with Less Cash. n Kill the credit cards. n Give yourself and family members weekly spending money – an allowance n Set “Saving” as a priority expense. n Refinance your debt during times of lower interest rates. n Give yourself “Incentives” for a job well done. 111

2. Budgeting: Be Smart When establishing your budget, keep the following purposes in mind: 2. Budgeting: Be Smart When establishing your budget, keep the following purposes in mind: n Set a forecasted amount for each revenue and expense item n Identify variances between actual and budgeted numbers n Define possible problems in spending patterns n Identify opportunities to overcome these problems, and n Help you realistically plan to improve your spending patterns 112

Consider the following tips when developing your budget: Design a budget form that is Consider the following tips when developing your budget: Design a budget form that is suitable to you. n Forecast your income. n Summarize past expenses. n Estimate future expenses. n 113

3. Debt Management: A Difficult Task Don’t overextend! 114 3. Debt Management: A Difficult Task Don’t overextend! 114

Rules of thumb in assessing whether a home mortgage will be offered to a Rules of thumb in assessing whether a home mortgage will be offered to a prospective borrower. n n n Monthly housing costs (including principal, interest, taxes, fees and insurance) should be no more than 28% of the prospective borrower’s gross income. Total monthly payment on all debts should be no more than 36% of gross monthly income. According to the underwriting guidelines for the Federal National Mortgage Association (Fannie Mae), this includes: monthly housing expense (including taxes and interest) monthly payments on installment/revolving credit monthly mortgage payments on non-income producing property) monthly alimony, child support, or maintenance payments 115

Debt Management Tips Don’t go crazy. n Shop Around. n Review credit card bills. Debt Management Tips Don’t go crazy. n Shop Around. n Review credit card bills. It happens. Credit card companies do make errors. n 116

4. Insurance Planning Essentials: Protecting Your Financial Assets n Rattiner’s Rule: If you can’t 4. Insurance Planning Essentials: Protecting Your Financial Assets n Rattiner’s Rule: If you can’t afford to replace the loss or if it would kill you to write the check to replace the loss, then you need insurance! 117

Types of Insurance n n n n Types of Insurance Life Insurance Disability Insurance Types of Insurance n n n n Types of Insurance Life Insurance Disability Insurance Health Insurance Homeowners Insurance Automobile Insurance Umbrella (Liability) Insurance Long Term Care Insurance 118

Life Insurance n Rule of Thumb – Needs analysis should equate to roughly 7 Life Insurance n Rule of Thumb – Needs analysis should equate to roughly 7 times gross salary 119

Disability Insurance n You have no one else to depend on. n 60% of Disability Insurance n You have no one else to depend on. n 60% of gross salary 120

Health Insurance n Get as much as you can afford! 121 Health Insurance n Get as much as you can afford! 121

Homeowners Insurance n Purchase an HO 3 and HO 15 or HO 5 n Homeowners Insurance n Purchase an HO 3 and HO 15 or HO 5 n Purchase riders 122

Automobile Insurance n Liability and uninsured/underinsured coverage should be identical n Collision and Comp Automobile Insurance n Liability and uninsured/underinsured coverage should be identical n Collision and Comp – Use Rattiner’s Rule 123

Umbrella (Liability) Insurance n Don’t underestimate! 124 Umbrella (Liability) Insurance n Don’t underestimate! 124

Long Term Care Insurance n Ask your kids if they are up to the Long Term Care Insurance n Ask your kids if they are up to the challenge! 125

5. Investment Planning – Investing for a Secure Financial Future n n n The 5. Investment Planning – Investing for a Secure Financial Future n n n The Uncomfortable Realities About Saving and Investing. Know why you are investing Invest for growth Diversify across investments Diversify within investments. Take control over your investments 126

Investment Parameters Risk Tolerance n Time Horizon n Liquidity n Marketability n Tax Consequences Investment Parameters Risk Tolerance n Time Horizon n Liquidity n Marketability n Tax Consequences n Diversification n 127

