divorce practice aid

[Strongsilence-CPA]

I'm interested in learning the basics of divorce planning.

The basic facts of the situation are following.  I'm more interested in learning what resources for guidance and learning you recommend. But, if you like, feel free to comment on this situation.

Spouse keeps the house and the business (C Corp). Spouse will purchase TP out of these by giving TP a sum of $100k upfront and $8k/mo. for 10 years. Spouse will assume the financial responsibility for kids. 

Some tax issues that come to my mind:

1.  Spouse and TP are the only owners and receive salaries. TP could have taxable gain on sale of stock to Spouse.  Installment sale?

2. Is it beneficial for TP to sell 50% ownership?  Is it advised that both remain owners?

3. Can the payments of 8k be structured to allow the business a tax deduction? I think the TP would need to provide services to the corporation.

4.  Home sale in 2024 is likely by Spouse in order to fund payments. Sale would likely have 1/2 M taxable gain at a 20% rate.

Anyway, there are lots of moving pieces, which means opportunities for tax planning. And both parties are talking so that is a positive.

[PhoebeRoberts · Accepted solution]

Start with Sec 1041 transfers incident to divorce. That resolves pretty much any income tax question.

[qbteachmt]

My guidance is: Don't mix business and pleasure.

You mention their house.

You mention a business, but is that the C Corp, which is its own entity, and is that Shares, since they are not owners but are shareholders? Or, is that really the Business, not the entity? And then you have to know if the entity continues afterward or is disbanded. That's because, in many C Corp-Spousal Divorce situations, there is some consideration or agreement for who has the right or responsibility to continue being in that business, for who is going to be restricted on being in that same business, etc.

So, you need to know community property and common law property issues. How are real and personal property items titled or deeded?

Your info for purchase isn't good enough, considering it is house and "business." for these reasons.

And valuations matter. The house might have a FMV with a mortgage. The business entity might be free and clear of debt, have huge assets, be leveraged to the hilt, need a business evaluator.

For an example of confusing all of the elements, your item 3 is problematic. The business either is or is not buying out that shareholder. You cannot deduct as business expense the price of one spouse buying out the other, which is often a mistake made because people consider, "My only source of that size of money is the business, so of course, when the business pays, that makes it business."

Nope.

And services to the corporation is an Employment issue. Not a Buyout issue or a divorce issue.

Your question 2 could be read as follows: My two people who are divorcing are 50/50 shareholders now. Once they divorce, they still need to cooperate or will butt heads over business issues as 50/50 shareholders. So, only they know if it is beneficial, because they are lots of benefits and downfalls going forward. It isn't clear which benefit you are considering. I bet, if you draw a line for two columns, you are going to have lots of benefits, and lots of cautionary notations.

And going forward, think of what happens when one or each of them remarries. I like Dave Ramsey's "3 Ds":

Death

Divorce

Drugs

Nothing like leaving the two shareholders to also continue to be the employees. Then, one remarries, the new replacement spouse has a drug or gambling habit, there go the reserves, then they divorce and that leaving replacement spouse claims a share of the business...

Ah, life.

[Strongsilence-CPA]

Thank you kindly.

W/R/T community property. This is California and community property state.  To determine house ownership, do I get and read the trust document?  Do I ask for the deed to the house?  An ADU is being built - does that have a separate deed? What is the legal document needed to verify C-Corp ownership?

[qbteachmt]

Honestly, these people need some divorce planning. If the house is being sold, that could be done before the divorce, so they get the marital exemption and now everyone starts at the same level.

"To determine house ownership, do I get and read the trust document?"

I don't see where you previously mentioned a trust

"Do I ask for the deed to the house?"

Yep. Start with the Deed (title). If the property is deeded to the Trust = done. Now you need to know what type of trust, and what is in the trust. And that might mean reading their wills, in case they did a "pour over" of their Estate into the trust. Is the trust already filing tax returns?

"An ADU is being built - does that have a separate deed?"

You'd have to check with that County.

"What is the legal document needed to verify C-Corp ownership?"

Shareholders. Corp records, K-1 from the C Corp on their personal tax return, etc. For instance, you would find out if they hold Ford, or other investments, as publicly traded investments, and "closely held" investments, and what other assets are involved for purposes of the divorce. If you've been doing their personal taxes, you should already have a handle on most of this.

You're not handling the divorce, though. Are you sure you want to go down this rabbit hole?

[Strongsilence-CPA]

I met with them today. They want to know the tax ramifications which is in my wheelhouse.  Thanks for the input and especially the warning about a rabbit hole.