After-Tax Property Division

As you know, a 50/50 division of assets may NOT be fair, because the after-tax picture can be very different. Family Law Software i...

Wednesday, May 6, 2020

After-Tax Property Division


As you know, a 50/50 division of assets may NOT be fair, because the after-tax picture can be very different.

Family Law Software includes the very valuable feature of enabling you to help the parties reach an
agreement on dividing their assets on an after-tax basis.

Here's how:

Click Negotiate > Property After-Tax.

We know that this approach will not work in most litigation contexts, because the court will not permit this kind of speculation.

But it can be incredibly useful in a mediated, collaborative, or negotiated settlement context -- especially when there are significant retirement assets or appreciated assets.

Please forward this e-mail to everyone in your office who uses Family Law Software.


Below are details on using this valuable feature.

After-Tax Property Division - The Basics

When you click Negotiate > Property After-Tax, you will see the screen shown below. (The images in this e-mail are from the Cloud Edition of Family Law Software.)




You will see that the screen has several sections.
  1. Key tax rates used. These are the tax rates that are used in the after-tax calculation.
  2. Percent paid in tax. This section shows the calculation of percent paid in tax for each asset.
  3. Marital property division on an after-tax basis. This is the bottom line result.
  4. Line item detail (not shown in the image above). This shows each asset and allows you to change the percent of assets allocated to each party.

The next sections of this newsletter discuss these four sections further.


Key Rates Used

We calculate the tax to be paid assuming that capital assets will be sold today and that retirement assets will be distributed in retirement.

Our first step in figuring the after-tax value of assets is to calculate the two key tax rates that will apply:

  1. The ordinary income rate that will apply in retirement. This is for retirement assets such as 401(k) plans and defined-benefit pensions.
  2. The current capital gains rate. This is for capital assets such as securities and real estate.


You can click the links labeled "explain" and see how we get each number.

Each of these numbers is a guess -- especially the tax rate in retirement.

There will be a message (shown in the image above) if the projection in the case does not go until retirement. You may increase the number of years projected on Files & Settings > Settings > Assumptions > Number of years for cash and net worth projections.

Or, just override our guess of the tax rate that will apply to the retirement income.

You may override each number if you have a better guess than we do -- which may well be the case.


Percent Paid in Tax

The next step is to determine the percent of each asset's value that will be paid in tax when the asset is sold or distributed.



In your software, click the links illustrated in this image to view the calculation.

The software is making various assumptions to do these calculations. These assumptions are spelled out along with the explanation of the calculation.

You should check our assumptions, and, if they are not correct, you should override the percent paid in tax that we calculate.

After-Tax Property Division Worksheet

The next section has a worksheet like the Property Division worksheet, but showing after-tax values.




Note the columns (a) through (g) in the image here.

Here is what each column means:

(a) Pre-tax marital equity. This is the same as on the Property Division Worksheet.

(b) % kept. This is the % allocated to that party, also the same as on the Property Division Worksheet. Note that there is no column to enter "Dollars to Able," because the after-tax dollar is a calculated amount, not a user entry.

(c) % paid in tax. This is carried from the calculations above. This is calculated as: (tax payable / marital equity). For example, if an asset worth $10,000 would result in tax of $500 upon sale, then the % paid in tax is $500 / $10,000, or 5%.

(d) After-tax equity. This is column (a) * column (b) * (1 - column (c)). For example, suppose pre-tax equity in column (a) is $10,000, Able's % in column (b) is 50%, and the % paid in tax in column (c) is 5%. The calculation is as follows:

  • Before tax, Able's share is 50% of $10,000, or $5,000.
  • Taxes will take 5% of that, leaving him 95% after tax.
  • After tax, he will have 95% of $5,000 = $4,750.

Columns (e), (f), and (g) are the same as (b), (c), and (d), but for the other party.

And that's it! We have calculated each party's share of the after-tax value of each asset.


No Equalization Payment

You will note that there is no equalization amount shown for the after-tax property division.

This is because an equalization amount would have to be expressed in after-tax dollars.

But there is no straightforward way to use that information.

You have to tweak your ownership percents until you hit the desired after-tax division.


A Very Valuable Tool

As you can see, the after-tax property division goes to some lengths to try to give you an accurate assessment of the value of each asset on an after-tax basis.

Each asset is individually calculated, based on the tax attributes of that asset and the assumptions we make. (You should check each calculation, to make sure our assumptions are reasonable under the circumstances.)

The results roll up to a very complete best-guess of the after-tax consequences of the property division.

This is a very valuable feature. It can make your property divisions significantly more fair by the measure that really counts -- value after tax.

