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Financial expert Derrick Kinney discusses 529’s and how to prepare for a child’s education and Sharon Ramage joins us to discuss how you maneuver the taxable side of divorce.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
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Chip Franklin:
Well, welcome to the Practical Tax Broadcast with tax attorney Steve Moskowitz. I’m Chip Franklin. We’ve talked about this in the past. If you had a kid that was five or six years old, would you jump in and start saving for college right then? Is that the best-
Steve Moskowitz:
No. I would save on the day he was born. When he or she were born, I would be making the first deposit.
Chip Franklin:
Yeah. Let’s get into that too. In fact, let’s start with our first guest. Derrick Kinny is a financial expert, author of Good Money. You’ve seen him on Fox News, Fox Business, Bloomberg, CNBC. Right down the line, everything. He’s one of the top financial experts around the country. Nice enough to join us here with Steve Moskowitz, tax attorney Steve Moskowitz, on Practical Tax. Derrick, hello.
Steve Moskowitz:
Hi.
Derrick Kinney:
Hi, Chip. Hi, Steve. Great to see you both.
Steve Moskowitz:
Great to see you too. Thanks.
Chip Franklin:
So, you probably heard what Steve said. Would you agree that as soon as you start to think about having kids, you should start that savings?
Derrick Kinney:
I agree with him completely.
Steve Moskowitz:
Yeah. Actually, Chip, I agree with that. When you start thinking about it is when you start making the deposits. Don’t even wait til the birth.
Chip Franklin:
Okay. Well, let’s back up a little bit, and talk about the different ways to do it and the tax implications. The 529. If I understand that correctly, a lot of states, if not every state, has an option where you can … Well, Steve, why don’t you explain it to me so I don’t mess it up?
Steve Moskowitz:
You were doing just fine, Chip. You never messed anything up. Basically, this is an incentive. The government gives all kinds of incentives for people to do things, because if you don’t, eventually people look to the government and say, “You pay for it.” So what you have here is an opportunity for people to put money away, and you can save some taxes. Not on the deductibility, but on the income tax you would’ve paid on the earnings. And then what they do is, in a recent change in tax law, they got more generous. Because it’s not just for college anymore. It’s kindergarten on up. So this is a way that parents, grandparents, interested people can set up an account for the child, and then you take advantage of the education. And education is so important to so many people, and this is something to help pay for it. Derrick, what do you think about that?
Derrick Kinney:
Yeah. I agree. It’s interesting, because you want to think strategically. You mentioned the 529 now being able to use K through 12, and you can pull out to $10,000 per year. Whether it be private school, a charter school, it gives parents more options. But what I like about it is, is people work with someone like Steve, or they work with an estate attorney, et cetera. And they recognize that, “Look, I’m going to have an estate problem. These are ways people can use to help solve that problem and be the good person in their family.” In the 529, they could give $16,000 per student per year, which reduces their gift tax. So picture, when the second spouse passes and there may be gift taxes due, this can reduce that. Plus, if you’re married, the spouse can give 16,000. That’s like $32,000 a year, that you can really stockpile a nice college savings fund very, very quickly.
Steve Moskowitz:
Also, you can even throw in a bigger payment, if you want, on some special deals. So I won’t get too much into technicalities, but grandpa and grandma says, “Boy, we’d like to put some money away.” You can put away even more than that if you want.
Chip Franklin:
Oh, well, that’s an interesting point. So I wasn’t fortunate to have grandparents leave us money, but a lot of my friends did, and their kids. If the money-
Steve Moskowitz:
That’s why you made your own, Chip.
Chip Franklin:
Yeah. Kids or money?
Steve Moskowitz:
Both.
Chip Franklin:
What if the amount the parents give exceeds what the child spends in college? Well, how do you treat that money then?
Derrick Kinney:
Well, in terms of the 529, if it’s used for college and education, then there’s no penalties. If it’s used for other things, sometimes they put in there a 10% penalty, or it can be actually moved over to another sibling as well.
