What Does Custody Really Mean?

If you had to define “custody” how would you define it? Interestingly, Oregon statutes do not actually define sole custody but they do define joint custody.  ORS 107.169 defines joint custody as “an arrangement by which parents share rights and responsibilities for major decisions concerning the child, including, but not limited to, the child’s residence, education, health care and religious training.”

There are a number of common misunderstandings about legal custody:

Custody doesn’t impact child support. People sometimes think that legal custody impacts child support. It doesn’t. The parenting plan impacts child support but legal custody doesn’t.

Custody is not parenting time. People often confuse custody with parenting time. Custody literally only refers to decision making while parenting time refers to the actual parenting schedule. To illustrate this point, you can have: Sole custody with a 50/50 parenting plan; Sole custody with an every-other-weekend parenting plan; Joint custody with a 50/50 parenting plan; or Joint custody with an every-other-weekend parenting plan.  When we discuss these two concepts in mediation or Collaborative Law we usually talk in terms of “decision making” and the “parenting plan” or “parenting schedule.”

Custody doesn’t automatically allow someone to move out of state. People often think that sole custody automatically allows a parent to move far away with the children. That’s not the case. In Oregon, if there is a contested move-away situation the court looks at what is best for the child. The assumption used to be that if a parent was moving away to get a better job or to get more family support, that would be good for the parent which would then be good for the child. That assumption is no longer made. Now the assumption is that if a child has a regular relationship with both parents, it is best to ensure that those relationships continue.  Mediation is a great option for addressing move-away cases because it allows parents to focus on creating a workable arrangement for both of them  rather than taking a “win-lose” approach to the situation.

So what is custody?

In the mediation or Collaborative process we don’t usually use the word custody. Instead, we refer to it as “decision making.” The phrase “decision making” is more accurate and less inflammatory than the word custody. When we talk about decision making we typically are talking about religious upbringing, school decisions and elective medical decisions. As we see in ORS 107.169, the major decisions “include but are not limited to” these three types of decisions. Realistically, major decisions include any decisions that are coming up where you end a lot of time thinking about the decision, research different possible options, etc.

How is decision-making addressed in mediation and Collaborative Law?

In mediation we begin by asking the question, “How have you made decisions in the past?” We then ask, “How do you envision making decisions in the future?” Often times whatever people have done in the past they will continue to do in the future, although that doesn’t always have to be the case. For example, it may the case that a stay-at-home parent historically made most of the decisions but now that there will be separate households the wage-earning parent begins to take a more active role.

Regardless of the approach to decision-making, mediation and Collaborative Law provide a process for identifying and discussing interests. When we are discussing something as important as making major decisions for your children, it is important that each parent have a chance to discuss the issue from their perspective and feel heard.

Creating Budgets in the Divorce Process

In the traditional divorce process there is a lot of haggling back and forth about the amount of spousal support that will be paid. We take a different approach in the mediation and Collaborative Law context. In both of these processes we attempt to arrive at a meaningful support arrangement – one that compares need versus ability to pay and seeks to make sure everyone can pay their bills after the divorce. Budgets are instrumental in determining spousal support awards in both mediated and Collaborative divorces.

You have probably heard of budgets before although you may not have ever done one. In short, a budget is simply the total of all the money coming in and all the money going out. Here is a Monthly Budget Form for your convenience. Although this form is fairly comprehensive, you can certainly add to it.

Here are a few things to think about when you are preparing your budget:

Apples to apples budgets. It is important that both people use the same level of budget. They do not need to use the same amounts in their budget, but they do need to be including (or excluding) the same types of expenditures. For example, if one person includes a travel line item in their budget, then the other person should as well. If someone includes voluntary retirement in their budget, then so should the other person. However, the amounts don’t need to be the same. For example, it’s not unusual that one person has a much higher grooming budget than the other. The bottom line is that if someone is using a minimalistic budget, the other person should as well. If someone is using their preferred budget, so should the other person.

