The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Marriage Penalty Returns||Date: 1/20/2013 9:24 AM|
|Author: SamuelClemens||Number: 117424 of 121061|
Yes, you would need to talk to a lawyer about all the repercussions of a legal divorce and how to deal with them. One that comes to mind is legally making each other medical proxy in case of incapacitation. Also, what will the impact be on estate taxes if one of you passes away and are not entitled to spousal transfer of assets without taxation?
This is definitely something I would have to research. My thinking was that I could possibly set up a situation in a similar way that a gay couple must set up matters -- that is, affording the legal protections of a couple without the actual marriage. How effectively can the legal protections of marriage be simulated with a trust?
Additionally, you would need to figure out how to address this with your children. What kind of example to you want to set for them? I am not making judgements here, and I think you pose interesting questions, but these are also issues you need to think deeply about how they will be perceived. Will you tell your kids about the "divorce," or simply carry on as though nothing were changed?
I would tell the children. In fact, I've already told them its being considered. I wouldn't do it without replacing it with legal documents in place which would replicate the present financial arrangement (shared everything), assuming that is possible. That is what I need to find out.
Would this constitute fraud in the eyes of the law, since you are essentially divorcing solely to avoid paying taxes? It would not be hard to prove with this internet trail.
I don't think it would be fraud (but please correct me). If it were, then I would not do it.
But, I do not think it is even in a grey area. I read some IRS publications (pub. 501) and they say your marital status for the year is defined by your legal marital status on the last day of the year. However, if you divorce for the sole purpose of paying single taxes, and then marry the following year, then you must file as married for both years. My reading of this is that I cannot divorce on Dec 31 and then remarry on Jan 1 to avoid the taxes, but nothing prohibits a permanent divorce to avoid taxes. Am I misinterpreting?
Another poster, Angel May, suggested that we could afford the extra $20K per year. Of course we can afford it. I could afford to drive more expensive cars, live in a high end neighborhood, and send my kids to private school, but I don't do those things either. It is more important to us to save the income, have more financial security and retire earlier. (And I think it is harmful to the kids to bring them up in that way, but that's a whole other discussion.)
I manage our investments. Here I am presented with a course of action that I estimate will yield more than $100K over the next 5 years. Say I take a week of vacation off work and meet with a lawyer to set this up. Say it costs $10K to set up. $10K and a week's worth of vacation burned to earn $100K. Don't I owe it to my family to provide for the extra level of financial security? My wife and I would likely draw down about $100K per year in retirement. Thus the extra savings would mean we could retire a year earlier than planned. I can tell you that an extra year of not working sounds pretty good to me.
Yes I understand there are social implications with not being married. But at what price? The government sets tax policy to shape behavior all the time. I can get a tax break for buying an electric car, for instance. In this case, the tax law is telling dual high earners that they are better off single -- and the difference is pretty large. At what point do the "pros" of marriage (social benefits, legal benefits which cannot be replicated) outweigh the "cons" (marriage penalty, cost of setting up alternative arrangement). At a few thousand dollars I wouldn't consider it, but this is more than a $100K.
As for what would we tell people, I would certainly tell my children and show them the legal documents set in place. I would want them to have full understanding. And I would probably tell the one family member who is an executor of our will. But other than that, why should anyone else need to know? It is not that I would be ashamed of the arrangement, but it would lead to the discussion of why we did it, an necessarily to how much money we earn. And people react strongly when discussing that (as shown by this thread).
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