Steve Moskowitz:
Yeah. That’s That’s the one I was going to suggest.
Derrick Kinney:
Is the main thing.
Chip Franklin:
Oh. Interesting. Can a grandparent give money for education? Can you do a 529 for trade school education, for other … If I wanted to go back to law school or something, could a 529 still apply that started 50 years ago? Or they’re not 50 years old. But, I mean, how long does it go, and how many different uses does it have?
Derrick Kinney:
Steve, you want to take that one?
Steve Moskowitz:
Yeah. So the bottom line is, that’s fine. The whole idea here is to encourage education. So, the bottom line is … And also, if you do this as part of the estate plan, Chip, what you were talking about before, is getting money out of the estate. So, the whole idea is to go ahead and use the money for education. And sometimes you’ll have this situation. The child is born, and the parents and the grandparents set up a big fund. And then the kid says, “You know what? I finished high school, and I’m going to be a rock musician, and I don’t want to go to school.” You just transfer the account to somebody else. So here, the government’s very generous in what they allow, and this is something … It’s a combination. Yeah, it’s good for estate planning, but also it’s good for helping people out. And education’s a good thing, or at least most people would agree that it is.
Chip Franklin:
The situation you mentioned probably happens all the time. What if there’s not another sibling to transfer it to? What happens to the money then?
Steve Moskowitz:
Well, there may be somebody. But eventually, if you say, “You know what? Nobody wants to go to school, or I need the money back,” then and only then do you start have to worry about the taxability. Derrick, you were going to say something?
Derrick Kinney:
I was going to agree with that. Ideally, you want to have another sibling, and this is where it’s possible to over-plan. Where you might think, “Well, if I’m going to have three or four kids, I need to have this amount of money.” You may want to take it child-by-child, and have a strategy unique to each one. But as Steve talked about, hey, the moment that child is born, begin putting a strategy in place. But also, you want to blend that in, I think, with some non-529 money that’s more flexible. Where if there were to be even a business opportunity that they wanted to invest in as a parent or grandparent to really help this child get a headstart, that could be a way to compliment this planning as well.
Chip Franklin:
Does the money in the 529 earn interest for the parents, or grandparents, or whomever?
Derrick Kinney:
Well, it’s inside. I think of it like a bottle. You can put anything in the bottle you want, but inside that wrapper it’s tax-deferred, and it comes back out tax-free. You get to choose how aggressive or conservative the money’s invested. So whether it’s a mutual fund family, or different stocks or bonds, you get to custom tailor. Even some cases they’re age-based, where they’re more aggressive when they’re younger and they get more conservative the closer they get to using the money.
Steve Moskowitz:
You see here, the tax thing here is, although the initial contribution isn’t tax-deductible, you’re not paying taxes on the earnings. So wouldn’t you rather have what you would’ve given to the IRS given to your kid, or a grandkid, or a nephew, or whomever? That’s one of the tax benefits of it. Not to just get it out of the estate, but to not pay the tax on the income.
Chip Franklin:
That’s interesting, because I was thinking about this. I know that every state has peculiarities to their 529. Right? Or is this a federal program?
Steve Moskowitz:
It’s federal, and the states jump in [inaudible 00:08:11].
Derrick Kinney:
That’s right. Yep.
Chip Franklin:
Okay. What if I’m living in Ohio, and my son, God forbid, wants to go to Penn State after all that? Can I take that money from there and then take it over to another state?
Steve Moskowitz:
Is that before or after disowning him?
Chip Franklin:
Man, you nailed it right there. That’s for sure.
Derrick Kinney:
And there’s a huge tax penalty for that decision too.
Chip Franklin:
No, seriously. Is the money generally just for any school, or does it have to be a state school? Because I recall it being just for state schools when I heard about it 20 years ago or so.
