Divorce is so complicated that the decisions regarding college planning are often left unaddressed causing disagreements when they do have to be made. Most divorce agreements have a plan as to how to divide other assets that have been accumulated during the marriage, such as the family home, cars, collectibles, joint bank accounts, retirement and brokerage accounts, but when it comes to other savings, such as college savings or 529 plans, often the agreements are too vague. Couples operate from assumptions, such as the parent who established the account controls it, and absent any other agreement that will be true. We all have suffered the consequences of operating under the wrong assumptions, and for divorcing families, when they make assumptions, the mistakes they make often mean they pay more for college education than is necessary.
For example, during divorce most accounts are divided, but that does not have to be the case for college savings or 529 plans. In fact the division of these accounts may either over complicate things or serve failing purposes. There is much more to consider in dealing with educational funding accounts than a simple division of assets.
First, it is generally assumed that 529 plan funds continue to benefit their children and that these funds will pay for a college education. Most agreements that address these accounts allow each parent to continue to contribute to them and by agreement how the funds can be used. Under the new tax legislation, however, funds can be used beyond college costs, such as for private high schools, and agreements should probably address these new possibilities and the process of agreement upon expenditures. What if a child chooses not to attend college, but another form of advanced education, revisiting this agreement in this instance should be addressed. If there are insufficient college savings, but there are other savings that could be used for college, agreements should address which savings should be allocated first. If agreements require ongoing contributions to 529 plans they should spell out when they terminate and may even stipulate the maximum age at which the children can use the money in the account for educational purposes. Agreements should also clearly state how assets remaining in the account after that date are to be distributed, if they have not been used for college and who should pay the tax penalty. This obviously requires that each party be able to see the statements, so agreements should address how and how often. A simple solution is to name the parent not managing the account as an interested party with the custodian.
For some families who struggle in their ongoing relationship it may be clear these accounts should be divided and they generally can be divided without penalty. An obvious situation is where parents do not have good working relationships. Separating accounts serve to avoid ongoing conflicts and each parent can then decide their own deposits to be made to the account and how their funds might be used.
Divorce Decisions Affect College Aid Eligibility
In addition decisions regarding 529 plans can have a great impact on eligibility for financial aid mostly by which parent owns the 529 plan and who and when they take the distributions.
When parents are divorced, completing the Free Application for Federal Student Aid (FAFSA) is the responsibility of the custodial parent (the parent with whom the dependent student lived the most during the 12 month sending on the FAFSA filing date). If the student lived equally with both parents, which can happen in a recent divorce, the custodial parent is the parent who provided more support. If the custodial parent owns a 529 account,it’s reported as an asset on the FAFSA, but distributions are ignored. Need-based financial aid eligibility is reduced by a maximum 5.64 percent of the asset value. If the non-custodial parent owns a 529 account, it isn’t reported as an asset on the FAFSA, but distributions count as untaxed income to the student. This reduces need-based aid eligibility by as much as half of the distribution amount. Thus the timing of the distributions is critical and possibly should be left to the final few years when the FASFA look back would have less of an impact.
Assume the 529 account has a $25,000 balance and it’s spent to zero during freshman year. If the custodial parent owns the account, the worst-case scenario is it reduces aid eligibility by $1,410 (5.64 percent of$25,000). If the non-custodial parent owns the account, the worst case is it reduces aid eligibility by $12,500 (half of $25,000).
These considerations may also give guidance as to annual custodial arrangements, division of 529 plans and whether and how they should occur as well as distributions and their timing Stepparents are also a consideration.
Stepparent’s income and assets are also considered in FASFA forms and impact financial aid eligibility. Their own children can also have an impact especially when their kids are enrolled at least halftime in college, it can reduce the expected family contribution (EFC). Going from one child in college to two is like dividing the parent income in half.
Today college costs greatly affect family finances both in traditional and divorced families. They deserve great consideration in both circumstances, with divorced families needing to give a little more!
After a long and brutal U.S. Presidential election campaign, Donald Trump has emerged victorious. Equally important, the Republican party retained control of the U.S. Senate while also retaining a comfortable majority in the House of Representatives.