Asset Allocation: Brinson Hood Beebower Study 94% of the volatility of the portfolio return Asset Allocation: Brinson Hood Beebower Study 94% of the volatility of the portfolio return is due to the asset class selected n 4% is due to security selection n 2% is due to market timing n 128

Investment Types Cash/Cash Equivalents n Fixed Income n Equities n Hard Assets: Real Estate, Investment Types Cash/Cash Equivalents n Fixed Income n Equities n Hard Assets: Real Estate, Gold, Precious Metals n Collectibles n 129

Tips For Investing In Bonds n n n n n Seek expertise when necessary Tips For Investing In Bonds n n n n n Seek expertise when necessary Keep an eye on price volatility Ladder maturities Compare interest rates Don’t chase yield Diversify Keep maturities relatively short Use mutual funds for investing in unusual bonds Consider the tax effects 130

Types of Stocks Blue Chip n Income vs. Growth n Cyclical n Interest Sensitive Types of Stocks Blue Chip n Income vs. Growth n Cyclical n Interest Sensitive n Defensive n 131

Tips for Investing in Stocks 1. 2. 3. 4. 5. 6. 7. 8. 9. Tips for Investing in Stocks 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Never buy stocks indiscriminately Select a promising industry Diversify Buy low and sell high Stay abreast of market trends Use stop-loss orders to protect against loss Buy value Buy low P/E high dividend stocks Buy stocks in companies with strong dividend payment records Finally, rely on your own experience and judgment. 132

Hard Assets: Real Estate, Gold, Precious Metals n An inflation hedge 133 Hard Assets: Real Estate, Gold, Precious Metals n An inflation hedge 133

Real Estate: Direct vs. Indirect Ownership n Don’t overload here 134 Real Estate: Direct vs. Indirect Ownership n Don’t overload here 134

Collectibles n Don’t bank on this! 135 Collectibles n Don’t bank on this! 135

6. Retirement Planning: How Long Will Your Money Last n Running Out of Money 6. Retirement Planning: How Long Will Your Money Last n Running Out of Money is Your Biggest Challenge Retirement Needs Analysis – The 3 Step Process Step 1: What will be your shortfall at retirement? Step 2: What will be the lump sum needed at retirement? Step 3: How much do you need to save today on an annual basis to arrive at the lump sum needed at retirement? 136

Common Retirement Planning Mistakes n n n Not taking advantage of contributing towards your Common Retirement Planning Mistakes n n n Not taking advantage of contributing towards your retirement plan, such as a 401(k) or 403(b) plan Neglecting to prepare retirement income and expense projections during your working years Expecting social security to cover all your needs at retirement Accepting an early retirement offer from your employer without thinking it through Failing to take out required Minimum Distributions (RMDs) after age 70 ½ 137

7. Estate Planning Common Issues to Think About n n n n Minimizing the 7. Estate Planning Common Issues to Think About n n n n Minimizing the problems and expenses of probate and avoiding family conflict Providing your new spouse with too much responsibility and flexibility Providing for the conservation of your estate and its effective management afterwards Minimizing taxes at the time of death Avoiding leaving the children too much too soon Provide for adequate liquidity to cover taxes and other expenses without a forced sale of assets Providing for estate management in the event of incapacity Organizing all your important papers affecting your estate plan – the death folder 138

How Much Will You Leave Behind for Your Heirs? n The concept of “zeroing How Much Will You Leave Behind for Your Heirs? n The concept of “zeroing out” 139

Letter of Instructions n Plans out exactly what should be done 140 Letter of Instructions n Plans out exactly what should be done 140

Qualified Terminal Interest Property (QTIP) Trusts n Protects the kids from a prior marriage Qualified Terminal Interest Property (QTIP) Trusts n Protects the kids from a prior marriage 141

