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California Divorce FAQ, Orange County CDFA
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"Is it better to take more of the marital property, such as a house or IRA, instead of spousal support?" It really depends on your individual circumstances. That will include your age, how close you are to retirement, how many assets you have, whether you have children -- there are a lot of factors that go into evaluating which is best to do.
Many times you'll have an IRA (let's say it's worth $500,000), but after tax, that IRA is worth only $250,000. On the other hand, if you have $250,000 in a home, that may be tax-free. So you have to evaluate those in the big picture in the settlement, making sure that that's going to work for both parties. You have to make sure that both parties have the liquidity and the cash flow still to be able to maintain the assets that they do. For example: if the wife maintains the home, will she have enough cash flow to be able to maintain the mortgage? Because if she keeps the home, she has to refinance it to get the husband's name off the mortgage if she wants a tax deduction and the husband wants to go out and buy property for himself. Another option to consider is: what if the person gets remarried, dies, or has a material change in circumstances? The person paying the lump sum may end up paying more money than they would be required to pay, and the person receiving the money may get more than they're entitled to get. They may have plans to remarry in a year or two; we don't know that, so we have to look at those considerations to decide if a lump sum is appropriate. Thirdly, many times it's better off to receive spousal support because there's an anomaly in the tax brackets. A husband may be in the 38% tax bracket, and the spouse may only be in the 15% tax bracket. And by paying spousal support, which is deductible, and paying it to the lower-income individual, we may have a 10 or 15% disparity, which increases the cash flow for both parties.
Paul J. Toohey is a Certified Financial Planner (CFP®) and Certified Divorce Financial Analyst (CDFA™). He is a member of Collaborative Divorce Solutions, a Collaborative Divorce Group located in Orange County, CA. His financial services can be reached at (714) 998-8200. View his Divorce Magazine profile. |