For a large number of Americans and the international community who were anticipating a Clinton victory this was a significant blow. In the wake of their disappointment we saw international stocks, currencies and commodities fall while treasuries rose. Investor reaction was to take a risk off posture and liquidate stocks in a flight to purchasing treasuries. Wise investors won't react so quickly.
First, the U.S. economy that President Trump will inherit is in pretty good shape. Real economic growth has picked up in recent months, the unemployment rate is at 4.9%, S&P 500 earnings have rebounded from the oil and dollar induced slump of 2015 and inflation is still moderate. In addition, the global economy is also showing signs of life with the global manufacturing purchasing managers’ index hitting a two-year high in October. (See the attached article.) All of this, absent political uncertainty, would be positive for stocks and negative for bonds in the long run.
While the election results represented a Republican sweep, actual policy change will be far less dramatic than the campaign rhetoric. As we saw during the campaign “establishment” Republicans are not fond of Trump and the latter may well balk at unfunded tax cuts or spending increases.
Common sense tells us that both the new President and Congress must act slowly on dismantling/changing the Affordable Care Act or trade agreements, until some better alternatives can be found.
But the voters have spoken and the politicians may be willing to go along with some proposals to increase spending, lower taxes, reduce illegal immigration and increase tariffs, all inflationary in their affect. The question that remains is will these strategies create sufficient economic growth resulting in the tax revenue to pay for them. If not, the alternative is additional government debt, an unpleasant prospect given it's recent downward trend.
In the meantime, there will be volatility! But investors would do well to do NOTHING. Stay the course of your investment strategy and hold a well diversified portfolio of high quality global stocks, bonds and alternative investments.
What we have learned is that populism is a good political strategy. Whether it should change your investment strategy? Probably not!
This past weekend I was participating in an advanced sailing class where we were learning how to raise a spinnaker, those colorful pluming sails that completely surround the front of the sailboat. We were in Boston Harbor, where sailing can be challenging with the wind blocked or redirected by buildings and freighters. But today it was Mother Nature who wasn't cooperating.
Now raising a spinnaker for the first time feels complicated. It has many more sheets and lines, requires care in exactly where they are placed and has its own private boom. Even releasing the spinnaker is a controlled, planned process. Our instructor was barking orders to the four of us in our respective tasks but our helmsman was missing his cues. As the wind shifted abruptly, things began to quickly spin out of control. The sail burned through our instructors fingers and nearly completely off the boat while our boom swung in an accidental jibe, fortunately just as I ducked into the deck below. But our helmsman wasn't so lucky taking in on the head and requiring a few stitches.
I thought to myself, coordinating our financial lives can seem very much like raising a spinnaker....placing sheets and lines very carefully and letting things unfold in a controlled, knowledgeable fashion. I also thought how, absent that, a single event such as an illness or accident, can cause our finances to quickly spin out of control. So who is helping you raise your spinnaker? Michael Kitces, a financial writer I greatly admire, states quite clearly the characteristics of a good financial advisor in this article. Read it and ask yourself if your advisor is providing you the central guidance you need to avoid disaster.
I recently read a good article of "moving on after the storm of divorce" by paying proper attention to post divorce details in order to preserve the settlement agreement. Some suggestions included preparing a post divorce budget, reviewing insurances including life, health, property casualty, and considering taxes.
While I absolutely agree that any of these items can derail an agreement if not duly considered, I disagree that attention to these details should be done post divorce. I personally recommend that all these items be considered while hammering out the agreement.
We all know that the accumulation of data and information pre-divorce can be time consuming, complex and overwhelming. The court requirements generally have us looking backwards to past real estate values, previous investment and retirement account statements, previous tax returns and old budgets. But when you think about it, none of this information will be relevant to either party post divorce. One party will own the real estate and all costs and liabilities attached to it. One party will retain some of the investment and retirement accounts and the other will have the balance. No ones budget will be the same. Many insurance premiums will change, health insurance requiring changes, life insurance now deemed not necessarily needed or adequate, and property casualty insurances that will be the sole responsibility of one or the other. And income taxes certainly change with regard to filing status, sharing of gains, losses and deductions.