Exchange budgets before the meeting. You should exchange your budgets with each other before the meeting in which you will be addressing support. Neither person has veto power over the other person’s budget, but it is perfectly fair to comment on the other person’s budget. Often times people overlook or underestimate certain expenses; having the other person review your budget may help identify these things. Similarly, sometimes people overestimate costs and it fair to point that out as well. The purpose of exchanging budgets before the meeting is so that both people can offer feedback prior to the meeting. You want to go into the meeting with both people satisfied that the other person’s budget is reasonable. Two hour appointments aren’t cheap – you don’t want to spend the meeting arguing about budgets! Instead, you should come into the meeting having already reviewed and commented on the other person’s budget so that you can spend your time actually discussing support rather than arguing about whether someone should have included lawn service in their budget.

One-time expenses. Expenses such as your mortgage or cell phone are easy to identify. What are more difficult are one-time expenses. For example, you only need new tires every three or four years, but when you do they may cost $600 to $800. Similarly, Christmas only comes around once per year, but if you don’t budget for it you could end up with a huge credit card bill. It’s therefore important to think about these one time or irregular expenditures when preparing your budget.

Use post-divorce budgets. Many times people are still living together while they go through the divorce process and don’t have any idea how much life will cost after the divorce. Although this is somewhat challenging, it is very important to try to accurately project what your budget will be after the divorce is final. For example, if you will be moving, try to figure out what part of town you are moving to and how large a place you are looking for. This will give you some idea about what your rent will be and it will also help you begin thinking about the total cost of your utilities. Sometimes people decide that it makes sense to create two budgets – one based on current expenses and one based on their expenses after they move out.

Budgets can be challenging – particularly if you are not used to doing one. However, they are very important in determining an appropriate support award. Since budgets usually take some time to figure out, you should probably start working on your budget sooner rather than later…you will be glad you did!

Divorce and Taxes – Ten Things To Know

Divorce frequently has tax consequences.  Here are ten important things to know when going through the divorce process.  Depending on your situation, you may be able to implement strategies during the divorce to reduce taxes for one or both of you for years to come.