FINANCIAL PLANNING SUMMARY WORKSHEETS Debt Solvency Worksheet – 10 Basic Questions Take this quick FINANCIAL PLANNING SUMMARY WORKSHEETS Debt Solvency Worksheet – 10 Basic Questions Take this quick 10 question survey to help you manage your debt. 1. Is more than 20 percent of your take-home salary used for credit card payments? Yes 2. Are you charging more each month than you are paying off? Yes 3. Have you received calls from credit card companies because of paying bills late? Yes 4. Do you charge things impulsively? Yes 5. Are you approaching the limit on your charge cards? Yes 6. Do you find yourself paying only the minimum payments on your charge cards? Yes 7. Have you defaulted on a mortgage or rent payment more than once? Yes 8. Are you uncertain about how much money you owe? Yes 9. Are you using the cash advance on one credit card to pay off another card? Yes 10. Is the balance in your savings account shrinking? Yes No No No 142

INSURANCE POINTERS When reviewing your client’s life insurance policy: a) b) c) d) e) INSURANCE POINTERS When reviewing your client’s life insurance policy: a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) separate long-term needs from short-term needs recalculate needs regularly review ratings of existing carriers review reasons why current insurance was purchased determine how original needs have changed and identify new needs review beneficiary designations review policy riders and options review each policy’s features compare client’s current health if debating whether to switch policies if it’s a term policy, evaluate conversion and renewability features and feasibility if it’s a permanent cash value policy, evaluate the true cost of insurance with the value received determine it makes sense to gift one of the client’s life insurance policies determine whether it makes sense to name a charity as a revocable or irrevocable beneficiary and establish a wealth replacement trust determine whether it makes sense to establish a charitable trust to own the life insurance on the client evaluate the effect of current life insurance ownership on its value in the estate determine if any incidents of ownership exist for insurance that is intended to be outside the estate determine if beneficiary designations of any policies owned outside the estate will cause inclusion within the estate 143

2. When reviewing your client’s health and disability policies: a) Inquire whether your client 2. When reviewing your client’s health and disability policies: a) Inquire whether your client opted for the best type of medical coverage based on their family situation. b) Determine the monthly disability needed c) Determine whether sufficient coverage exists under the client’s current policy, or was the existing coverage purchased many years ago when the client was earning a lower salary. d) Determine whether the policy provides a definition of “own occupation” e) Determine whether the policy noncancellable and guaranteed renewable f) Determine whether a provision for residual and partial disability exists g) Determine whether a guaranteed insurability rider or COLA rider have been added h) Determine whether the elimination period is appropriate 144

3. When reviewing long-term care insurance: a) Identify qualification triggers for benefit eligibility. The 3. When reviewing long-term care insurance: a) Identify qualification triggers for benefit eligibility. The use of ADLs and/or physician referral is preferred. b) Compare existing policy triggers to current products. Consider replacement of policies requiring prior hospitalization. c) Determine levels of care provided. Avoid policies that do not cover all levels of inpatient care. Evaluate client’s needs regarding home care versus inpatient care. d) Review elimination period and relate to other resources for coverage. e) Review benefit level relative to current costs and other available income. f) Review benefit period relative to family history of client. g) Compare premium histories of guaranteed renewable policies. 145

4. When reviewing homeowners insurance coverage: a) Ensure whether coverage is adequate to replace 4. When reviewing homeowners insurance coverage: a) Ensure whether coverage is adequate to replace dwelling only. The replacement cost and the value may be two very different numbers. b) Is the proper form of insurance in place? A homeowners policy on a property currently being rented out is not acceptable. c) Determine the last time the client reviewed the cost of the coverage. d) Determine whether the client have replacement cost coverage or actual cash value (ACV) coverage. e) Determine whether the policy contain an inflation-adjustment rider. f) Determine whether personal property coverage is adequate based on assets owned. g) Determine whether replacement cost protection on personal property exists h) Determine whether your client understand the limitations on high value items i) Determine whether your client has floaters for all high value personal property j) Determine whether an HO 15 rider exists. k) Determine if disaster coverage is necessary and appropriate. 146

