Considerations Related to Tax & Estate Planning During a Divorce
As the old saying goes, the only things you can count on in this life are death and taxes. As a result, a good lawyer will always think about these two things when helping you through a divorce.
Death While Divorcing
The reality is that divorce takes a period of time, anywhere from several months to more than a year. Most people do not have a warning that the grim reaper is coming, so there is always a chance that you could die during the divorce process. The reality is, if you die before the final divorce decree and you do not protect yourself, then your spouse will typically get everything you own. Because of that, it is wise to revise your estate plan while you are going through a divorce. Leaving everything to your children in a new will is the most common way to fix this problem. Do not forget to also revise your beneficiaries on items like your life insurance, as those will usually not follow your will.
Taxes While Divorcing
If you are still married when the end of the year rolls around, taxes can be a bit complicated. If you are in an amicable situation, you may still want to file a joint tax return. That tends to be uncommon, however, and the more typical action is to label your taxes as “married filing separately.” The challenge here is that most deductions that you would take together as a married couple can now only be taken by one of you. So it is almost inevitable that divorcing spouses or their attorneys will need to coordinate on taxes to some degree. You may need to decide who will deduct the mortgage interest and property tax, for example. You also must decide who will be the “custodial parent” that will claim the children as dependents. Some deductions and credits may be completely off limits.
Estate Planning After Divorce
A new divorcee is usually getting a fresh start of sorts and should completely reconsider their estate plan just like anyone else going through a major life change. They should take steps to avoid the costly probate process and have assets transferred automatically, using a pay-on-death bank account for example. The stumbling blocks start to crop up when getting remarried. The law generally favors a spouse over children upon death, so anyone getting remarried should take steps to protect their children. Children should be specifically incorporated into a will or protected with other instruments like a trust. Otherwise, the second spouse could inherit everything and leave the children from the first marriage out in the cold.
Death Taxes for a Divorcee
The impact of death taxes are somewhat overblown for the general public. The IRS has a threshold of about $5.5 million dollars before death taxes must be filed and then taxed. Some states also have estate taxes, but those also usually do not kick in until an estate reaches a couple million dollars. So most people do not need to worry about the estate tax, but if you are worth more than a million dollars or so you may need to have a carefully crafted plan to maximize what you will leave behind. This is especially true for small business owners.
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