For all these reasons I counsel all clients to look at the implications of various settlement considerations from primarily a post divorce view. What their budget is to day is not nearly as important as what it will be post divorce. How will divorce affect their health insurance costs? What will it feel like to pay the property taxes by themselves? What are the additional income taxes and how does that affect my paycheck gong home? All these are vital considerations in understanding if a settlement is even "affordable" to all.
Good divorce counseling should include both legal and financial consulting with the attorney focused on the legal issues and a financial advisor demonstrating alternative settlements as they will impact each party financially. The best settlement is one with no surprises!
Do you know who is on the other end of that email address? It might not be as apparent as you think. Can you be sure someone isn’t watching every move you make on your computer? You can’t see them, but they can see every keystroke. We are all under the constant threat of a cyber-assault. Are you protected?
The number of people that access their financial accounts online has nearly doubled in the last couple of years. So, it isn’t surprising that the number of cyber-thieves and online “fraudsters” has also increased. They’re after your money and they are relentless in pursuing any and all technological means to get it. Because their point of entry is your computer, you are really the last line of defense in preventing an assault that could rob you of your identity and your money. The first step of prevention is to know how they can get to you.
Also known as “keylogging,” this is a method prevalent among cyber-thieves that actually records each of your keystrokes and mouse clicks. Keyloggers gain access to your computer’s operating system by imbedding a virus. From that point on, it’s as if you have someone looking over your shoulder the moment you log on to your computer. Every entry of sensitive account information, long-on IDs and passwords, PINs, is captured enabling fraudsters to gain access to your financial accounts as if they were you.
How to prevent keylogging theft:
• Use reliable anti-virus and anti-malware programs and keep them updatedUpdate your computer’s operating system.
• Make sure you are using the most recent security patch available.
• Monitor your financial accounts regularly looking for unusual activity.
• Never enter personal information over a public-use computer or a computer with which you have no certainty of its security.
Even more common is a scam referred to as “phishing” where fraudsters attempt to elicit personal information through phony email notifications or fake websites, both created to look official and legitimate. The typical ploy is to send an email that might look like it originated from a bank or government agency. In it is a request for financial information or a Social Security number that’s needed to verify or update your personal account. It usually includes some form of a threat that your account will be negatively affected without action on your part. You are asked to click on a link that will take you to website where you need to enter your information. The website is facade for fraudsters and the information you enter is now in their hands.
How to prevent a Phishing Attack
• Don’t open emails from unknown senders. The sender address could include the name of a bank or government agency – know the difference between fake and real addresses.
• Never, ever open a link in an email to a business website when a request for personal information is made. Legitimate organizations never request personal information through an email.
• For general fraud protection, you should change your passwords regularly, and avoid using the same passwords on all of your accounts. And, never store your log-on ID or passwords where they could be found.
Cyber-theft is potential threat to all of us, so we must be vigilant and take deliberate measures to prevent it. We hope you find this information to be helpful in your efforts to protect your personal information.
In the good old days thieves just went after the green. Nowadays they’re after your credit card information. Why? Because, it’s easier to steal your credit card information than your money. Each day, billions of credit card transactions with each use being a potential opportunity for a thief to abscond with an account number. But, contrary to popular belief, most credit card information thefts don’t occur through online transactions, rather through physical theft, such as retrieving receipts or bills from garbage cans or open cars. In any case, your credit card information is a top target of relentless identity thieves as evidenced by the millions of people who have theirs stolen each year. Just by taking a few extra measures in your daily activities, your credit card information can be kept safe and secure.
These days, most credit card receipts don’t show the complete account number, but a quick glance to be sure is always prudent. If your receipt does show your complete account number it should be immediately placed in a secure location until such time that you can reconcile your bill later. At that point, both your receipts and your bills should be shredded. More people are moving towards paperless billing, so there is no need to receive a physical bill in the mail. Any document that includes your credit card account number or social security number should be shredded along with any application for credit.