Steve Moskowitz:
Okay. So what happens is, the big taxes are federal. That does vary from state to state. So I know this show goes out through all over the country. So basically, what I would say is, you want to talk to your tax advisor about that one.
Chip Franklin:
That’s always smart. What about the idea for estate planning ideas, and for gifting at the end? I mean, I know that, for most people watching this, they’re probably not going to inherit enough to deal with an estate tax. Is that right, Steve?
Steve Moskowitz:
Oh, yeah, because you’re talking about millions and millions of dollars. So the people that pay estate taxes, we’re talking about a very select few. And if those people are married, you double the exemption. So you’re talking about over 22, $23 million. Most people don’t have that amount of money to go ahead and give to somebody. And if you have $23 million that you can give, chances are you have somebody like me telling you how to do it every step of the way.
Chip Franklin:
Interesting. I got an email after one of our shows a couple weeks ago, and it fits perfectly in here, about the idea of side-hustle money that comes in and the different ways that you might be able to be taxed that. In other words, this one person wrote and said they put off buying equipment this one year because they thought they had enough deductions, and they waited until the next year. But their advisor said, “Since you’re a corporation, you could actually set up a tax year that would fit when your biggest volume was and when your purchases were.” That’s a lot in one sentence, but-
Steve Moskowitz:
That’s not the way I would handle it, Chip. I don’t know how recently that advice was, but most people want to be S-Corps rather than C-Corps. And in the old days, I’m talking a long time ago, when you and I were little boys, people used to set up an S-Corp with a fiscal year of January 31st and push it off for a year. But now, with S-Corps, they’re calendar-year, you’re not going to do that. So instead, what I would say is, better than that, set up a retirement account for yourself or for the entity. And then, instead of writing that big check to the IRS, write a big check to the pension plan and a smaller check to the IRS. That’s one of the ways. Not to mention, there’s other deductions. Not to mention, when you start up a company, there’s questions of, “Are there expenses I have to amortize over a period of years?” Oftentimes 15. Or, “Can I write these expenses off this year?”
So the bottom line is, again, who’s ever thinking about setting up a business, you want to talk to your tax advisor. And there’s a lot of ways to legally offset the income. I mean, I always talk about this, but look at the Fortune 500. They make billions of dollars in profit, and they legally don’t pay any taxes. And a question that I oftentimes ask new clients, I say, “So, what do you think? You think you make more or less than Apple computer?” And everybody laughs. “Oh, ha ha. I make less than Apple computer.” I say, “Guess who pays more taxes?” So, there’s so much you can … A big part of my career is saying, “Do this, and don’t do that, and set this up to legally avoid paying the taxes.” Like a pension plan. It’s beautiful. Who would you rather pay the money to, the IRS or yourself?
Chip Franklin:
So I did send this out, what we were going to talk about today, on social media. And I did get one more question. I think it’s really relevant. You may have answered it already, but I don’t know the answer, and I’ll ask the both of you. We talked about the 529s for education. If I wanted to go to school to make myself more hireable, is that tax-deductible? Is it difficult to prove, and is it … For example, if I wanted to go and learn something more about computers, or something I do a lot with, or a camera, and I want to go learn that. Is that a-
Steve Moskowitz:
Well, you want to do that through a … Again, there’s so many reasons to set up a business. And in the last major tax act, what businesses could do would be greatly increased, and what individuals could do would be greatly decreased. So what you’re talking about is, with educational expenses, in miscellaneous itemized deductions a lot of things were taken away from individuals. The way around that is to set up a business, because a business can deduct it. So if we’re talking about a business idea in order deduct educational expenses, you have to meet the minimum educational requirements of the field, and have it help you improve what you’re doing.
