Our clients, a husband and wife in the process of obtaining a divorce, contacted our office seeking advice in structuring the financial portion of their separation agreement. Their divorce was being mediated and the couple was in fundamental agreement on many aspects of the separation agreement, such as child custody arrangements for their three children (primarily residing with the mother) and the division of most assets. However, they were having trouble determining how much alimony and child support the wife was to receive.
The wife believed she should receive whatever amount was necessary to support herself and the three children. She also wanted to stay in the marital home to provide stability for the children. The husband fully supported the notion of ensuring the well-being of his soon-to-be ex-spouse and three children but wasn't sure that he could afford to pay her what she believed she needed. He also wanted to buy a condo but needed funds for a down payment. In addition, they wanted to minimize their respective tax liabilities and each wanted to take the children as dependency exemptions on their tax returns. While both agreed that they wanted the financial well- being of both parties and minimize their joint tax liability, they were unsure about how to proceed.
Based on an abc analysis of the proposed division of assets with BLC's affiliate, Susan Miller, it was clear that in order to afford a condo the husband was going to need money from the appreciated value of the couple's home. While the wife wanted to refinance the mortgage to pay the husband half of the current equity in the house, that option was unrealistic since she did not work outside the home and was going to be unable to obtain refinancing on her own or afford the increased mortgage payments. After much deliberation they agreed to keep the house titled in both names upon the divorce and decided that she would stay in the house for the following two school years, at which time they would sell the house and split the proceeds from the sale. Until that time the wife would be responsible for the mortgage and real estate tax payments.
The couple's mediator suggested a number of different proposals for the payment of alimony and child support. We prepared a cash flow analysis for each spouse, based on income, proposed alimony and child support, and expenses that could be anticipated once the divorce became final. We also prepared a tax projection for each spouse, using the proposals suggested by the mediator. For each of these scenarios we calculated the amount of disposable income available to each spouse and the relative tax implications for each. Based on these scenarios the couple was able to see what percentage of the total "pie" would be available to each spouse. With the help of the mediator, the couple was able to agree upon child support and alimony amounts that were fairly equitable to both parties. In addition, it was agreed that the dependency exemptions would go to the spouse who benefited the most from them. The tax savings would then be split between them, thus minimizing their overall joint tax liability.
We subsequently helped the couple to arrange refinancing of their home to take advantage of recent lower interest rates. We also helped the wife to analyze her spending habits in light of her new cash flow needs and helped to structure a budget for her.
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