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LONICH PATTON EHRLICH POLICASTRI
1871 The Alameda, Suite 400, San Jose, CA 95126
Phone: (408) 553-0801 | Fax: (408) 553-0807 | Email: contact@lpeplaw.com
LONICH PATTON EHRLICH POLICASTRI
Phone: (408) 553-0801
Fax: (408) 553-0807
Email: contact@lpeplaw.com
1871 The Alameda, Suite 400
San Jose, CA 95126
Located in San Jose, Lonich Patton Ehrlich Policastri handles matters for clients in northern California, specifically San Jose and Silicon Valley. Our services are available to anyone within the following counties: Santa Clara, San Mateo, Contra Costa, Santa Cruz, Monterey, San Benito, and San Francisco. For a full listing of areas where we practice, please click here.
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/in Firm News /by Lonich Patton Ehrlich PolicastriSpousal Support is Not Always Deductible When Liability Extended Beyond Death
/in Family Law /by Mitchell EhrlichHusband and Wife entered into a Marital Settlement Agreement predicated upon their ultimate judgments of divorce. If the couple were to enter into a divorce, the provisions of the agreement would be fully incorporated into the final divorce judgment.
The agreement included two provisions regarding their respective rights upon death of the other party with respect to the property of the other. This included an interest in past, present and future spousal support obligations accepting any obligations set forth in the agreement itself.
The agreement provided that it was binding and shall inure to the benefit of the parties and their heirs except as specifically excluded by the agreement. Any terms not met would be an obligation of the decedent spouse’s estate.
The agreement obligated the husband to provide a sizeable sum in escrow to his wife upon the entry of a divorce judgment. This amount would be used to purchase a condominium for her prior to the divorce; the unused balance of the escrow account was to be paid to the wife after the divorce was final. The agreement also obligated the husband to pay the condominium fees prior to the final divorce judgment.
The agreement also required the husband to pay the wife’s attorney’s fees up to a set amount.
The husband paid as mandated by the agreement and attempted to deduct it as spousal support. The IRS disallowed the deduction and found that the Marital Settlement Agreement which had been fully incorporated at that point into the final divorce judgment did not support his claim that it was spousal support giving him the benefit of the deduction for those sums paid. The IRS further found that the agreement, by its terms, caused the escrow account to be an obligation account that would not cease upon the death of the wife and as such was disallowed. Spousal support cannot continue after the death of either spouse as a matter of law.
Inherited IRA’s and Management in Your Living Trust or Marital Trust
/1 Comment/in Estate Planning /by Michael LonichA husband and wife developed an estate plan that included a trust which was subdivided into Trust A, Trust B and Trust C. Trust A would contain the survivor’s separate and community property (Survivor’s trust). Trust B would contain the balance of the decedent’s estate (Decedent’s Trust). And Trust C (Marital Trust) allowed the surviving spouse to fund it with property or cash.
The husband died, he and his wife were residents of a community property estate at the time of his death. Prior to his death the husband had transferred two of his IRA accounts into one combined IRA and made the family’s revocable trust the primary beneficiary of his IRA.
Upon the husband’s death the wife has the power to amend, revoke, or terminate Trust A and as sole beneficiary of that Survivor Trust she will receive income and can take the corpus out at any time.
However, she cannot amend, revoke or terminate the Decedent (Trust B) or Marital (Trust C) Trust. She has the right to receive income or corpus from the trust as needed for her support, health, maintenance and education.
Under the foregoing scenario the survivor and successor trustee, the wife, could have the IRA distributed to Trust A, then withdraw the funds, and move the amount into an IRA in her own name. As such she may be treated as the payee or distributee of the IRA, the IRA would not be treated as an inherited IRA and she is eligible to move over the distribution to set up an IRA account in her own name. Considering the foregoing she would not have to report the IRA distribution as income if properly moved over.
This is an example of a significant benefit in utilizing a family or revocable living trust for purposes of managing retirement assets after the death of the first spouse.