5. When reviewing your client’s liability coverage: a)Determine whether current policies include adequate coverage 5. When reviewing your client’s liability coverage: a)Determine whether current policies include adequate coverage for the client b)Determine whether current coverage is enough to qualify the client to obtain an umbrella policy. c) With the client’s current circumstances, determine whether the client’s umbrella policy sufficient and cost-efficient. d)Determine whether the client has any high-risk assets, such as a swimming pool, that would warrant additional or special coverage 147

6. When reviewing your client’s auto policy: a) Consider whether state-mandated levels are met 6. When reviewing your client’s auto policy: a) Consider whether state-mandated levels are met and whether they are adequate. b) Consider the deductible relative to other assets. c) Determine whether it would be appropriate to remove collision coverage on older vehicles d) Determine whether all owned vehicles are included on the policy 148

7. When reviewing business insurance: a) determine whether coverage is appropriate. b) determine whether 7. When reviewing business insurance: a) determine whether coverage is appropriate. b) determine whether insurance agents have been performing an adequate job of discovering all of the pertinent exposures 149

Investment Pointers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Summarize all Investment Pointers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Summarize all of your investments Determine how your investment are allocated, in total, amount the three investment categories: stock, fixed income and cash. Factor in your objectives when designing the right allocation of your investments Put “savings” first. Save on a regular basis. Constantly monitor your portfolio. Don’t be rash in making changes. Substance over form. Make sure the investment merits outweigh everything else. Taxes should be a secondary reason to invest. Don’t time the market, Long term buy and hold will usually work best. Use mutual funds as your primary investment vehicle. Don’t chase returns. Keep with your long term strategy and don’t deviate from your long-term objectives. 150

Retirement Pointers 1. If the client’s savings program will not result in a sufficient Retirement Pointers 1. If the client’s savings program will not result in a sufficient amount to fund his or her retirement lifestyle, there are basically four courses of action: a) save more, b) earn more (a higher investment return on the retirement savings fund), c) retire later, or d) retire in a more modest lifestyle. 2. Wherever possible, the client should be saving through a tax-deferred vehicle such as a qualified plan, or personal retirement plan, such as an IRA, SEP or SIMPLE. 3. In determining the client’s retirement savings need, use appropriate assumptions for investment rate of return, inflation rate, years till retirement and years during retirement. 4. Retirement plan funds should be maintained in tax-deferred accounts to maximize the benefits of tax deferral. Urge the client to consider alternate sources of funds needed during the pre-retirement period, so that retirement plan balances will not be eroded. 5. Review beneficiary designations on all retirement plan accounts to ensure that they are consistent with the client’s goals. 6. Keep retirement planning in view as short-term decisions are being made regarding the use of income and assets. 7. Review the client’s retirement projections periodically; revise the analysis periodically, and in the event of material changes in the client’s situation (change of employment, divorce/marriage, death of spouse) 8. As the client approaches retirement, plan on incorporating the stretch (multi-general) IRA to enable the retirement funds to grow tax deferred as long as possible. 9. Fully analyze any projections made by other professionals when projecting a pension maximization or other recommendation. 10. Monitor the client’s investment return; compare to assumptions that were used to build the retirement fund. If the client’s investments are not realizing the expected return, the client may need to shift the investment allocation or modify the retirement lifestyle. 11. Monitor the client’s expenses compared to projections; modifications in lifestyle may be necessary. 151

