ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, December 9, 1996 TAG: 9612100003
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
More than ever, divorcing couples need strategic tax and pension advice. You may not think of it while you're battling over the house and other property, but what you gain at the bargaining table may be taken away by tax and pension laws.
Your divorce lawyer can't vet all these technical points alone. He or she needs a tax partner or consultant when property is at stake.
I have two exhibits to back up my opinion.
Exhibit A: A new federal Court of Appeals ruling on taxes and the family home. It's gumming up the works for many couples who want to sell the house and divide the home equity between them.
Exhibit B: Older court rulings on pension rights. Couples and their lawyers still make mistakes of the sort that may leave the pension assets to the wrong person.
The new federal ruling came in July in the 9th Circuit covering Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. ``It's going to influence courts in other states, because it's the first circuit court ruling on this issue,'' says divorce lawyer Jan White of Pasternak & Fidis in Bethesda, Md.
The basic facts of this case will sound familiar to any divorcing couple.
Curtis Perry of Irvine, Calif., split with his wife, left the house and never came back. The divorce agreement gave his ex-wife and daughter exclusive occupancy. It also provided that the house would be sold after a certain number of years and the proceeds divided between the ex-spouses.
After the sale, Perry rolled his share of the profit into another house and deferred the tax on his capital gain.
``No good,'' the court said. ``No tax deferral allowed.'' Deferrals are for people who have sold their principal residence. From the moment he signed the separation agreement, that house was no longer Perry's personal residence. The ex-Mrs. Perry could tax-defer her profits, but Perry couldn't.
The IRS demanded back taxes plus interest and a negligence penalty. The court said Perry had to pay.
``Many lawyers and accountants have been telling spouses who move out that they have two years to sell the house and still use the deferral,'' White says. ``If they don't know about this case, they may be advising their clients wrongly.''
The decision puts the departing spouse - usually the husband - in a bind. If he wants to avoid disrupting his children's lives, he won't insist on selling the house. But that decision will cost him dearly when the house finally goes on the market.
When they split the assets, they might decide that the wife gets the house (because she can use the tax deferral) and the husband gets the pension. But when the wife sells, she may owe a capital gains tax on at least part of the profits, so the house isn't worth as much to her as it appears.
Pensions are another can of worms. Spouses are generally entitled to a share of an ex's retirement plan. When both spouses have plans, they'll both be on the table.
If you get a share of your spouse's plan and cash it out, you'll owe income taxes on the money. There's no penalty for early withdrawal, however, as long as you got the money under a ``qualified domestic relations order'' - a legal document that should be part of the divorce agreement. Alternatively, you might leave the money where it is or roll it into an Individual Retirement Account.
But what if the plan holder dies? If not properly coached, you may run into unintended consequences.
As an example, assume that the husband names his wife beneficiary; they separate or divorce; then he dies without changing the beneficiary. Here's what generally happens, according to Marcia Fidis, also of Pasternak & Fidis:
*If the couple were separated but not actually divorced, the wife gets the plan. The husband could unilaterally name a new beneficiary for an IRA. But for retirement plans such as 401(k)s, 403(b)s and Keoghs, the wife has to consent to a change of beneficiary. If she doesn't consent, and the husband names one anyway, the wife still gets a share of the money - usually at least half.
*If the couple divorces and the husband forgets to remove his ex-wife's name as beneficiary, she usually collects.
*If the couple divorces and the husband remarries but dies before making his new wife the beneficiary, the ex-wife collects the IRA and perhaps half of any other retirement plans.
Moral: Have your change-of-beneficiary forms filled in - for trusts and insurance, as well as pensions - and sign them the moment you hear the divorce is final.
LENGTH: Medium: 86 linesby CNB