Secure your mail box
Amazingly, the prime source of personal information for thieves is still the mail box. If you have an external mail box, make sure it has a secure lock, and never leave outgoing mail exposed.
Watch for skimmers
One of the fastest growing forms of credit card theft are skimmers which are devices placed on or around actual credit card scanners. These have been found at ATM machines, gas station payment kiosks, and even in restaurants and stores. They’re not always easily detected, but, in most cases, they can look out of the ordinary as compared with the standard card scanner, so it is important to give the scanner an extra look before scanning your card. It’s not always possible, but you should try to keep your credit card in sight at restaurants as some thieves have operated as servers with hand held skimmers.
Never email your credit card number
There is absolutely no reason to ever provide your credit card number in an email. Legitimate businesses or organizations never request credit card numbers through email. So, if you receive a request, either to confirm an order or an account, or to pay for something or make contribution, it is likely to be a phishing expedition. Phishing is the technique used by thieves to lure you into giving personal information in an email or over the phone. Just say no.
Lock up your cards
You should try to limit the number of credit cards you carry, keeping the others locked securely in a safe.
Shop online carefully
It’s estimated that people will be doing most of their shopping online in a few years, and, in reality, there’s not too much to worry about if you know where you’re shopping. Legitimate shopping sites use extremely secure encryption technology that makes it virtually impossible for thieves to intercept your information. In fact, online shopping could be more secure than physically carrying around a credit card. Just be sure that the sight has the encryption technology. You will want to see “https” rather than just “http” on the address bar, and there should be an “SSL” certificated insignia on the site as well. The best course is to only shop on trusted sites with which you are familiar.
Use a credit monitoring service
By taking all of these measures, you can vastly reduce the chances of having your credit card information stolen; however, there is little you can do to protect your information when it is in the hands of the credit card companies or third part payment processors. In just the last year, VISA and MasterCard have experienced security breach resulting in the possible exposure of millions of credit card customers to computer hackers. No one yet knows the extent of the exposure and the breaches were not disclosed for months. And, on a more local level, if your credit card information has been stolen, you might only learn of it after the fact. In either case, you should consider subscribing to a credit monitoring service which, for $5 to $15 a month, can alert you to any unusual activity with your credit. Although the damage may already have been done, the sooner you realize it, the easier it is to limit the damage and begin to fix the problem.
A new client came to me this month at the recommendation of her Family Law attorney. She wanted to consult with a financial advisor while preparing for her mediation.
She wasn't necessarily looking for a specialist, a Certified Financial Divorce Analyst, just someone who could help her envision her financial life post divorce.
I am a CDFA and understand divorce law in New Hampshire but in this case that really wasn't my role. My role, as her attorney defined it, was to help her understand what she and her husband owned and how some of that would support her for the rest of her life.
Therein defines the respective roles of an attorney and a financial advisor during a divorce process: the attorney will address the legal issues and the CDFA® will assist the client and his/her lawyer in understanding how the financial decisions he/she makes today will impact the client’s financial future.Today's Family court is a crowded and complex arena and Family Law attorneys are handling increasingly complex issues such as commercial real estate, business interests and complex family dynamics with child custodial issues. If they can receive assistance in developing the financial settlement it allows them to focus only on those legal issues. Financial Planners have always assisted clients in understanding how their financial resources such as retirement plans, social security, real estate holdings work together in retirement and other exit situations. Divorce is one of those exits with it's own legal overlay.
During the divorce process, attorneys and their clients are often asked to present mediators with very clinical financial affidavits containing assets, budgets and family statistics. These briefs outline only the very basic facts and financial information of a family's circumstances. Proofs at trial can be equally empty and perfunctory. What is lacking is a great deal of “non-legal” information from other disciplines which would take those same financial facts and incorporate them into a process that includes economic assumptions, tax consequences, and actuarial projections. These projections help all parties involved see the whole picture long term.
Divorce has the possibility of being devastating to the families involved. But it doesn't have to be. A mutually agreed upon settlement hammered out by informed parties has a greater possibility of successful acceptance and implementation than one handed down by a judge. Having gone through a lengthy divorce with painful consequences to myself and my children, it has become a bit of a dream of mine to help others avoid the same. It can be done!