So for example, as you know, I was a CPA before I was a tax attorney. And I said, “Well, I want to go to law school to be a tax attorney. I don’t want to chase ambulances or do divorces. And clearly, being a tax attorney would help my career. In doing that, can I deduct it?” The answer would be no, because it qualifies me for a new profession, being an attorney. But then I went on, and I became an attorney, and then I took an advanced degree in tax. The LLM in tax, which is an advanced law degree specialization in tax. And then I could deduct it, because I already met the minimum educational requirements of the field, a law degree, and it maintained or improved my skills.
Now, again, this law changed. So, we used to be able to do that on the personal return. Right now, you can’t. This law is supposed to expire, and then theoretically, sometime in the future, you can do it again. But right now, today, if you’re watching this, you want to consider setting up through a business, because there’s an awful lot of stuff you can do with it. The same with the pension. You can do the pension individually, but you can do more with the business.
Chip Franklin:
You just reinforced, and I think Derrick will agree, when you have a question, always consult a tax professional.
Derrick Kinney:
That’s right. Yeah.
Chip Franklin:
I mean, it’s the same for you. For investing, obviously. People come to you, and again, we’re talking to Derrick Kinney. His book is Good Money. He’s a financial expert. You’ve seen him on everywhere television covers finance, and been nice enough to join us today. Will you come back, Derrick, please?
Derrick Kinney:
Happy to. Steve, Chip, it’s been great. Thanks for having me.
Steve Moskowitz:
Derrick, a real pleasure. Thanks so much.
Chip Franklin:
See you, pal. All right. Bye-bye. Again-
Derrick Kinney:
Thank you.
Chip Franklin:
… the book is called Good Money. Great reviews on Amazon. So, check it out.
Time for Ask a Tax Attorney, and this is one of those questions that I want to start with this quick story. My brother-in-law worked for the IRS for years, and he was at a party once, and they used to laugh at it. This guy was talking about how, “Oh, I get all this cash in. And the IRS, they’ll never know it.” Somebody stopped him and said, “Chuck has worked for the IRS for 30 years. He’s one of the top people. He goes before Congress.” And the guy’s face turned green, as it should. Right? That’s what you would say. But here’s the question. “I know someone who’s cheating on their taxes, and it bothers me, and I want to report them. Is there anonymity there? What happens? How does that process work, Steve, and is it a good idea?”
Steve Moskowitz:
So, I’m a defense attorney. But yes, there is a mechanism for people to report others. And the IRS receives a lot of tips, but they have to evaluate, because a lot of times the tips come from jealous business competitors or people that are angry with you. So yes, there’s a process. And the IRS does receive information like that, and that can lead to a criminal prosecution, or civil fraud, or all kinds of things that can come up. But again, my entire career, what I’ve always counseled is, you should take everything to which you’re entitled. No more and no less. And I know people who, when they were younger, they cheated on their taxes. And when they were older, they were very, very sorry.
So what I’m saying to you is, we’re as aggressive as they come within the bounds of the law. But if you’re thinking about cheating on your taxes, A, don’t do it. Not just because it’s illegal, but when you get older, you will really be sorry. People don’t realize about that. For example, they’ve hidden the money someplace, but they can’t spend it anywhere, and they’re always looking over their shoulder. Again, as a tax attorney, we do all types of cases, criminal and civil. If you would see the people in my office that are being criminally prosecuted for tax offenses, and how genuinely sorry they are, and how miserable they are. For a few bucks, it’s going to cost them way more in the future. Don’t do it. Don’t think about it. I guess I’d say the same thing if you’re getting ready to take some illegal drug at a party. I would say, “Don’t do it.”
Chip Franklin:
Well, hey, let me-
Steve Moskowitz:
You’ll be really sorry.
Chip Franklin:
Let me wrap this up with, I think … And it sounds like I’m doing a big plug, but I’m not. Instead of maybe calling the IRS, tell them, “Look, go see a tax attorney. And if you haven’t filed all these years …” Let them go to the IRS. Let them solve it so you can stop this lifestyle. As you call it, a criminal lifestyle. That’s what it is. Right?