Estate Planning Pointers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Estate Planning Pointers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. In considering any gift or estate strategy, analyze the basis aspects of any particular property being planned for use in the strategy. Where spousal transfers are involved, always check the citizenship of the transferee spouse. Where necessary, be willing to pay a small tax to achieve an important personal objective. Recommend a will even in situations where the plan in place will avoid probate completely. Encourage the use of a durable power of attorney and the medical proxies available under state law. Strongly recommend filing a will and other estate documents for safekeeping with the appropriate court. Among retirees consider all charitable giving techniques that would enhance current income. Review all indications of domicile and try to consolidate domicile as much as possible. Avoid presenting clients with probate and revocable trusts as an either-or proposition. Use joint ownership arrangements sparingly as an estate planning technique. Estimate estate liquidity needs and identify sources of liquidity. If life insurance is to be purchased as a source of liquidity, avoid even initial ownership by the insured. Discourage clients from using joint, mutual or reciprocal wills, and/or joint trusts. Compile a family tree for the client, clarifying relationships and identify critical dates (e. g. , marriages, births, deaths, gifts, etc. ). Construct a net worth statement for the client, extrapolating from that the degree of planning appropriate. Identify items that would be classified as income in respect of a decedent in a prospective gross estate, and attempt to determine how best to handle those items. Make sure the client understands the planning limits imposed by spousal rights in community property states and common law states. Determine and present to the client the estate plan that the client currently has (even if it is all intestacy). Don’t allow the generation-skipping transfer tax to discourage clients from making transfers to grandchildren or others until the exemption is fully utilized. Consider carefully what plans are in place for the disposition of pension plan benefits and whether different dispositions should be explored. Assess the adequacy of provisions for minors and dependents, and make recommendations as needed. Where there is a closely held business interest, determine definitively how the succession in interest is to be achieved, whether by a buy-sell agreement or through another technique. Survey the postmortem elections that might be available to the particular estate and adopt strategies that will preserve the availability of these elections. 152

Guidelines for Preparing a Will 10 Item will preparation Checklist The following items should Guidelines for Preparing a Will 10 Item will preparation Checklist The following items should be included in a will: 1. Statement that the document is a will. 2. Statement revoking all previous wills. 3. Your full name and location of principal residence. 4. Specific transfers of property to the named beneficiaries. 5. Instructions for dividing the balance of the property. 6. Identify trusts, including the names of selected trustees and successor trustees. 7. Names of guardians and alternate guardians for minor children or special needs relatives. 8. Designation of what monies are to be used to pay death taxes. 9. Names of the executor and back-up executor. 10. Signature and date. The will should be signed in the presence of all of the witnesses. 153

Chapter 10: Afterwards: The 25 Steps to Future Success n Did You Know? In Chapter 10: Afterwards: The 25 Steps to Future Success n Did You Know? In a recent poll, American men and women were asked if they would marry the same person if they had it to do all over again. 80% of the men responded that they would marry the same woman. 50% of the women responded that they would marry the same man. 154

Chapter 10: AFTERWARDS: THE 25 STEPS TO FUTURE SUCCESS n An ex-spouse is like Chapter 10: AFTERWARDS: THE 25 STEPS TO FUTURE SUCCESS n An ex-spouse is like an inflamed appendix, they cause a lot of pain and suffering, but after it's removed you find you didn't need it anyway! RECAP: SO WHAT DID YOU REALLY GET FOR $100, 000+…? 155

Financial Planning Responsibilities That Need to Be Followed Up 1. 2. 3. 4. 5. Financial Planning Responsibilities That Need to Be Followed Up 1. 2. 3. 4. 5. Read the Divorce Decree Hopefully One Last Time Obtain Certified Copies of the Divorce Make New Deeds for Real Estate Transfer Car Title Update Insurance Coverage and Beneficiary Information 156

Financial Planning Responsibilities That Need to Be Followed Up 6. 7. 8. 9. 10. Financial Planning Responsibilities That Need to Be Followed Up 6. 7. 8. 9. 10. 11. 12. 13. Update Your Retirement Plan Beneficiary Designations Update Your Retirement Plan Accounts Update Your Estate Planning Documents, including Wills, Trusts and Powers of Attorney Confirm that All Bank Accounts, Brokerage Accounts, and Stock Certificates are Separated into Your Own Name Confirm that All Credit Cards, Other Obligations, and Possessions are Separated by Having Your Ex Removed from the Accounts Keep Meticulous Records Remove Personal Assets Name, Address and Work Related Changes 157

