Category Archives: Children and the Law

The Tax Ramifications of Divorce (What the heck is front-load recapturing?)

It seems like there are tax ramifications to practically everything.  It is very rare to find a transaction where the Federal government leaves you alone—and says something is neither a gain nor a loss.  That said, in some areas the IRS is somewhat charitable to divorcing spouses and in others they are the heartless brutes that you would expect them to be.

Property Transfers

The Internal Revenue Code provision 26 USC § 1041 (A.K.A IRC 1041), states in pertinent part, “No gain or loss shall be recognized on a transfer of property from an individual to…a former spouse, but only if the transfer is incident to the divorce.”  Great.  You get divorced and when you receive your portion of community property, that transfer is not taxable. To anyone.  At all.  That’s great unless you are domestic partners.  Then, even though as domestic partners you have community property, distributions of assets after terminating the partnership are taxable because you are not spouses under § 1041.  DOMA hurts.

 

Spousal Support

Spousal support is deductible for the payor and gross income (taxable) for the payee.  See 26 USC § 71.  Some families in which the payee is not employed and the payor is a high income earner may benefit from “Family Support,” where support is designated differently and the tax ramifications are reversed.  However, family support is complicated, requires the agreement of both parties, and is rarely worth delving into instead of spousal support.  Also, any amount claimed on taxes as spousal support may be re-characterized by the IRS if they believe there is hidden child support.

Child Support

Child support, like a property transfer, is totally tax-neutral.  No gain is attributed to the payee and no deduction is attributed to the payor.  It is like nothing happened.  See §71(c)(2).

Front-Load Recapturing

Now, this is a bit complicated and more of a note for CPA’s and those attempting to draft their own marital settlement agreement, but the IRS can re-characterize spousal support payments under a rule called “front-loading recapturing” which is described in 26 USC § 71(f).  If the amount of spousal support paid in years 1, 2, and 3 following a divorce are all within $15,000 of each other, there will be no recapture.  If year three amounts paid are more than $15,000 lower than years one or two, the IRS can find that there was front-loading.  Front-loading means that there was an attempt to disguise a property transfer as a deductible spousal support payment.  So, that amount was taxed as a Payor deduction and a payee inclusion, but that portion was really a lump payment of property.  So at year three, the recaptured portion becomes a Payor inclusion and a Payee deduction—having tax consequence to both parties.  The lesson with front-load recapturing is that if you write your own settlement agreement or are trying to get really creative with support deductions—you need to do some research to make sure you aren’t shooting yourself in the foot.

Alimony Trusts

Alimony trusts are ridiculous and infrequently used, but here are the basics.  An alimony trust is when property is transferred to a former spouse as a source of support following a divorce or separation. The payor spouse transfers investments and other assets that generate income into an alimony trust for the recipient spouse or beneficiary.  It should only be used when a paying party has the financial ability (big pockets) to set up a significant trust account and there is some concern about the paying party’s ability to keep paying.  For instance if the paying party is elderly, terminally ill, has a high risk of insolvency, or has financial resources but takes high risks (think Donald Trump) it might be a good idea.  The tax consequences follow, but you can see Alimony Trusts have the ability to make spousal support a tax neutral event, while characterizing child support as gross income for the beneficiary (payee).  26 USC § 682.

Alimony Trust Tax Consequences:

  1. Alimony Trust as Spousal Support:
    1. No deduction
    2. Payee not taxed on income.
  2. Alimony Trust as Child Support
    1. Payor: No tax consequence;
    2. Trustee: Amount is deductible expense; and
    3. Beneficiary: Amount counts as gross income.

 

Other Issues

For a discussion of other issues including the loss of exemptions and capital gains rates on the family home see my previous post here.

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Filed under Children and the Law, Family Law, Mindless Academia, Tax

Grounds for Modifying a Custody or Visitation Order (what the hell does “substantial change of circumstances” mean anyway?)