  1. Property Division Not Taxable.  A property transfer related to divorce is not a taxable event pursuant to Internal Revenue Code Section 1041.  This means that you do not have to pay taxes on assets that you receive in the divorce.  This also means that you do not get to deduct the transfer of assets on your taxes.
  1. Spousal support.  Spousal support is tax-deductible to the person paying it (the payor) and taxable to the recipient.  If the payor is in a higher tax bracket than the recipient, then the family can “save” on taxes by transferring the support so that the person in the lower tax bracket pays taxes on them money.  The payor will want to adjust the exemptions on his or her W4 to increase take-home pay so that there are more dollars available to pay support and also pay for his or her own expenses.
  1. Child Support.  Child support is not a taxable event. The payor pays child support with after-tax dollars and the recipient does not have to pay taxes on the money received.
  1. Dependency Exemption.  The dependency exemption is a deduction from your taxable income associated with caring for a child.  If you do not specify who gets to claim the child, then the IRS rules say that whoever spends more than half of overnights with the child gets to claim that child.  If you have a 50/50 parenting plan, the IRS says that whoever has the higher income gets to claim the child.  These are just the default rules – you are allowed to “trade” the dependency exemption.  For example, if you have one child, it is possible to agree that you will each claim the child every other year.  If you have two children, it is possible to agree that you will each claim one of them.  It is important to note that the tax benefit associated with claiming the dependency exemption is phased out at very high income levels.
  1. Capital Gains.  When you are dividing stocks or mutual funds that are NOT held in retirement accounts, you need to be aware that you may have to pay taxes on those stocks when you sell them.  For example, let’s say you have ten shares of Google stock that are worth $500 and you paid $100 for five of them and $450 for five of them.  If you sold the shares tomorrow you will pay capital gains on $400 of gain for the shares that were purchased for $100 but only pay capital gains on $50 of gain for the shares that were purchased for $450.  This is true even though all of the shares are worth $500!  Therefore it is very important to know what the “basis” (purchase price) is when you are dividing assets to which capital gains may apply.  Capital gains can also apply to other assets, not just stocks.  It is important to know that assets that are held for less than one year are taxed at normal income tax rates, while assets that are held for more than year are taxed at a more favorable long term capital gains rate (0% or 15% for most people).  Depending on how you structure a settlement, you may be able to save on taxes thanks to the capital gains rules.
  1. Retirement Transfers.  You can divide a 401(k) and certain other types of retirement accounts without incurring penalty or paying income taxes using a Qualified Domestic Relations Order (QDRO).  If you did not use a QDRO and just cashed in a portion of the retirement to give to your ex, you would incur a 10% penalty (if you are under 59.5) and pay income taxes based on the account owner’s tax bracket.  A QDRO allows you to make the transfer without tax or penalty; the amount awarded to your ex will be transferred into a retirement account in his or her own name (usually a rollover IRA).  Your divorce judgment will specify how much will be transferred.  The QDRO is a supplemental legal process that happens after the judgment is signed by the judge (or at the same time).  QDROs are a specialized area of the law and most divorce attorneys do not draft them.  However, your divorce attorney or mediator should be able to provide you referrals to one or more QDRO attorneys.
  1. IRA Transfer.  IRAs can be transferred without a QDRO when done pursuant to a divorce judgment.  The company that holds the IRA will have a form that you need to fill out and you will likely have to provide a copy of the judgment when you initiate the transfer.  IRA transfers are free and relatively quick; QDROs usually cost $500 or more and can take up to several months to complete.  If you have both IRAs and 401(k)s, one strategy is to do the entire transfer from the IRA so you can avoid having to do a QDRO.
  1. Head of Household.  If you have more than 50% of overnights with a child then you can file your taxes “head of household”.  Head of household is a more favorable tax filing status and results in having to pay less tax.  Unlike the dependency exemption, you cannot “trade” head of household tax filing status.  In other words, you can only file head of household if your child actually spends more than half of the year at your house.  If you have a 50/50 parenting plan and two kids, one strategy is for each parent to get an extra weekend with one of the children so that both parents can file head of household.
  1. No Partial Year Filing.  If you are married as of December 31st you can file taxes as “married filing jointly” or “married filing separately”.  If you are divorced as of December 31st you have to file “single” or “head of household” (if applicable).  It is not possible to file part of the year as a married couple and part of the year as single.  One common strategy toward the end of the year is to wait to finalize your divorce until January so that you can file jointly for the prior year.
  1. Capital Losses.  Don’t forget to address carry-forward capital losses in your divorce judgment.  If you have previously filed jointly, look at your most recent tax return to see if you have capital losses that you can carry forward to the following year.  If you do, these can be divided between the two of you.  Depending on your situation, it may make sense to award the losses to someone who is also receiving an asset that has capital gains associated with it.  A different strategy would be to award the losses to a person in the higher tax bracket.

Lastly, lawyers not CPAs!  You should not rely on your lawyer for tax advice unless they happen to be a tax lawyer or also happen to be a CPA.  Lastly, this article is provided for general information only and should not be construed as tax advice.  If you need tax advice you should consult with a licensed tax professional.

Refinancing and Divorce

If you own a home chances are that you are joint on the mortgage with your spouse.  If you are going through the divorce process, getting someone’s name off of a mortgage is often a very important consideration.  Here are several things to think about:

  1. Title vs. Mortgage.  It is easy to remove someone’s name from the title to the property.  This is typically done by signing something called a Bargain and Sale Deed.  On the other hand, it can be very difficult to remove someone’s name from a mortgage.
  1. “Cash Out” Refinance.  Sometimes people need to do a “cash out” refinance in order to remove someone’s name from a mortgage and buyout their interest in the property.  Most lenders will only allow you to increase your mortgage up to 80% of the total value of the property (this is called “loan to value ratio”), although a few lenders will allow you to take up to 85% loan to value.  For example, if your home is worth $400,000 and you owe $280,000 and your lender will allow you to go up to 80% loan to value, this would mean that the maximum you could take out is $40,000 in cash which would put your total mortgage at $320,000 (which is 80% of $400,000).  This would allow you to remove the other person’s name from the mortgage and pay them $40,000, but you would then have a $320,000 mortgage.
  1. Low Income Refinance.  If someone has had little or no income for an extended period of time it will be difficult to refinance, but it’s not impossible.  Different lenders have different requirements, of course, but many lenders will work with someone if they can show that they have received support (spousal and child) for six months and will receive it for at least four years.  You should check with your lender for their specific requirements.  Since different lenders may have different requirements you may consider checking with a few different lenders.
  1. When to File.  If you have a pending divorce case a lender may not want to work with you until the divorce is final.  From the lender’s perspective they want to make sure they know how much support someone is paying or receiving, and they also want to know if someone else will have an ownership interest in the house after the divorce.  One strategy that people will sometimes use is to complete the refinance before the divorce and then file the divorce once the refinance is complete.  If you are planning on doing this it is important that you answer your lender’s questions honestly about your situation.  For example, if they ask you if you are about to go through a divorce and you know you are, then you need to disclose that information.  Another strategy is to wait until the divorce is complete before filing for the refinance so you can provide the judgment to the lender immediately.
  1. Timing of Refinance.  It is important that you set a timeline on the refinance of the house.  People will frequently agree that the former spouse can remain in the home for a period of time until the home sells or can be refinanced.  If you are the person who moves out but your name is still on the mortgage, it is important from your perspective that you agree to a timeline by which your name must be off of the mortgage.  This timeline might be as little as three or six months, or it could be several years.  It is not unusual at all to agree to a timeline that allows a child to get through a certain school before requiring the refinance.  If the refinance cannot be accomplished, then typically the judgment says that the home must be sold.  Although this may seem harsh, the person who is not living on the home needs to know that they will be off the mortgage at some point.  The person not living in the home may not be able to qualify for another mortgage until they are off the mortgage.  Perhaps more significantly, being joint on a mortgage means that you are dependent on someone else paying the mortgage to make sure your credit doesn’t suffer.
  1. Credit Risk of Remaining on Mortgage.  If you are joint on a mortgage and the other person does not make the mortgage payment, the lender will call you looking for payment.  It does not matter to the bank that you have a judgment that says the other person is supposed to pay.  As far as the bank is concerned, you both applied for the mortgage so you are both responsible for the payment.  If you pay the mortgage for the other person the judgment typically provides that they have to reimburse you, but that provision doesn’t do you any good in the short term.
  1. Loan Assumption vs. Refinance.  Even if you can refinance, it may not be preferable to refinance.  You may have a mortgage interest rate of 4% or less, so refinancing into a higher rate is not very appealing.  If that’s the case, you should ask your lender if they have a “loan assumption” or “name deletion” process.  These processes allow you to remove someone’s name from a mortgage without making any other changes to the mortgage.  This means that if you have a great interest rate you can keep it.  Another benefit of doing a loan assumption is that the fees for an assumption are typically a lot less then for a refinance.
  1. Refinance Fees.  One thing to consider when refinancing is who is going to pay the refinance fees.  Often in a mediated divorce the clients will split the refinance fees.  The idea is that since both people benefit from getting someone’s name off the mortgage, they should both share in the cost.  If you are going to split these fees you should make sure that you are just splitting the actual fees and not any of the prepaid costs such as homeowner’s insurance or property taxes.

One benefit of going through the divorce mediation process is that the timeline and all decision-making is completely up to the clients.  For clients who can work together effectively, the divorce process can be utilized to insure that both people are able to own their own homes in the future if that is their goal.  A little bit of strategy during the divorce can go a long way to achieve a client’s interest of security, stability and home ownership.