Divorce and the Family Home

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One of the main issues that needs to be decided in a divorce is what to do with the family home. Here is an overview of the most common approaches:

Sell the Home.  It is very common to sell a home as part of a divorce.  This is the simplest and easiest approach, although it may not necessarily meet your family’s interests as well as some of the other options, particularly if children are involved.

Advantages of selling the home:

  • It (hopefully) provides cash for each spouse. The cash can help someone get into a new home or can be used as funds for one spouse to “buy out” spousal support or to pay a property settlement.
  • You do not need to decide how much the home is worth because the home will sell for whatever it sells for. In a buyout it’s important to decide how much the home is worth, which can sometimes be difficult, particularly if you have a unique property.
  • It eliminates the need to remove someone from the mortgage.
  • It disentangles former spouses from one another.

Disadvantages of selling the home:

  • It may be important to maintain the family home for the stability of a person or the children.
  • It may be not be affordable to purchase a new home and/or your new mortgage payment may be much higher than your original mortgage payment.

Buyout.  A buyout occurs when someone keeps the home and “buys out” the other person’s share of the equity.  This can happen by doing a “cash-out refinance” or by transferring other assets.  It’s important to specify when the mortgage will be refinanced so that the other person’s name is removed from the mortgage.  If the person keeping the home cannot fund the buyout and remove the other person’s name from the mortgage, the judgment typically states that the property will be sold.

Advantages of a buyout:

  • It allows someone to maintain the family home for the stability of the children or themselves.
  • The person keeping the home does not have to deal with moving, which can be an overwhelming process, particularly when it’s happening as part of a divorce.
  • When structured correctly, a buyout may enable the other person to purchase a home so that both people have a home following the divorce. (This would also be true of selling a home.)

Disadvantages of a buyout:

  • There might not be enough assets to fund the buyout. Even if there is, one person may end up with the bulk of their assets being tied up in home equity and have no retirement funds, for example.
  • It’s important to determine the value of the property. Sometimes this is easy to do, but sometimes this can be challenging.  People usually determine the value of the home by obtaining one or more “CMA’s” (comparative market analysis) from a realtor, or by hiring an independent real estate appraiser.  Sometimes people will obtain multiple CMA’s and/or multiple appraisals and average them.  With that said, you won’t truly know how much the home is worth unless you sell it.
  • The person keeping the home will be responsible for all of the real estate commissions if/when they sell the home in the future.
  • A refinance will be necessary if people are joint on the mortgage. If the person keeping the home is the only one on the mortgage, then no refinance will be necessary.  However, a cash-out refinance might still be needed in order to pay the other person their share of the equity.

Co-ownership.  People sometimes decide they will continue to jointly own a property following the divorce.  Co-ownership is probably more common than you think – however, it’s also the most complicated of the arrangements.

Considerations in co-ownership:

  • Are the two of you capable of effectively owning a property together after you are divorced?
  • If it’s the family home, who will live there?
  • If it’s a rental property, who will be responsible for dealing with it?
  • How will the monthly expenses get paid? What happens if repairs need to occur?  What happens if you can’t agree if a repair is needed?
  • How long will this arrangement last? It’s very important that a co-ownership arrangement is very detailed so that it addresses all contingencies and describes how and when people can end the co-ownership.

Advantages of co-ownership:

  • It allows someone to maintain the family home for the stability of the children or themselves for some period of time. People will often co-own a property until a child gets through a certain school.
  • You may consider the property to be a good investment.
  • People don’t typically need to refinance the mortgage if they are co-owning the home (although there may be reasons to do so).

Disadvantages of co-ownership:

  • Both people’s equity is ‘tied up’ in the property. This doesn’t necessarily matter for the person remaining in the home, but it could prevent the other person from being able to buy a new home.
  • Your credit will be negatively impacted if you remain on a mortgage and then the person who is supposed to pay the mortgage misses a mortgage payment.
  • What happens if there is a disagreement or if someone changes their mind and decides they no longer want to be co-owners?

These are the most common approaches and considerations to dealing with a home in the divorce.  With that said, there may be other approaches and considerations in your particular situation.  Here’s the good news: Once you decide which approach makes sense in your situation, the “details” are usually relatively easy to determine.  An experienced mediator or attorney can help identify and work through these details to develop a framework that makes sense for your family.

How to Use the Oregon Child Support Calculator

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In Oregon child support is based on a formula.  You plug in the numbers, press a button, and the calculator produces the presumptively correct amount of child support.  You can agree to use a different number if both people are willing to do so.  However, in the absence of some other agreement agreement, the number produced by the calculator is the number that will be used.

Here is an overview of how to use the Oregon Child Support Calculator:

Income.  Income is the first and most important factor in the child support calculator.  In Oregon, “income” is defined very broadly and includes almost any form of money you receive (e.g., wages, bonuses, stipends, overtime, etc.).  There may be exceptions to this depending on your circumstances, but generally speaking all income is included.