Steve Moskowitz:
And Chip, in so many cases, when people come in the office that did that, I say, “You know what? We could legally save you more than you’re cheating on. They could put you in prison, or-“
Chip Franklin:
Well, you’ve done it for two of my friends. I have musician friends and artists that hadn’t filed, and I sent them, and that was the lesson they got. And it worked out. Have you ever seen the movie War of the Roses with Michael Douglas? Remember, there was a couple that were fighting, and-
Steve Moskowitz:
I didn’t see the movie, but I saw advertisements for it. So, I know what [inaudible 00:18:38].
Chip Franklin:
Okay. Well, it’s been years since I’ve seen it, but I just know that divorce is … If people think that buying a home or getting married, the process is difficult, divorce has to be just the biggest nightmare. I’ve, knock on wood, never been through one. But I do think that there’s aspects to this that are both emotional and financial, and they kind of intertwine, and you got to have really smart people with you to help you.
Steve Moskowitz:
That is why it’s so incredibly difficult, because romance and finance don’t mix. And if something is strictly a business deal, you’re making a decision based on business principles. What’s the best thing to do economically? But when it comes to a divorce, I’ve seen so many people spend a fortune on something … For example, that they’re fighting over the popcorn maker. And I say, “You’re out of your mind. What does a brand-new popcorn maker cost?”
Chip Franklin:
But it’s not the popcorn maker.
Steve Moskowitz:
Exactly. That’s the problem. It’s not the popcorn maker. It’s, “I’m not going to let you tell me what to do anymore.”
Chip Franklin:
Well, let’s bring in Sharon. Sharon, I believe it’s Ramage, is a seasoned family law attorney. She handles a wide range of cases, and can help us traverse-
Sharon Ramage:
Hi there.
Chip Franklin:
Hello, Sharon.
Sharon Ramage:
It’s actually Ramage, kind of like [inaudible 00:20:04].
Chip Franklin:
Ramage. Okay. Ramage sounds-
Steve Moskowitz:
Oh, I like that.
Chip Franklin:
… French.
Steve Moskowitz:
It’s such a good name for an attorney.
Sharon Ramage:
Damage? Yes. Mm-hmm.
Chip Franklin:
Oh, I bet you’ve had marketing people that said, “Limit the damage with Ramage,” or something.
Sharon Ramage:
Something like that.
Chip Franklin:
So, let’s start with just the divorce. I know both of you guys have just so much knowledge and preparation for these, but let me start with this quick question for you, Sharon. When a couple comes in, and they’re determined they’re going to get a divorce, they really want it, where on the ladder of concerns is money, and separation of assets, and division of assets?
Sharon Ramage:
Oh, it’s very high on the level. First of all, typically-
Chip Franklin:
Hold on, Sharon. I’m getting a buzz. I’m getting a buzz on your microphone. Is there-
Sharon Ramage:
Okay.
Chip Franklin:
Oh, yeah.
Sharon Ramage:
Do I need to take my AirPods out?
Chip Franklin:
Yeah. Take your ear plug out, and maybe you can just talk directly into the computer. That might just-
Steve Moskowitz:
This is no place for you to be getting a buzz, Chip.
Chip Franklin:
Nah. It is a Friday, though, Steve. Right? If I was going to start one-
Sharon Ramage:
Sorry about that,
Chip Franklin:
You sound fine there. That’s fine.
Sharon Ramage:
Okay. Well, first of all, I would only be meeting with one of the clients. Just in about any state, that’s the case, because there’s a conflict of interest. We don’t meet with them together. But it is first, and it is at the front of everybody’s mind, especially with these economic times. Because even in the best of situations you’re dividing the household income, you’re dividing the household resources, and they’ve got to figure out a way to make it work going forward. And one party is always going to have a harder time recovering than the other, and you have to try to figure out how to meet everybody’s interest with what is there. When you’re dividing things, not all things are created equal. Not all divisions are equal. And as I’m sure Steve will say, there are different tax impacts for different types of divisions that I always want my clients talking to their accountants about, or a financial planner, to make sure they’re doing things that leave them in the best situation from a financial standpoint going forward.
