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J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce

Overview

A straightforward and practical reference for the complicated tax and financial topics of divorce

Professionals specializing in the field must understand the financial and tax aspects of divorce in more detail than ever before–and the issues are more complicated than ever before. The J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce is designed to arm professionals with the information they need to best serve their clients in dealing with the complex finances of ...

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Overview

A straightforward and practical reference for the complicated tax and financial topics of divorce

Professionals specializing in the field must understand the financial and tax aspects of divorce in more detail than ever before–and the issues are more complicated than ever before. The J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce is designed to arm professionals with the information they need to best serve their clients in dealing with the complex finances of divorce. Practical and accessible enough for nonprofessionals, the book also helps those worrying over their own divorce understand the topics they must deal with. Examples, guidelines, forms, tools, and checklists complement expert discussion of these issues and more:

  • Valuing interests in closely held companies
  • Finding the right lawyer and accountant for your divorce
  • Negotiating the settlement
  • Tax implications
  • Research and investigation in the discovery phase
  • Subpoenas and requests for documentation
  • Marital versus nonmarital property
  • Analyzing and determining one’s true economic income
  • Alimony and other maintenance payments
  • Dissipation
  • Mediation and collaborative law for divorce

Please visit our Web site at www.jklasser.com

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Product Details

  • ISBN-13: 9780471098881
  • Publisher: Wiley
  • Publication date: 2/28/2002
  • Series: J.K. Lasser Series , #10
  • Edition number: 1
  • Pages: 276
  • Sales rank: 1,020,805
  • Product dimensions: 9.00 (w) x 6.00 (h) x 0.81 (d)

Meet the Author

BRUCE L. RICHMAN, CPA/ABV, CVA, CDP, is President of The Investigative Valuation Group, LLC, where he and his firm specialize in business valuations and all tax and financial aspects of divorce. He has authored CPE courses as well as numerous articles on the subjects of business valuation, divorce, taxation, and real estate. Mr. Richman has also lectured around the country on all financial areas of divorce. He can be reached at valuationplus@aol.com.

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Table of Contents

Preface.

Acknowledgments.

SECTION I: FINANCIAL ASPECTS OF DIVORCE.

Chapter 1: Introduction.

Knowledge Is Power.

Finding and Selecting the Right Divorce Attorney.

Gathering of the Assets.

Discovery.

The Concept of Marital versus Nonmarital(Separate) Property.

Understanding Your Spouse's True Economic Income.

Net Worth Analysis.

Developing Your Lifestyle Analysis.

What Is This Thing Called Dissipation?

Chapter 2: Mediation in Settling Cases and Collaborative Divorce.

Mediation.

Collaborative Divorce.

Chapter 3: Glossary of Common Legal/Divorce Terminology.

SECTION II: THE TAX SIDE OF DIVORCE.

Chapter 4: Taxation of Financial Support.

Introduction.

Alimony and Child Support.

Chapter 5: Transfers of Property in Connection with a Divorce'IRC Section 1041.

General Rules.

Basis in the Property Received.

Recapture.

Transfers to Third Parties.

Chapter 6: Special Issues in Property Transfers.

Transferees of Closely Held Businesses and theIssue of Stock Redemptions.

Overview of Retirement Plans and the Tax Impact onTransfers During Divorce.

The Sale of the Personal Residence-When, How, orDoes One of the Spouses Get It?

Chapter 7: Filing Status.

Head of Household.

Allocation of Income.

Assignment of Income Doctrine.

Deduction for IRA Contribution.

Dependency Exemptions.

Chapter 8: Allocation of Itemized Deductions.

Medical Expenses.

Qualified Mortgage Interest.

Deductibility of Divorce-Related Attorney andAccounting Fees.

Chapter 9: Allocation of Tax-Related Carryovers.

Charitable Contribution Carryovers.

Net Operating Losses.

Capital Loss Carryforwards.

Investment Interest Expense.

Passive Loss Carryforwards.

Other Credit Carryforwards.

Chapter 10: Allocation of Estimated Tax Payments and Tax Refunds.

Estimated Tax Payments.

Federal Income Tax Refunds.

Chapter 11: Innocent Spouse Rules, Child Care Credits, and Adoption Credits.

Innocent Spouse Rule.

Child Care Credits.

Adoption Credits.

SECTION III: THE VALUATION PROCESS.

Chapter 12: The Basics in Understanding the Valuation of theClosely-Held Business.