Per Oregon law, if someone is not working they are usually still “imputed” minimum wage.  This basically means that the we pretend they are earning minimum wage even if they are not actually earning that amount.  There are a few exceptions to this rule, including disability of a party.  If someone is unable to work due to disability they typically are not imputed minimum wage.

Sometimes people are imputed income based on what they could be earning even if they are not currently earning that much.  This is similar to being imputed minimum wage, but slightly different.  For example, if someone has always earned $80,000 and then they are laid off but they are confident they will regain similar employment, they might be imputed $80,000 even though they aren’t currently earning that much.  Imputed income is definitely not a straightforward or easy topic.  Your mediator or attorney can talk to you more about this if it is relevant to your situation.

Spousal Support.  The transfer of spousal support is a factor in the child support calculator.  If someone pays spousal support to the other party, the calculator deducts that income from the payor (the person paying) and adds it to the income of the recipient.  In other words, you don’t have to pay child support based on money that you have to transfer as spousal support, BUT, the recipient receives slightly less child support due to receiving spousal support.

For example, if Party A earns $6,000, Party B earns $3,000 and Party A pays $750 per month in spousal support, then the calculator treats this as Party A earning $5,250 and Party B earning $3,750 for purposes of the support calculation.

Union Dues.  Union dues are a deduction off of your income in the child support calculation.  For example, if you earn $4,000 per month and pay $75 per month in union dues, the calculator treats you as earning $3,925.  In other words, you don’t have to pay child support based on money that you have to pay in union dues.

Parenting Plan.  A significant factor in the calculation is something called the “parenting time credit.”  The parenting time credit is a reduction in child support based on the number of overnights each parent spends with the children.  The idea is that if one parent has the children more, they will incur more costs directly on behalf of the children than if they had the children less.  For example, if you have the children half of the time, you are going to spend more on their food, day-to-day needs, etc., then if you only have them one day per week.  However, a 50/50 parenting plan does not necessarily mean there will be no child support.  If there is a disparity in comes with a 50/50 plan, you can still expect that there will be at least some amount of child support (although the other factors mentioned also play a role in determining this).

Note: The entry for parenting time credit is the number of overnights a child is expected to spend with each parent.  If there is a 50/50 parenting plan then you enter 182.5 overnights.

Cost of Parental Health Insurance.  The cost of a parent’s own health insurance just for that parent is a factor in the calculation.  This is similar to union dues mentioned above in that you do not pay child support based on dollars that you have to spend for health insurance premiums (but not other out-of-pocket medical expenses).  Both parents’ health insurance premiums are factored in, even if only one parent is providing health insurance for the children.  If you aren’t sure of the cost just for your own health insurance, ask HR to provide you a breakdown.  You will want to know the “employee only” cost.

Cost of Children’s Health Insurance.  The cost of health insurance just to cover the children is also a factor in the support calculator.  This is treated differently than the cost of a parent’s health insurance.  Instead of being a deduction off of your income, the cost of children’s health insurance is split between the parties proportionate to their incomes.  What this ends up meaning is that if a parent pays child support and provides health insurance (unless it is free), then that parent’s child support obligation will be reduced by the other parent’s proportionate share of the health insurance.  If a parent is receiving child support and provides health insurance for the children (unless it is free), then that parent’s child support will go up by an amount equal to the other parent’s proportionate share of the health insurance.  This means that both parents end up contributing to the cost of health insurance premiums even if only one parent is paying the premium out-of-pocket.

If you cover the children on your health insurance, the cost just for the children can be determined by subtracting the “employee only” cost from the “employee plus dependents” cost.  For example, if the “employee only” cost is $100 and the “employee plus dependents” cost is $220, then the cost just for the children is $120 ($220 – $100).

Note: Depending on your plan there may be a distinction between “employee plus family” and “employee plus dependents.”  If you currently cover your spouse, you might pay the “employee plus family” rate.  After the divorce you will no longer be able to cover your ex-spouse, so just make sure you are using the right figures when you are calculating the cost just for a parent vs. the cost just for the children.

Note: If you cannot distinguish between the cost for a parent and the cost for the children, the rule is that you prorate the amount per person.  For example, if the total cost is $300 and that covers you and two children, then the cost just for you is $100 and the cost for the children is $200.  Again, this only applies if you cannot find information about the difference in cost for employee only and dependents.

Childcare.  The cost of work-related or school-related childcare is a factor in the child support calculation.  The cost of childcare is treated just like the cost of a child’s health insurance premiums, i.e., it is split proportionate to the parties’ incomes.  So, if one parent pays all of the childcare, child support will be automatically adjusted so that both parents end up contributing to the cost even though only one person is paying for it.

Note: Childcare to go on a social outing is paid by the person who needs it and isn’t factored into the calculation.

