Death and Taxes

Death and Taxes.jpg

As Benjamin Franklin said, “in this world, nothing can be said to be certain except death and taxes.” 

Let’s talk about both.   

First, let’s get to the hardest thing; no one ever wants to think about their death, but those who avoid the topic risk leaving a mess for their descendants.   You risk having your estate divided in ways you never envisioned. If you have opinions about what should happen to your stuff after you die, make a will. Divorce can invalidate a previous will. While some state laws protect people who divorce by ruling that a divorce invalidates any provisions of your will that refer to your former spouse, play it safe, and once your divorce is final, make a new will as soon as possible.   

  • Money and Property.   If you don’t have a will, your money and property will be divided equally among your heirs.   If you don’t have a will that specifies who your heirs are, the state law will determine it. That means that your deadbeat daughter gets a share, while the niece you adored gets nothing. 

  • Children.   If you have minor children, a will is critical.   While your ex-spouse has parental rights, it’s always best to separate the money from the child. If your child(ren) will inherit from you and receive life insurance proceeds, you want to be sure their assets are managed responsibly.   No one should see your child as a meal ticket, so it’s best to appoint a trustee over your minor child(ren)’s money who you trust to manage it safely and responsibly for your child(ren)’s benefit.   Many parents opt to have their estate paid out to the child(ren) in increments.   Some award part of the estate to each child at age 21 or upon the award of a bachelor’s degree, to give the child incentive for college, then release the remainder at age 30. Your ex-spouse will have rights that are superior to any of the children’s other relatives, but you can express a preference for custody in your will. An uninterested parent may remain uninterested if they gain no access to the child(ren)’s money if they take custody. Even if you trust your ex-spouse to use the money for the benefit of your children, you should leave your money in trust for your children with your former spouse as the trustee.   That is because a trustee has a fiduciary (legal) duty to manage the trust assets for the benefit of the trustee.   

  • Life Insurance. Life insurance should always name minor children as beneficiaries IN TRUST. Again,   the creation of the trust, and the appointment of a trustee, even if it’s your ex-spouse, creates a legal fiduciary duty for the trustee to manage the assets for the benefit of the trust beneficiary, in this case, your children. 

And now, on to taxes. Tax law is complicated. Not only are lawmakers changing the tax code, but IRS bureaucrats also rewrite the rules, often simply to justify their existence. The result is a landscape that changes frequently.   IRS Publication 504 covers Divorced or Separated Individuals. It’s surprisingly readable, for a tax document, and I advise you to review it before your divorce.   The advice contained here is not a complete reading of IRS law and should not be used as the basis for any final decisions. You are encouraged to consult a tax expert before entering a final judgment of divorce. 

  • Alimony.   One significant change for 2019 and later has to do with alimony.   Before the 2019 tax years, alimony was tax-deductible to the paying spouse and counted as income to the receiving spouse.   That meant that some portion of the receiving spouse’s income would have to go toward paying the taxes on the support.   This arrangement advantaged the higher-earning spouse, for whom the deduction was a great advantage while disadvantaging the lower-earning spouse who would be required to commit some portion of her support to income taxes.

  • Filing Status.   If you were married for any portion of the tax year, you must file jointly, unless some narrow exceptions apply. There are some ways to separate your tax liability from your spouse in limited cases.   You should the with a tax professional about being declared an innocent spouse, or an injured spouse if your portion of a tax return was seized to pay your spouse’s debts. 

  • Property Settlements and Capital Gains.   Generally, a transfer of property because of a divorce is not a taxable event. BUT if you sell the family home and are not otherwise exempt (because of age, etc.), or cash in stock, stock options or retirement funds, you may be subject to taxes. Rolling over your portion of your spouse’s retirement fund into a fund of your own is not taxable unless you cash all or a portion out of the fund. The transfer of IRAs, health savings accounts and medical savings accounts is non-taxable. Caution: if you live in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, and WS), you may be taxed on “community income.” Consult a tax expert in your area if you are subject to community property laws.                   

Thinking about death and taxes now can save you and your heirs a lot of trouble and heartache later. Or, as Ben Franklin also said, “An ounce of prevention is worth a pound of cure.”

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