Hiring an Expert-Types of Business Appraisers,Professional Accreditation Criteria, and Standardsof Business Valuation.

Important Internal Revenue Service Revenue Rulings.

Use of Financial Experts Generally.

Protective Orders.

The Valuation Process.

Chapter 13: Business Valuation Approaches.

General Introduction to Business Valuation Approaches.

Income Approach.

Summary of Major Steps Using the Capitalizationof Earnings Method or Discounted FutureEarnings Method.

Summary of Major Steps Using the Discount ofFuture Earnings Method.

Determination of Capitalization/Discount Rate.

Chapter 14: Market Approach.

Introduction.

Guideline Publicly Traded Company Method.

Private Transactions'The Comparative TransactionMethod.

Rules of Thumb/Industry Method.

Chapter 15: The Cost Approach.

Net Asset Value Method.

Excess Earnings Method.

Chapter 16: Discounts and Premiums.

Control Premiums and Minority Discounts.

Lack of Marketability Discounts.

Discount for Lack of Voting Rights.

Key-Person Discounts.

Blockage Discount.

Personal Goodwill Discounts.

Chapter 17: Effect of Purchase Price, Buy-Sell Agreements, andKey-Person Insurance upon Valuation.

Common Business Valuation Mistakes in Divorce Cases.

Chapter 18: Revenue Rulings.

Rev. Rul. 59-60, 1959-1 C.B. 237.

Rev. Rul. 68-609, 1968-2 C.B. 327.

Rev. Rul. 93-12, 1993-1.

Appendix A: Stock Options.

Stock Options Defined.

Qualified Stock Options.

Nonqualified Stock Options.

Vested and Unvested.

Tax Treatment of Stock Options.

IRS Ruling.

Valuation Issues.

Valuation Approaches.

How to Handle Option Issues in Dissolution ofMarriage Cases.

Sample Language for Marital Settlement Agreementsfor the Allocation of Stock Options.

Appendix B: Uniform Standards of Professional Appraisal Practice andBusiness Valuation Standards Of ASA.

Importance of USPAP Generally.

Business Valuation Standards Promulgated by theASA Business Valuation Committee.

Reading Material on Business Valuation.

Business Valuation Standards of USPAP 2000.

Appendix C: Information and Documents Requested for Sample Company.

Appendix D: Summary of Common Ratios Used by Business Appraisers.

Liquidity Ratios.

Activity Ratios.

Leverage Ratios.

Profitability Ratios.

Appendix E: Comprehensive List of Common Terms and Definitions Used byBusiness Appraisers.

Index.

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First Chapter

J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce


By Bruce L. Richman

John Wiley & Sons

ISBN: 0-471-09888-4


Chapter One

Introduction

The devastating truth hits one Monday afternoon when you are served with divorce papers. Whether it comes as a surprise or not, the reality that you are about to go through a divorce has now hit. We now rush to defend. The feelings of anger, hurt, getting even, and winning begin to go through one's mind. The problem is we begin to think from the heart and not the head. It is not uncommon to feel lost, scared, empty, and uncertain. What will the future bring? What will this cost me? How can I survive? What is my attorney doing? These are all feelings and questions that both men and women have. Many battles would not need to be fought if we only knew the financial consequences.

Knowledge Is Power

The question "Is my attorney really being creative and understanding of my financial consequences?" is often met with a blank stare. The key to a successful divorce and the ability to negotiate on an equal footing with your spouse is knowledge. Knowledge is power. The reason most cases can not be mediated is the lack of knowledge by one party or both. The more knowledge the parties have, the more likely a case is to be settled and the easier they will feel with the final settlement. This book will provide that knowledge in the area of tax and financial matters that affect divorce. Various areas of divorce will be covered with theuse of checklists and easy to read discussions of the topics, laid out in a direct format. The book is broken down into three sections: Section I-Financial Aspects of Divorce, Section II-The Tax Side of Divorce, and Section III-The Valuation Process.