Other Critical Issues That Need Your Follow-up 14. 15. 16. 17. 18. 19. 20. Other Critical Issues That Need Your Follow-up 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Your Children Moving Away Modifying Child Support Your Kids and Post Divorce Syndrome Modifying Spousal Support Dating Again: Having Your Kids Cope Cohabitation Agreements Prenuptial Agreement Getting Married Yet Again (Remarriage) Mix and Match with the New Extended Family: Your version of The Brady Bunch Support Groups and Persons The Bottom Line: Take Care of Yourself 158

Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. When Rattiner’s Planning Tips 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. When it’s time to recap the events, you will have learned much from the process. It would have been easier, cheaper and healthier to work out the differences and the divorce during the process with minimal input from the lawyers. Chapter two of your life states that you’ve been through the worst already and now it’s your time to take care of yourself going forward. Remember, if you don’t no one else will, and there’s a lot of people counting on you. Read the divorce decree carefully. If you don’t agree with the conclusions, you need to correct it ASAP. Once the ink dries, it’s too late. Obtain certified copies of the divorce decree because there are many documents and many instances where it is a necessity. Most entities you’ll need to deal with won’t accept unofficial legal copies. Change the deed on real estate to your own name so you can apply for financing to buy your spouse out of his or her share of the housing interest. No tax liability is included in this transaction. Transfer the car titles to the spouse who ends up with the car. Make sure you have all documentation for paperwork regarding paid off loans or other liens. Update all your insurance policy beneficiary designations. Remember, insurance passes by contract of law and that will always supersede a will. If you don’t change them, then the person you want to get the benefits may not be legally entitled to them. Go on COBRA health insurance if you are the non-working spouse who is in between jobs. Coverage can be extended for up to 36 months. Update your retirement plan beneficiary designations. Look at the list you prepared for the court disclosing all the different types of retirement plans so you don’t forget any during the process. Make sure you have completed a QDRO to actually split the money from a qualified retirement plan. The spouse who is likely to benefit from receiving those monies needs to be the one to pursue this along. IRAs don’t need to complete QDROs. 159

11. Updating your will and other estate planning documents is important. The most current 11. Updating your will and other estate planning documents is important. The most current will is the one that is relied upon because it supersedes all previous wills. You need to make sure that it states that you are not married. Also change your health care proxies and powers of attorney so your ex can’t control any of your decisions going forward. 12. Confirm that all bank and brokerage accounts have been separated into your name only. Pass along a certified copy of the divorce decree to show that joint ownership is not to be applied in any circumstance 13. Make sure your ex is off any joint credit cards. Debts that he or she rings up could be your responsibility if you don’t follow through. Again, a copy of the certified divorce decree should be filed. 14. Keep meticulous records of all transactions involving the ex spouse. You may need them in court later on. 15. Remove all personal assets from your prior residence before the divorce becomes final. After that, it could turn into a “he said, she said” contest as to what belongs to whom. 16. Update various organizations relating to name, address and work related changes including notifying the IRS of an address change. 17. It’s always about the kids. Need I say more? 18. If you are moving away, you better have good reasoning to do so. The noncustodial parent will take exception to that and make your life a living misery. 19. If you need to modify child support, perhaps start by discussing it with your ex. If that doesn’t work, go to mediation or back to court only as a last resort. 160

20. Your children may never ultimately accept the divorce. It is your role to 20. Your children may never ultimately accept the divorce. It is your role to help them through the process, no matter how long it takes, so they can gain closure on the issue. Be persistent. 21. You can try to modify spousal support. Good luck. 22. After the divorce you need to be focusing on your new life. Dating is a starting point. How you work it in with your kids is the tricky issue. Don’t involve the kids early in the process. Only involve them when it becomes serious. One year is probably a good time frame before introducing he kids to your new love interest. 23. If you are living with this new person, have all your issues tied to writing to prevent any future misunderstandings either while alive or at death before marriage through the use of a cohabitation agreement. 24. Prenuptial agreements are a necessity. It sets the expectations from the beginning so everyone knows the deal ahead of time. You always must manage the other side’s expectations both before and after the process, if there is an afterwards. 25. Remarriage is tricky business. Make sure your kids and even your ex is ready for it. Protect yourself before it happens. 26. The Brady Bunch may have been shown on TV in the 1970 s but it exists more today than during any prior time period. Blending the families will be a constant challenge, so setting the ground rules in advance, managing expectations, and retaining important traditions and values will help go a long way. 27. Support groups and individual counseling can help you get over the hump regarding the divorce and put you in a better place to succeed the next time around. 28. When push comes to shove, you need to protect yourself and take care of your main asset – you! Nothing else matters if you can’t walk away from this grueling process happy, healthy and focused. 161