So, you have a child custody arrangement and you want it changed.  Child custody arrangements can always subject to the court changing them, even if they say “Final,” and even if the parties signed an agreement saying they wouldn’t change it.  See Family Code § 3022.  What are some reasons that would justify changing a custody or visitation order?

Some Factors Related to Modifications of Custody:

  • —  Facilitation or Frustration of Visitation: Is the other parent denying you rightful contact with your child or failing to follow the court order?
  • —  Employment: Have there been any changes in your employment or the other parent’s employment? Are the children always in daycare or the care of relatives? Are you more available to spend time with the children? Has a change in your employment increased the amount of time you can devote to your children?
  • —  Geographic Distance: Do you now live closer to the children and can see them more often than you previously could?  Would more frequent custodial changes be more feasible because of a geographical change?
  • —  School Performance: How is your child performing in school? Maintain active in any parent/teacher conferences and investigate your child’s performance by interviewing his or her teachers. Is the child’s homework getting done? Do the teachers notice any unusual behavior?  Try and stay objective as best you can.
  • —  Home Environment: What kind of environment is the other parent providing? Are there any problems with child abuse, drugs, smoking, or any other conditions in the home? Does the other parent and his or her new companion behave appropriately when the child is present? Does the other parent’s companion have a history of criminal activity or abuse?  Does your child receive proper supervision?  Does the child have proper sleeping arrangements?  Are other children from a subsequent relationship living in the same household?
  • —  Discipline and Punishment: Is corporal punishment being inflicted upon your child? Is the child being punished by someone other than the parent?
  • —  Fitness of the Ex-spouse as a Parent: Has the other parent committed any crimes? Does the other parent have any substance abuse issues?  Does the other parent have other impairments that would make effective parenting difficult?

 

Substantial Change of Circumstances:

The law has become increasingly murky in this area.  It used to be that in order to modify custody arrangements, the moving party must show that there was a “substantial change of circumstances.”  Now, no one knows exactly what that means, but some substantial changes have been changes in employment (losing a job), moving from one city to another, one parent’s criminal activity, and major changes in the child’s conduct such as grades in school.  Recent changes, most flowing from the case Montenegro v. Diaz (2001) 26 Cal.App.4th 249, have made it unclear exactly when a substantial change is needed and when its not.  A substantial change of circumstances is generally required to modify a “Final” court order for custody.  See Montenegro.  Custody modifications that simply make adjustments in time, modifications of temporary order, and modifications of visitation generally don’t require a showing of a substantial change in circumstances.

 

If you are looking to modify your current custody arrangement, it is best to work with an attorney near you to discuss whether or not there are grounds for a modification and how that modification can be carried out in the court system.

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We Don’t Protect Our Children

Almost all 50 states have an exception to assault: “reasonable corporal punishment of children that does not cause lasting bodily harm.”  So, you can treat your child in a way that you can’t treat anyone else.

CNN and other news outlets recently covered a story about Michael Pearl.  Pearl wrote a book To Train Up a Child, which uses old testament verses to support the use of corporal punishment of children.  A number of Pearl’s readers have recently been charged with murder when their children died from abuse.  A transcript of Anderson Cooper interviewing Pearl is available here.  There is a decent article about the interview here.
Last week, the daughter of a Texas judge released a video online (taken in 2004) in which the disabled daughter is beaten by her father and mother repeatedly.  The daughter has cerebral palsy and the beating was the result of her downloading music and playing video games online against her parents’ wishes.  To make things more ironic, the Judge tried cases of child abuse in his courtroom.  Law enforcement is investigating the incident, but it is unclear whether or not he will face charges (due to statute of limitations issues and the corporal punishment of children defense).  Even if he is not charged criminally, the Texas Bar should investigate and pursue professional discipline for a judge acting improperly and reducing faith in the judiciary.  The CNN article is available here.  Another article here.
We may have outlawed slavery and advanced women’s rights (somewhat) but we don’t do enough to protect our children.

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Filed under Children and the Law, The Judiciary