The book is designed not only as a technical resource but as a guide to assist you in raising the issues or questions to ask your attorney or soon to be ex-spouse. It is also designed for those who have not filed for divorce but wish to familiarize themselves with the multitude of issues that will need to be addressed and in effect do some pre-divorce planning. Interestingly enough, for many, this will be the first time that they get a true understanding of their personal financial situation. I have had many clients, married for 20, 25, and 35 years, who never even knew what their total family assets, or even their living expenses, were. In many cases, neither spouse really know what the other spouse earned. There is often a false understanding of what life should be and what it really is. Again, this may be the first time that both parties get a true picture of their expenses and earnings. Though, at times I refer specifically to men or maybe women, my comments are truly gender neutral. I have had many sophisticated clients who did not have any true idea of the details of their spending and the makeup of their assets. For those who do not have major estates and huge incomes, the simple knowledge of the basic tax and financial issues can lead the parties to accept the reality and work out a proper settlement. Knowing, understanding, and accepting what you have as a marital estate can take you a long way from what you think you deserve, which may be totally warranted, to what is equitable based on the marital estate.

Finding and Selecting the Right Divorce Attorney

Putting a professional team together to complete your divorce in a successful and cost efficient manner is an important first step. Many people will run out to hire a big name attorney in an effort to scare their spouse. Wrong! Again, it goes back to using one's head and not heart when interviewing lawyers and understanding their strengths and weaknesses and the type of cases that they deal with. It is very important to find out how much work they do in divorce. I believe that the practice of matrimonial law is one of the most difficult areas because the divorce lawyer not only needs to understand the law, but play psychologist, understand tax issues and financial matters, have a business acumen, ability to negotiate, and understand real estate and business valuations. Thus, finding a lawyer who practices in this area full time is a critical element in the selection process. Figure 1.1 provides a checklist to use when interviewing a prospective attorney. Using the checklist in your discussions will enable you to compare the candidates and make an informed decision.

It is also important to understand the type of case that you have: Is child custody an issue? Do you have a significant estate? Do you have sophisticated investments?, etc. It is important for you to ask yourself these questions honestly so that you can select the right attorney for your case. Each attorney may have a particular expertise or strength in a specific area, such as child custody or financial matters.

The first question I hear is always, where do I start in finding the right lawyer? If you already have located a good certified divorce planner or financial expert, that person should be able to assist you in your search. Some people find a divorce lawyer through recommendations from professionals such as clergy, therapists, and marriage counselors. Other lawyers that you may know are often also a good referral source for a divorce lawyer. With any referral source, you can always ask "Would you send your brother, mother, or sister to them?"

The local Bar Association can also provide you with names of experienced matrimonial lawyers. In this case, always ask for a couple of names so you will have a few to interview. Calling the local chapter of the American Academy of Matrimonial Lawyers is also a good source of qualified matrimonial attorneys. If you go to the library you can probably look in the Martindale-Hubbell Law Directory or The Best Lawyers in America. Given today's technology, the Internet is another source to begin your search. Lastly, if all else fails, you can always turn to the yellow pages. Many states do not allow lawyers to state a specialty, however, they usually will allow them to state that their practice is "concentrated in" or "limited to" an area of law, such as matrimonial.

In the end, one of the most important factors to consider when selecting an attorney is their reputation. Ask other matrimonial lawyers what they think of a particular attorney. The responses may shock you.

During your initial interview, besides just asking the questions in Figure 1.1, start to get a feel for whether or not you and the lawyer will be compatible. Remember you will be spending a lot of time with this attorney and your future financial well-being may be tied to his or her performance as well as personal needs and desires from the case. Make sure that you can share your most confidential matters with the lawyer without you feeling that the lawyer is being condescending or judgmental. It is very important that there is good chemistry between the lawyer and yourself. The problem with this area is that most of it will be based on your gut feeling and how you feel when you come away from the interview. Remember to write down your feelings so you can go back to your notes later on in the selection process.

A number of people going through divorce, especially when there are not a lot of assets involved and the people are civil, will ask whether the lawyer they find can represent both parties in an effort to save costs. Since attorneys are advocates for their clients, this is a difficult situation for an attorney. I do not know many that would handle it and I would not recommend it. If you have an issue or a question that may be advantageous to you, it will probably be disadvantageous to your spouse. In essence, both you and your spouse should have your own representation. Having said this, this does not stop you from representing yourself. Representing yourself in court without the assistance of an attorney is called pro se. But remember the old saying, "A person who represents himself, has a fool for a lawyer".

Gathering of the Assets

The first step is to gather and understand what the marital estate is. Many couples live like kings with very few assets to show for it. They may be living a million-dollar lifestyle only to find out they are in debt with very few real assets. So where can I turn to find out what my assets are? First pull together the obvious assets that you are aware of:

* The personal residence. Pull the insurance policy. There may be a rider attached detailing personal property and jewelry and its appraised value. Obtain a copy of any recent appraisals that you may have. (If you recently refinanced your mortgage, there would have been an appraisal. Go to your local real estate agents and ask them to pull the recent sales from the multiple listings to get an idea of the current fair market value. Then you can go on the Internet to find a preliminary value of your house. Take pictures of your house.