Steve Moskowitz:
That’s where we come in, as tax attorneys, and assist divorce attorneys. Where it’s, sometimes you can work out … Basically, I believe, and Sharon can say, the number-one reason people are getting divorced is over money. I see a lot of it, because if you can’t pay your taxes, it’s usually, you have a financial problem. And what happens is, if we’re assisting a divorce attorney, what we try to do is, work something out where it’s usually, “How much?” How much is being paid? How much is being received? And sometimes we can cut a deal where the person that gets the lesser amount is the IRS.
So if there’s a legal way for this couple to do it, that that can actually help the settlement. Because sometimes people dig their heels on the ground. “I won’t accept less than X.” “Well, I won’t pay more than Y.” And they say, “Okay. Well, if you can’t agree, then let the judge decide.” But I said, “Well, wait a minute. What if you could both get your way? What if you would only have to pay X, and you would receive Y because the difference is made up by the savings and taxes?” That’s one of the things we look at.
Sharon Ramage:
Absolutely, and that factors into property divisions all the time. And it’s sometimes not real fair to leave one person with all the retirement assets, which are going to have a huge tax impact to take anything out of, unless they will have a taxable impact, as opposed to, say, the marital residence.
Chip Franklin:
Can I interrupt you right there, Sharon? So you’re talking about, say they have a 401(k) that belongs to both of them. You’re saying if they open it up at that point, then they pay penalties on that. Is that what you were referring to? No?
Sharon Ramage:
Well, actually, no. Because in the year associated with the divorce, we have qualified domestic relations orders. That’s according to federal law, to ERISA, that a division of a retirement account can be made. There will be a tax impact post-divorce, if there’s any money taken out of that, to the spouse who is not the participating spouse. But you certainly don’t want to start cashing things out before the divorce, because then there is the penalty. But there is a difference in the treatment of how assets are received and what its real value is, because you have to take into effect the tax effect. The division of certain assets, as I’m sure Steve has done when he’s helped-
Steve Moskowitz:
Oh, yeah. Another thing you take a look at is, oftentimes the former spouses have very different incomes.
Sharon Ramage:
Correct.
Steve Moskowitz:
And you say, “Well, look.” Let’s assume there was one child involved, and you say, “If you will …” For example, there was a change in the law about who deducts the child as a custodial parent. But there’s a form that the non-custodial parent can attach to his or her tax return, signed by the custodial parent, where you can shift that. And you say, “Look, if somebody’s in a higher tax bracket, even though I’m not custodial parent, if you allow me to claim the child, not only can I pay less taxes, but I can be in a whole different tax bracket. I can be head of household instead of single. I will pay less taxes, so the IRS will get less money, and I’ll split it with you. If you don’t, you get less, I get less, the IRS gets more. If you do, IRS gets less, you get more, and I get more.” That’s what I mean about saying, “Hey, you can work something out where legally the IRS gets less and the parties get more.”
Chip Franklin:
All right. Let me ask you-
Sharon Ramage:
I never really liked for the IRS to get less. But you also have to look at, who does it make the most sense for that tax deduction to go to? Because state courts have no jurisdiction over that. I have clients come to me all the time, “I want to fight this, I want the tax deduction.” Well, that is a federal issue. And most of us from law school remember, federal law preempts state law. So, state courts cannot award that deduction to anyone.