In many respects, people can be their own worst enemies in their quest for financial security. When you consider that our lives are nothing more than a culmination of the decisions we make each day, if we tend to make more bad decisions than good decisions, or worse, if we can’t make decisions at all, it’s should be no surprise when financial security remains elusive.
When it comes to finances and investment decisions, many people are not wired to be able to make decisions dispassionately, without emotions clouding their reasoning; and that’s when people tend to make the most behavioral mistakes with their financial decisions. Understanding these behavioral mistakes and how to avoid them is crucial to achieving financial security.
How many of these behavioral mistakes have you made?
Impulse purchases – We’re all prone to an impulse purchase now and then, but for some people, it’s more of pattern than a one-off indulgence; and when these purchases add to debt, the damage is compounded.
Using bonuses or salary increases to add to lifestyle and not savings – When people lack a goal, or a vision or a purpose, they are more likely to want more lifestyle than savings.
Trying to pick the winners – When investing, do you spend your time looking for the top performing mutual funds in hopes of jumping on the train to riches? Very rarely does a top performing mutual fund repeat its winning performance.
Following the herd – In investing, many people have a fear of being left behind, which is why the human tendency is to follow the herd in times of stock market exuberance or panic. Almost invariably, this leads to buying near the top of the market or selling near the bottom.
Procrastinating – Procrastination, typically brought on by the inability to make a decision, is one of the primary causes of financial distress.
Trying to avoid risk – Many of the behavioral mistakes people make is a result of their lack of understanding of the role risk plays in investing. Without risk, there are no returns; and, without returns, achieving financial security is almost impossible. If you think you are avoiding risk by avoiding the stock market, you are actually inviting other, more corrosive forms of risk, such as inflation risk, longevity risk, and interest rate risk.
These common, costly behavioral mistakes typically result from a lack of planning, with no clear vision or purpose to guide decisions. Instead, decisions become reflexive responses to emotions that are allowed to dominate our thought process in the absence of the discipline, logic and reasoning that a well-conceived plan can engender.
Studies indicate that people who have well-defined goals, a clear purpose in life, and a thoughtfully prepared plan in place, are better able to check their emotions and muster the necessary discipline to follow their plan. In doing so, they are more likely to avoid many of the behavioral mistakes that can cost them their financial security.
With the holiday season looming, it’s not too soon to do your year-end tax planning. One of the consequences of achieving financial success is that, what was once a relatively straightforward tax return increasingly becomes more involved as more tax issues come into the picture. You may have more things to track, forms to file, and you also may also experience bracket creep which can suddenly change the way you manage your taxes and finances.
Waiting until tax filing time to deal with these issues could be hazardous to your wealth. As your finances improve, it would be important to become more knowledgeable about your taxes to avoid any surprises.
The tax code is loaded with many tiny provisions that can impact the financial lives of most Americans. And, having some understanding of some of the intricacies of the taxation process can save a lot of time and money. Tax filing time should be used as an opportunity to assess where you are financially and prepare for the year to come.
Here are some tax planning steps you can take right now to keep you ahead of the game:
Beware of Bracket Creep
All income is not taxed equally. Everyone starts the year off at the lowest tax rate – 10%, but as you continue to receive income, it begins to spill over into higher brackets – 15%, 25% and ultimately 28%. If your maximum tax bracket has been 25%, it’s important to know if an earnings increase pushes you to the next bracket, because not only will you be paying more taxes on the additional earnings, you will be paying it at a higher rate. And, don’t forget your state’s tax brackets (if your state has an income tax). They can creep even faster.
Manage to Your AGI
Your tax bracket is determined by your adjusted gross income (AGI) which is a function of all of your income, including earnings, interest and capital gains, less deductions. You can increase your earnings from one year to the next, but if you can keep your AGI from changing, you won’t pay any more in taxes.
For example, if your AGI last year was $80,000, and this year you earned an extra $5000 of income, you can keep your AGI in place by making an $5000 contribution to our qualified retirement plan if you are eligible.