* Obtain a copy of the most recent mortgage statement. If you know who is servicing your mortgage, you can call and get a history of the payments made and the current balance outstanding and if there is an escrow account maintained. Many times real estate taxes are escrowed and paid by the mortgage company. Any excess escrow amount would be an asset of the marital estate.

* Listing of all bank accounts. Include those that are checking, savings, and money market accounts. A simple review of schedule B of your joint federal individual income tax return will assist you.

* Investment accounts. This includes all brokerage accounts, mutual funds, and CDs. Even if you and your spouse trade on-line, there will be an account and a listing of investments. This should also include stock options from your employer including those that are vested and non-vested. Given the environment of the dot.com companies, a large portion of management and even staff's compensation may be in some form of a stock option. What a stock option is, how it is valued, taxed, and handled for purposes of the divorce is important. The issue of stock options in divorce and how to handle them is still developing and a basic overview of this subject is summarized in Appendix A.

* Retirement Accounts. This will include not only both spouses' individual retirement accounts (IRAs) but also all employer-sponsored plans: Defined Contribution Plans (profit sharing and 401(k) plans); Defined Benefit Plans (pension plans); Nonqualified plans (Stock Appreciation Rights); and Employee Stock Option Plans (ESOPs). Defined Contribution and Defined Benefit plans are discussed in Chapter 6. Normally, employer-sponsored plans will have a handbook describing the plan and its benefits. It is also not uncommon for the employer to provide a summary of benefits.

* Business Interests. This would include all closely held businesses that you or your spouse owns. These can be ones that you are active in, such as a business which you own and work at or investments made from a passive investment perspective such as an investment in a real estate limited partnership. The key here will be the determination of the fair market value of these business interests. In Section III we provide a straightforward overview of this process and basic terminology used by appraisers. Again, a review of one's federal tax return can provide information on one's passthrough investments.

* Life Insurance. When listing the various life insurance policies, it is important not only to know the amount of coverage, but also the cash surrender value. Obtain details such as: policy number; beneficiary; insured; cash value; policy holder loans; and owner of the policy.

* List of personal property. Don't be afraid to photograph or video tape the contents of your residence. You can also hire an expert to inventory and value your personal property.

* Automobiles. List the make, model, and year of each vehicle. Make a distinction between those that are owned and leased. The values can be determined easily through the Internet from one of the auto sites that price out used vehicles.

* Other miscellaneous items. Include items such as boats, artwork, jewelry, coin or stamp collections, and airline mileage. (This becomes tricky as most airlines will not allow the transfer of miles, thus forcing one spouse to cash in tickets to be used over the next year.)

* Liabilities. Don't forget to list all of the liabilities such as: credit cards, personal loans, and judgments. It is important that any loans between family members be documented to show intent as a loan as opposed to a gift.

These items can be put into a marital balance sheet which will summarize the assets and liabilities. Additionally, the spreadsheet can be used to allocate assets and determine the overall allocation of the marital estate. Figure 1.2 provides an example of a marital balance sheet worksheet. You will notice that the worksheet not only lists the individual assets but also categorizes them between marital and non-marital and provides an area to show how the allocation of the assets for settlement may be structured. For those states that are not community property states, usually the assets are allocated on an equitable basis. It is important to note that equitable does not necessarily mean equal. This concept is further discussed later in this section. However, the beauty of this worksheet prepared in Excel, is that it provides a complete picture of the parties' assets and how their allocation will provide each on an individual basis and as a percentage of the total marital estate. A worksheet such as this one gives a good picture of the proposed or negotiated settlement. The next step would be to use this worksheet to analyze the individual assets allocated and the income that they will generate for purposes of assistance with one's annual cash flow needs. The worksheet can also be used to look at those assets that will grow in the future and use it as a starting point to see how each party's net worth will grow or decrease over time. This can assist in determining whether a proposed allocation is equitable. Obtaining an equitable distribution of the marital estate requires understanding of the business assets, tax implications, pension rules, etc. Thus, the marital balance sheet worksheet is the best place to start in determining what type of discovery will need to be done, what experts will be needed, and what other issues will need to be resolved.

Continues...


Excerpted from J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce by Bruce L. Richman Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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