Steve Moskowitz:
Oh, and here’s another big one that I come up with all the time and that you see. In the divorce agreement, it’s agreed that spouse X will pay all the taxes for spouses X and Y when they were filing a joint return. And of course, the IRS goes after the other spouse. And the spouse that wasn’t supposed to pay is waiving the MSA, marital settlement agreement. Say, “Look, look. My former no-good spouse was supposed to pay this.” And I have to say, “Well, the IRS was not a party to that. So although you can bring your former spouse into state court for contempt, the IRS doesn’t care what you agreed. They can collect it from either one of you.” And on the other hand, that’s where you get something called innocent spouse.
Chip Franklin:
Yeah.
Sharon Ramage:
Correct.
Steve Moskowitz:
Where you say, “Well, look. I didn’t have the knowledge and I didn’t have the benefit. So even though we filed a joint return, and in a joint return you’re jointly and civilly liable, my no-good ex-spouse has to be …” The best example of that is, husband has his own business. Wife doesn’t know what he’s earning. He has some unreported income that the IRS later finds, and he spent the money on his girlfriend, or cocaine, or gambling. So she had no knowledge, no benefit. And even though the IRS initially comes after her, because say, “Joint return, they can collect it all from either party.” Say, “No, no, no. I qualify as an innocent spouse.”
Chip Franklin:
I love that phrase. You said-
Steve Moskowitz:
Another thing I’ll say is, what happens if the husband is a bum now and he has no money? The taxes just don’t get paid. It’s not like, “Well, somebody has to pay it. So wife, you have a good job.” No, they just don’t get paid.
Sharon Ramage:
The IRS, they’re going to go after whoever they can get it from.
Steve Moskowitz:
Absolutely.
Sharon Ramage:
And it’s really becomes a breach-of-contract suit in state court over if somebody was supposed to pay the taxes and they didn’t.
Steve Moskowitz:
Sometimes, I’ll get a question where one spouse will say, “Well, I make so much less than my former spouse, even if we’re both liable. Why is that agent only coming after me?” And I say, “What ZIP code are you in?” Because the agent only covers the ZIP code you’re in. Doesn’t cover the ZIP code the other one is, and that’s another agent.
Chip Franklin:
I love that phrase, innocent spouse. I told my wife the first time you said it to me, about eight years ago. And she said, “Well, you’re no innocent spouse. That’s for sure.” But let me ask you this, because this is something that’s happened to friends before. A couple’s married, everything’s fine. She inherits a lot of money from her mother’s passing. They put it in a joint account. Eight, nine years later, they go to get divorced. She says, “I want to take that out.” What happens?
Sharon Ramage:
There’s a big fight over whether they commingle. That’s generally seen as commingling. In most states, at least where I am, that would be separate property if it was received by inheritance. But once you’ve started commingling it with your community funds or your marital funds, then you’re pretty much saying goodbye to it. Then it becomes a matter of tracing. There are all kinds of tracing rules. And if it’s all gone, it’s all gone.
Chip Franklin:
But wouldn’t you advise-
Steve Moskowitz:
Sharon is so right-on in everything she said.
Chip Franklin:
But in that case, wouldn’t you just advise the guy and say, “Look, this is her money. Give it to her. Her mother gave her this”?
Steve Moskowitz:
Chip, How many people have you dealt with when they’re in the pain of divorce-
Chip Franklin:
No, I hear you.
Steve Moskowitz:
… and said, “Let’s be reasonable now. Let’s be fair.” It doesn’t work that way.
Chip Franklin:
It doesn’t work.
Steve Moskowitz:
Again, I’m not the divorce attorney. I’m the tax attorney, but I see this from the financial part, the tax part. People are so emotional, they just can’t think normally. That’s why I say these cases are so much more difficult. The same amount of money, if you bought stock in the X-Corp and there was a problem, you’d make a decision. But the X-Corp didn’t know where your buttons were. You weren’t in love with the X-Corp at one point. You didn’t have a child with the X-Corp. The emotion’s there. And when you start mixing the emotions, and the money, and the taxes, you’re not getting a reasonable [inaudible 00:29:50].
