This is the third month of a three-month series, “You Just Gotta Ask.” Stories about why you always get in front of an expert, and start asking questions, before making major decisions.

Proceed with Caution When Allocating Accounts in Divorce

Donna and John were getting divorced. The more financially savvy of the two, Donna, suggested they keep it simple and allocate accounts of equal value to one another, so that their walk-away totals were equal. Unknowingly, John agreed to accept assets with greater tax implications –traditional IRAs, highly appreciated stock, and their vacation property. Meanwhile, Donna kept the tax advantaged accounts for herself –including Roth IRAs, less appreciated stock, and their primary residence of 3 years.

How much did this mistake cost John?

Let’s review a simplified present-value tax model for their divided assets (assuming 24%ordinary income, 20% capital gain tax, 3.8% Net Investment Income Tax (NIIT), and primary residence tax exclusion):
Donna’s Half of Marital Assets = $1,250,000

• $300,000 Brokerage Account, with a cost basis of $250,000 = $11,900 tax

• $150,000 Roth = $0 tax

• $800,000 Primary Residence, purchased for $650,000 = $0 tax

If Donna sold all assets today = $11,900 taxJohn’s Half of Marital Assets = $1,250,000

• $300,000 Brokerage Account, with a cost basis of $50,000 = $59,500 tax

• $150,000 Traditional IRA = $36,000 tax

• $800,000 Vacation Property, purchased for $400,000 = $95,200 tax

IF JOHN SOLD ALL ASSETS TODAY=$190,700 tax Had John consulted an expert, he would have learned his assets are worth $178,800 less, after tax modeling. And the more his assets grow, the greater the tax discrepancy will become!

Of course this is not fair, but it happens all the time.

Not all accounts are created equal, especially not in the eyes of Uncle Sam. This represents a simple example, more complex assets presenta greater challenge for equal division. If you don’t know how to effectively model taxes when splitting assets in a divorce, ask an expert.

Never Take Your Name Off the House… and Keep your Name on the Mortgage!

In their divorce decree, Fran was awarded the home. Because they had locked in a 3.20%interest rate, Fran negotiated to keep the current mortgage, to avoid refinancing to 7% in today’s rates. Charlie agreed, and the judge ordered Fran to pay the remaining mortgage herself.
Following the court order, Charlie used a quit claim deed to change the home’s joint ownership to single title, in Fran’s name only, effectively removing his name from the property.

No Charlie! In a divorce, the ownership and the mortgage for the property are two separate issues.
Charlie is now liable for mortgage payments, but he has no ownership in the property. To make matters worse, if Fran stops making payments and defaults on the mortgage, the lender will come after both spouses in a foreclosure lawsuit. That’s right, Charlie is responsible for the foreclosure; his credit is destroyed, and it will be difficult for him to purchase another home in the future.
Charlie was simply trying to help Fran avoid refinancing, but in doing so, jeopardized his future. Charlie needed to consult an expert before making this mistake.

Expect the unexpected! Save yourself from the regrets. Always ask an expert, “What are my blind spots?” and “How do I get this right?”

Growing Your Wealth with Danielle Meister.
For over 30 years, Madrona Financial & CPAs has been helping individuals and families improve their financial well-being by givingthem experienced advice on public and alternative investments, real estate, insurance,taxes, executive compensation, business structure and business succession strategies,advanced gifting strategies, estate planning,and more. Danielle and her staffhave offices in Park City and Cottonwood Heights, Utah, while Madrona is headquartered in Washington State.

DISCLOSURES: The information, suggestions, and recommendations included in this material is for informational purposes only andcannot be relied upon for any financial, legal or insurance purposes.Madrona Financial Services will not be held responsible for any detrimental reliance you place on this information. It is agreed thatuse of this information shall be on an “as is” basis and entirely atyour own risk. Additionally, Madrona Financial Services cannot and does not guarantee the performance of any investment or insurance product. Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services. Madrona Insurance Services and individual advisors affiliated with Madrona Insurance Services and Madrona Financial Services receives commissions on the sale of insurance products. Clients are not required to purchase insurance products recommended or to otherwise implement financial advice through Madrona affiliates. When we refer to preparation and filing of tax returns, tax returns are prepared and filed by our wholly-owned sister company Bauer Evans, Inc. P.S., a licensed certified public accounting firm. Madrona Financial Services, LLC is a registered investment adviser with the SEC. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training.Madrona Financial & CPAs is a registered trade name used singly and collectively for the affiliated entities Madrona Financial Services, LLC(“Madrona”) and Bauer Evans, Inc., P.C. (“Bauer Evans”). Investment advisory services are provided through Madrona. CPA services are provided through Bauer Evans.

WRITTEN BY DANIELLE MEISTER, MADRONA FINANCIAL & CPAS