Lump Sum Payment Allowed as Alimony/Spousal Support Deduction
/in Family Law /by David PattonWife and Husband filed for dissolution of their marriage a couple years back. Prior to their final judgment of divorce, the couple reached an agreement for a lump sum spousal support payment. Marital Settlement Agreement called for a payment of approximately $150,000 and the final judgment incorporating the Marital Settlement Agreement was issued by the court.
The final Judgment was entered several months later and indicated that Husband had paid the lump sum spousal support by certified check. The final Judgment stipulated a much larger number as the total lump sum spousal support payment with the following adjustments:
The couple filed a joint return for the prior year reflecting deductions for the year in which the lump sum, with adjustments, spousal support payment was made. The IRS initially disallowed the entire amount claimed and ultimately agreed to the lump sum spousal support payment as the only one that was properly deductible; the balance of the payments redistributing the couple’s debt and assets were disallowed by the IRS.
Frequently in dissolution settlement a lump sum spousal support buyout includes a number of features that are nothing more than settlement of personal property (to include cash assets such as industrial accounts and the like) and real property and as such would not be deductible as spousal support. It is also typical that a spousal support buyout be treated as a non taxable event such that the payor does not get the typical spousal support deduction for the amount paid and the receiving spouse does not have to pay tax as it is described as a property division or settlement. In that case the agreement itself dictates that the payment would not be a deductible for the payor nor would it be income for the payee.
It’s Tax Time: Income Tax Considerations During a Divorce
/in Family Law /by Gina PolicastriIf you are in the middle of a divorce proceeding, you may be wondering how you should file your tax return, whether you can claim the children as dependency exemptions and how to determine whether support payments should be deducted or included as income. The following brief, non-exhaustive summary will help you navigate these issues so that you are well-prepared for your tax appointment. However, given the complexity of tax laws, it is always a good idea to speak with legal and tax professionals who can analyze your specific situation.
What is my Filing Status?
When deciding how to file, remember that your filing status is determined by your marital status on the last day of the calendar year. For example, if you filed for dissolution on June 30, 2009, but did not obtain a judgment of dissolution until January 1, 2010, you cannot file as a single person on your 2009 income taxes.
If you are still married, you and your spouse must decide whether you will file your returns jointly (“married filed jointly”) or separately (“married filing separately”). Generally, the high earner gets a benefit from filing a joint return, however, with a joint return comes joint and several liability, meaning that both spouses are liable for any taxes owed, regardless of who earned the income. Except in certain limited circumstances, you cannot amend a married filing jointly return to a married filing separate return, so if you have any doubts about how to file, you should err on the side of caution and file married filing separate.
Who Gets to Claim the Kids?
If filing separate returns, you must determine who will claim the children as dependents. The general rule is that the primary custodial parent will take the exemption, but that parent can release the exemption to the other. For tax purposes, the primary custodial parent is the one with at least 51% custody. It is therefore important when entering into a joint 50/50 custody agreement to include a provision that for tax purposes, one of the parties will be deemed to have 51% custody. When there are two children, you can each take 51% custody of one child and share the deductions. If there is only one child, you can alternate 51% custody on a yearly basis. If this is not spelled out in your custody order, the IRS will give the deduction to whoever had the child at least 51% of the year, so parents should keep good records of their actual time with the child(ren) in the event there is a dispute over who is entitled to take the deductions.
Can I Deduct Support I Paid/Is Support I Received Taxable Income?
Another common question is whether support paid or received should be deducted from income of the payor and included in the payee’s income. The general rule is that the payee’s gross income does not include amounts received for child support, but does include money received for spousal support/alimony. Similarly, a payor cannot deduct child support payments, but can deduct spousal support payments, which are an “above the line” deduction. To be deemed spousal support, payments must meet numerous IRS requirements, including, but not limited to, that the payments be made in cash by or on behalf of a spouse under a written divorce or separation agreement or decree. There are also special rules relating to spousal support and equalization payments made as part of a property settlement; if not properly structured, a payor can lose the right to deduct all spousal support payments made under the agreement. The IRS rules related to “front loading” are beyond the scope of this article, but should be discussed with a legal and tax professional so that you can structure a settlement that does not trigger this issue.