Technical Support

Optimizing Technical Support





If you have a question on a file, you can easily send the file to tech support.

Just click Files & Settings > Help/Support > Send Us Your File.

Below are several other valuable tips on how you can get the best possible technical support.

Please forward this to everyone in your office who uses Family Law Software.



Sending a File

The images here illustrate how to send your file. (These images are from the Cloud Edition, but the desktop edition has the exact same screens.)

1. Click Files & Settings
2. Select Help/Support
3. Click Send Us Your File.

That's it!



This is the best way to get tech support because we can understand the issue more easily.

We will respond even more quickly than if you call us.





Our Tech Support Process

All phone calls to tech support go directly to voicemail, are immediately transcribed, and go in the same queue as email.

The advantages of this approach to you are:

Prioritization. This enables us to prioritize the most urgent issues first whether they arrive by e-mail or voicemail.

Specialization. We can get your issue most immediately to the person who specializes in answering that type of question.

Effective use of your time. We can research the answer to your question without leaving you hanging on hold.

Ends phone tag. We can respond by email to your question, thus avoiding phone tag.

Quality response. We can respond to your question with an explanatory e-mail that includes images with circles and arrows, which is something we cannot do on the telephone.

Solving the problem. If you send your file, this enables us to see exactly the entries you have made, and that often enables us to solve the problem much more quickly than we could to on the phone.

Please Include Your E-mail Address






If you call and leave us a voice mail message, please be sure to include your email address.

That way, you can get all of the above advantages, and we can respond to you more effectively.





Please Be as Precise as Possible

When you write to us, please be as precise as possible about the screen to which your question relates.


That includes telling us which tab of the software you are on, and what screen or report within that tab.


Tell us exactly which number does not look right.


So, for example, "Line 37 of the Financial Affidavit on the Reports tab should be $800, and it is $400."


Then we will be able to help you most effectively.





If You Need a Call...



Almost all questions are best answered by email.

But if you need a call, here are some things to do:
  1. Let us know the best time to call you back. We will try to accommodate your schedule.
  2. Tell your receptionist to expect our call.

Too often, we call and are told by a receptionist that the person we are calling is not available. 

This happens even after we identify ourselves, and even if the request is marked to us as very urgent and we call immediately.

So please tell your receptionist to expect our call!



Arrears



How often does it happen that your client is owed child support and/or maintenance and you need to find the full amount, including interest?

Family Law Software can answer that question. Here's how:

Click Negotiate > Support Arrears.

Please forward this e-mail to everyone in your office who uses Family Law Software.

Below are details on using this valuable feature.

Arrears - The Basics 

When you click Negotiate > Support Arrears, you will see a series of links across the top, as shown in this image. (The images in this email are from the Cloud Edition, but the desktop edition has the exact same screens.)


Click each link, fill in each screen, and the last screen will have the result.

You will see that the screens have the flexibility to handle just about any situation: multiple obligations, changing rates, missed payments, occasional payments, different methods of handling interest and principal, and so on.

Obligations

The first screen, Contact, is just for names and other information. It does not affect the calculation.

The second screen, Obligations, is the first one where you have to start entering information.

Typically, you would enter information only in the Description, Start Date, Amount to be Paid, and Frequency, as shown here.                        


      
The remaining fields are for less-common situations.


Rates

On the next screen, enter the interest rate(s) that apply.





You may specify different rates for different time periods.

You also specify how your jurisdiction applies interest and principal.

There is no limit to the number of rates you may enter (different rates for different time periods).

If you leave the Interest Rate Adjustments section blank, the basic rate will apply to the entire computation.

Regular Payments

On the next screen, you specify the regular payments.

These are the payments that the payer made regularly.

For example, if the payer made all the payments from April 1, 2017 through January 1, 2018, that would be one regular payment entry, for those dates.

You typically only need to enter Amount, How it is applied, Start Date, Stop date, and Frequency. The other fields are less common.


Suppose the payer missed a date in the middle of the period of regular payments. You can fill in the missed dates at the bottom of this screen.


One-Time Payments

Suppose that, in addition to the regular payments, the payer made one big payment in December 2018. You can enter that on the next screen, "One-time Payments."


Typically, you just enter the date, amount, and how to apply the payment.

You may enter as many one-time payments as were made.


Report

At this point, you can go to the Report screen and see the result.



If you click the link at the bottom of the screen, you will see a very detailed report, explaining how the calculation was done.

And that's it!

You can find the arrears due even with complicated series of payments and interest rate changes, using the Ch Support Arrears screen of Family Law Software.