These hot tips for divorce settlement strategies during COVID (including the SECURE Act and the CARES Act) can supplement alimony post-TCJA.
By Michelle F. Gallagher, Financial and Valuation Expert
Hot Tips for Divorce Settlement Strategies:
Alimony Alternatives Post-TCJA
Let’s start with alimony alternatives. Everyone thought the sky was going to fall when alimony was no longer tax deductible or tax includible for the parties after the Tax Cuts and Jobs Act (TCJA) went into effect. However, some professionals have been very creative post-TCJA. The primary alternatives all relate to income-shifting – trying to shift the income to the lower taxpayer or the low tax rate taxpayer in a divorce case.
Retirement funds can be a good option: instead of splitting a retirement plan 50/50, you could give more to the spouse who would have received more alimony before the TCJA. If you do a very large disproportionate allocation of retirement funds, there are even some vehicles to replenish those very large discrepancies in the allocations – especially for business owners.
If the parties have rental real estate or income-producing real estate, you could to transfer more of those assets to the alimony recipient.
As the market starts to rebound from its COVID lows, transferring a larger share of investment accounts – or investments that have higher capital gains embedded in them – to the alimony recipient is back on the table now too.
If the divorcing parties own a company with liquidity issues, redeeming company stock is another way to get some money to the out spouse or the alimony recipient is another alternative that has gained a lot traction in the post-TCJA era.
Retirement Accounts in 2020: The SECURE Act and the CARES Act
The biggest changes we have seen in 2020 are in retirement accounts; there are some very beneficial retirement account changes that came into play in 2020. Let’s start with the SECURE Act.
The SECURE Act (Setting Every Community Up for Retirement Act) took effect on January 1, 2020. It changed the age that required minimum distributions are required from 70.5 to 72. You can keep money in these retirement funds a little longer, and the SECURE Act also allows for penalty-free withdrawals for any births or adoptions.
The CARES Act (Coronavirus Aid Relief and Economic Security Act) has opened up all kinds of benefits in the retirement account area. Although the Required Minimum Distribution (RMD) has moved to age 72 under SECURE, for 2020, parties 72 or older are not required to withdraw any money. Keeping money in the retirement accounts and splitting the accounts in a disproportionate way is a good way to get some tax-free money to supplement alimony.
The CARES Act also waives the 10% surtax or penalty for early distributions for a variety of COVID-related reasons. They are typically hardship driven; in a divorce where there is lack of liquidity because of COVID, many parties are using this provision to get some money out of retirement accounts now without having to pay the penalty.
The CARES Act also allows you to withdraw money from retirement accounts in 2020 and there is a three-year delay in recognizing the withdrawal as taxable income, or you can actually even pay it pay over three years, if you don’t end up needing it after all. This three-year delay in taxing and/or repaying the money can be a real benefit to parties who are struggling with liquidity issues due to COVID and opens up all kinds of settlement and planning strategies.
CARES has also has increased the limits on retirement plan loans. In some cases, it may make sense to use retirement account loans for settlement purposes.
Hot Tips for Divorce Settlement Strategies:
Other Ways to Avoid the 10% Penalty on Early Retirement Account Withdrawals
There are other ways you can avoid the 10% penalty or surtax that applies to early withdrawals from retirement accounts. For example, you can take a lump-sum payment and avoid the 10% penalty under a QDRO.
The 72(t) annuity option is a good one too – especially if you have a larger or multi IRA accounts. In most cases, you can split the accounts and calculate annuities to get the amount of money that your party needs. This requires some expert planning, but it is still a great opportunity.
These tips only scratch the surface, so I encourage you to join us for our deeper dive into these and many more items in our “Sum It Up” sessions that will cover various financial considerations as well as business valuation issues in the COVID era.
Michelle Gallagher, CPA/ABV.CFF, is a nationally-recognized business valuation, forensic accounting, and tax expert who leads Adamy Valuation’s family law practice. Her extensive experience includes serving as a trusted consultant, expert witness, mediator, and court-appointed expert. www.adamyvaluation.com
This article provides a sneak-peak into “To Sum It Up: How Tax Issues, Government Programs and COVID-19 Have Impacted Business Value”: a two-part seminar Michelle Gallagher will be presenting with fellow financial expert Jim Hitchner and family lawyer Brian Vertz at the 2020 AAML/BVR Virtual Divorce Conference on September 10 and 11, 2020.
Starting September 9, this Virtual Divorce Conference brings together leading matrimonial attorneys and financial experts for the only event of its kind. You can stream and connect from the comfort of your own home or office; to see the full Agenda, go to www.bvresources.com/events/national-divorce-conference-2020/agenda
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Now that alimony is no longer tax deductible, family law professionals have to find new tax planning techniques to settle cases.