Chapter 11: Planning for Same Sex Couple Divorces n Love may be blind, but Chapter 11: Planning for Same Sex Couple Divorces n Love may be blind, but marriage is a real eye-opener! 162

Chapter 11: Planning for Same Sex Couple Divorce Issues Specific for Same Sex Couples Chapter 11: Planning for Same Sex Couple Divorce Issues Specific for Same Sex Couples n n Domestic partnership agreement/cohabitation agreement Last Will and testament Income Tax Issues Estate Planning Issues 163

The Personal Financial Planning Process Step 1: First obtain copies of all of your The Personal Financial Planning Process Step 1: First obtain copies of all of your and your partner’s financial information – assets, liabilities and income. You may have to focus on just compiling yours and then exchange it with your ex-partner since you likely have no legal access to their financial records. 164

Step 2: Compile your financial information into a net worth statement. On the left-hand Step 2: Compile your financial information into a net worth statement. On the left-hand side of the page list all of your assets. On the right-hand side of the page list all of your liabilities. These should be assets and liabilities held in your name alone, your ex-partner’s name alone and joint held. Indicate whether you came in to the relationship with this asset or liability. If possible indicate any additions or six attractions that have occurred during your relationship for each asset or liability. 165

Step 3: Gather information regarding the income both you and your partner were making Step 3: Gather information regarding the income both you and your partner were making at the time of your long-term commitment. Also, list changes to income for either party, changes to pursuit or attainment of education or career advancements that were made to benefit the partnership. And list the income each of you were making at the time of dissolution, plus a note regarding earning potential. 166

Rattiner’s Divorce Summary n The best option is to stay married, when possible. If Rattiner’s Divorce Summary n The best option is to stay married, when possible. If not, then you need to be smart, practical and shrewd about getting divorced. It’s an occurrence, that if not done right, can have devastating financial and emotional repercussions for the rest of your life! Your own personal financial planning for divorce can never be more important or have a bigger impact than now! All of the information shared today can be found in detail in my latest book published by John Wiley and Sons. 167

Parting Thoughts! n n n If Love is Blind and Marriage is an Institution, Parting Thoughts! n n n If Love is Blind and Marriage is an Institution, then Marriage is an Institution for the Blind. Sir, if you were my husband, I would poison your drink. --Madam, if you were my wife, I would drink it. - A conversation between Lady Astor and Winston Churchill Men marry women with the hope they will never change. Women marry men with the hope they will change. Invariably they are both disappointed. - Albert Einstein "I bought my ex a gift for her birthday, but she didn't use it so I'm not going to get her another. " "What did you get her? " “A cemetery plot!" We were very happily married for eight months. Unfortunately, we were married for ten years! 168

The Lesson! n A cop tries to pull over a guy for speeding who The Lesson! n A cop tries to pull over a guy for speeding who tries to outrun him. Finally the guy gives up and pulls over. The now ticked-off cop walks up and yells at the guy, “Hey, what's the big idea? " The guy responds, Well officer, I have a very good reason for not stopping sooner. The cop replies, “if you can give me a reason that I have never heard before in all my 30 years on the force, I will not issue you a ticket!” The guy responds, "Last week my wife ran off with a cop and I was afraid he was trying to catch me to give her back!" "Off you go, " said the officer. 169