Hire Your Kids for the Holidays
You can keep your income in the family and still reduce your tax bite by hiring your children during the school breaks of the holidays. Any income paid to children is a deductible business expense, and, in most cases, the amount of income you might pay during that time frame won’t create significant tax consequences for your children.
Accelerate Deductible Expenditures
Another way to manage your AGI is to move up the payments of any deductible expenses so they occur this year instead of next. For example, you could make your January mortgage payment on December 31 of this year and claim it as a current year deduction. Accelerated deductible expenses could include your homeowners fees, property taxes, car registration, and, of course, any charitable donations you planned to make next year.
And, don’t forget any work-related expenses, such as subscriptions, trade dues, legal fees, career education, licenses, all of which can be paid in advance for a current year deduction.
Accelerate Business Expenses
Accelerating your business expenses can have the same effect as accelerating your personal deductible expenses. By pre-paying invoices, or, if run your business on a cash-basis, delay receipts into January, you can reduce your business income enough to keep your AGI down.
Buy Your Tax Preparation Software Early
If you are trying to manage your year-end tax planning, it would be a great idea to purchase your tax preparation software now instead of waiting until tax season. This would enable you to input your numbers (based on estimation) now and begin modeling your tax moves between now and the end of the year. This way you can more accurately determine which moves to make and how much you might need to move around in order to minimize your current year tax bite.
Most of us live here in New England because we love the change of seasons. It's always bittersweet when we bundle up for those last few trips to our farmer's markets, become tourists ourselves of the spectacularly colorful transformations of our hillsides, and finally wait for that first snowfall. Our farmer friends are in the process of gathering their final crops and putting their fields to bed. We too should be considering our own harvest...... tax loss that is.
Whether you manage your own portfolio or have a financial advisor, you know that every investment you pick is not going to be a winner. Companies disappoint, economies disappoint, stocks and funds go up and down in the process. When your funds are done, what can you do about it?
First, if it is an investment that you like and you believe will recover you could choose to hold it or even buy more. If you choose to sell it permanently, you realize a loss and a tax break. You can deduct up to $3000 of long term net losses against your taxable income. Or you can tax loss harvest.
Tax loss harvesting is the process of selling a security that has experienced a loss and replacing it with a similar one, maintaining your original investment strategy enhanced by tax savings. Said another way, in this strategy you have both the benefit of a tax loss that can be taken against other investment gains or taxable income and your original investment strategy. (Example, a $10,000 loss could shelter $7000 of investment gains and $3000 of taxable income) If your tax bracket was 33% your tax savings would be $1000. If the market then reverses and heads north, all returns being equal, you have preserved your returns through your new investment enhanced by your tax savings. You returns have been enhanced by tax law not just market speculation.
There are limitations. First the IRS will not just allow you to buy and sell securities simply to take advantage of tax losses. The "wash sale" rules state that the loss will be disallowed if a substantially identical asset is purchased within 30 days.
Most investors would not want to be out of the market for 30 days. In that case you could purchase a highly correlated investment, one that moves similarly, to replace that one that you sold, for example a large cap mutual fund to replace your S&P 500 index fund.
Another limitation is the income limitation. Only $3000 can be used to reduce your taxable income. But if you have gains in other areas of your portfolio, these losses can be used to offset those gains and excess losses can be carried forward for use against taxable income in future years.
Realizing these losses does reduce your basis in your investment so that if the market continues to travel north you may ultimately pay the tax piper but the value of your tax savings may have a greater value to you today.
Keep in mind these losses are only valuable to you in your after tax accounts. Retirement accounts, IRA and Roth accounts are already tax preferred and any losses realized in those accounts will not create this tax advantage.
Finally, we have to be aware of the cost of buying and selling Care should be taken to review the tax savings against any cost of selling and buying to make this happen.In summary, there is a bright spot in market fluctuations, one created by tax law. A timely review of your portfolio for loss opportunities may enhance investment returns in your portfolio. Research has shown that these enhancements could be as much as .5% to 1%. Over a long period of time these additional dollars earned are not shabby.