Chip Franklin:
Okay. Here’s a question then for you guys. Why don’t we require, in every state, when you go to get married, you have to have a prenup? You got to do it right there. So somebody goes, “Oh, a prenup. You don’t trust me.” No, it’s the law. I mean, wouldn’t that make sense?
Steve Moskowitz:
Go ahead and try to pass that one, Chip.
Sharon Ramage:
Yeah. Okay. There’s the law, and there’s the ways around the law, and there are plenty of prenups. Some are enforceable, some aren’t. They’re not all created equal. And again, you’ve got to have some pretty strict compliance that you have a prenup, that you’re not going to accumulate community property during your marriage. But you start commingling all your funds together and you’ve acted in a manner that’s inconsistent with your prenup, it’s going to make it very impossible to enforce. But we do prenups for people all the time, and we’re telling them, “You’ve got to make sure that you do everything you’re supposed to.” It’s just sort of like people, when they establish trust during their lifetime, it’s like, “You better keep it funded and you better utilize it correctly, or you’re going to do something that’s going to cause you to lose those protections.”
Steve Moskowitz:
Also Chip, what you have to remember is, I always ask people, “Well, what would you like to achieve? What are your desires? What are your goals?” And when you marry somebody, you might have very different goals than when the marriage goes wrong.
Sharon Ramage:
Correct.
Steve Moskowitz:
And you say, “Well, wait a minute. Going into the marriage …” Basically a prenup says, “What’s mine is mine, and what’s yours is yours, never the twain shall meet.” And a romantic notion of marriage is, “Well, you’re one entity. You share everything.” Maybe that’s the way you felt going in, and maybe something happens. Maybe there’s infidelity and someone says, “Oh my God, how could you do that to me?” And then there’s real anger. And when people get angry, they can’t think straight. Again, the same amount of money in the stock in the X-Corp would not bring out the emotions than somebody that you loved did that to you. So the bottom line is, you’re taking rationality, which is fine. We’re all nice and calm here, talking about laws, and finances, and stuff. But it’s kind of like if somebody took a hot poker and stuck it in one of us-
Sharon Ramage:
Ow.
Steve Moskowitz:
… we’d be jumping and screaming, and as opposed to sitting here and having a nice scholarly conversation.
Chip Franklin:
I know. I know. I mean, I’ve been married 35 years, and you can ask my wife. It’s not every day paradise, but you kind of … No. There’s a combination of romance and pragmatism, and, I mean, I think that-
Steve Moskowitz:
Maybe in your marriage.
Chip Franklin:
Well, yeah.
Steve Moskowitz:
Everyone’s different.
Chip Franklin:
I waited til I was 31 to get married though, and I think that makes a big difference to a lot of people too, is like the timing and all that. Sharon, you are awesome here. Really appreciate you coming on with us. Will you come back again, please? I don’t know about you, Steve-
Sharon Ramage:
I’d love to come back.
Chip Franklin:
I find this fascinating. All right. Sharon Ramage. We’ll put your information at the end of this. If people ever want to talk to you, they’ll know how to find you. Okay?
Sharon Ramage:
Okay. Thank you, Chip.
Steve Moskowitz:
Thanks so much.
Chip Franklin:
Thank you so much. Bye-bye now.
Steve Moskowitz:
Bye-bye.
Sharon Ramage:
Bye-bye.
Chip Franklin:
All right. Yeah. I really mean that, Steve. I find that fascinating, because that is really the perfect combination of emotion and money, and just the constant battle between the two.
Steve Moskowitz:
Think of it like this. You’re in a warehouse that is manufacturing dynamite, and you’re standing there with a big cigar in your mouth with a big ash hanging off the edge. Now, you’re just being introduced to the divorce area.
Chip Franklin:
You’re a funny guy. All right. Well, that’s this edition of Practical Tax with tax attorney Steve Moskowitz. We’ll see you next time. I’m Chip Franklin. Until then, goodbye.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.