Note: Due to the fact that childcare fluctuates over time, people will often exclude childcare from the child support calculation and instead split the cost proportionate to their incomes.  Doing this allows you to address the cost of childcare without having to rerun the child support calculation every time childcare changes.

Rebuttal Factors.  The child support calculator produces the amount that will apply unless there is a really good reason that there should be an adjustment to the amount.  There are a number of “rebuttal factors” that can be applied to either increase or decrease child support.  These usually don’t apply unless there is a very compelling reason to change child support.  A good example of a situation where a rebuttal factor is appropriate is if you have a child with special needs who requires significant additional costs for his or her care.  There are many rebuttal factors and a description of them is beyond the scope of this article.  They are mentioned here only so that you know that they exist.

Note: As a practical matter, you can change child support as long as you both agree (and the change is within reason) even if there is not necessarily an applicable rebuttal factor.  You should discuss his further with your mediator or attorney if you think this may come up in your situation.

Agreed Upon Changes.  Parties can agree to either increase or decrease child support within 15% as long as they both agree to do so and without the need to prove a rebuttal factor.  Parties do this for a variety of reasons, including that they want to make child support a round number.  For example, if child support is $198, you could agree to increase it or decrease it by $29.70; parents will often round up $2 so that it is $200.

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Here is a link to the Oregon Child Support Calculator: https://justice.oregon.gov/guidelines/

Feel free to try and run your own ballpark calculations.  But if you can’t figure it out, don’t worry about it – that’s what mediation is for.  Also, there is plenty of room for disagreement and/or adjustment in some of these factors (particularly income).  So again, don’t feel like you have to get it all figured out yourself.

The Basics of Health Insurance in Oregon Divorce

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Every Oregon divorce or custody case that involves children must include a provision about 1) who is going to cover the children on health insurance, and 2) how unreimbursed medical expenses are going to be paid for.  It can also address how parents’ health insurance is going to be handled, although that is not required.  Here is an overview of important concepts to keep in mind when going through a divorce or custody case:

Health Insurance for Children.  Every judgment must require that at least one parent provides health insurance for the children, even if the children do not currently have health insurance.  The children can be double-covered, but they don’t have to be.

Oregon Health Plan.  If the children are covered on the Oregon Health Plan, the judgment must include a provision that one of the parents is required to maintain OHP coverage for the children (it has to specify which parent).  Further, the judgment must include a provision that says both parents are required to provide private health insurance if it is available to the children and is “reasonable” in cost.  “Reasonable” is defined as no more than 4% of a parent’s adjusted income (there are additional limitations which may apply).  However, once one parent covers the children, double coverage is not required.

If the children are on OHP and the child support obligor (the parent who owes child support) has income that is more than minimum wage, that parent will be required to pay something called “cash medical support” to the state.  (There are other exceptions to payment of cash medical support as well.)  This is basically a reimbursement to the state if they are receiving state-subsidized health coverage.  Cash medical support can also be owed from one party to the other, although this does not usually happen (people usually divide unreimbursed medical expenses instead of paying cash medical support).

Cost of Premiums.  Typically, at least one parent has some out-of-pocket cost for a child’s health insurance premium.  Parents sometimes ask whether the other parent is required to contribute to the cost.  The way this gets addressed is that the cost for a child’s health insurance premium is factored into the child support calculation.  The calculator then divides the cost between the parties proportionate to their incomes.  What this ends up meaning is that if a parent is receiving child support and also provides health insurance, child support will increase.  On the other hand, if someone is receiving child support and the other parent provides health insurance, then child support will go down.  In this way both parents end up contributing to the cost of health insurance premiums for the children, even though only parent pays the actual premium.

Unreimbursed Medical Expenses.  “Unreimbursed medical expenses” refers to the out-of-pocket cost of medical expenses for the children which is not covered by health insurance.  Every judgment needs to address how these costs will be paid.  Think of it this way, if you received an $800 medical bill for children after insurance coverage, how would that bill get paid between you?  The two most common approaches are to split these expenses 50/50 or to split them proportionate to your incomes.  Generally, these costs are split 50/50 unless there is a significant disparity in incomes, in which case proportionate to incomes may make more sense.

The following applies to health insurance for adults:

COBRA.  Someone can only be covered on their spouse’s health insurance while they are married.  Once they are divorced, the now-former spouse can no longer be covered.  COBRA is a federal law that allows for the continuation of health insurance coverage after divorce for the now-former spouse.  (COBRA applies to employers with 20 or more employees.  There is an Oregon law that applies to employers that are smaller than this.)  There are very strict timelines that apply to maintain health insurance coverage under COBRA.  Further, COBRA tends to be fairly expensive because you have to pay the entire cost of the health insurance (and you no longer receive an employer subsidy).

If you are considering maintaining your health insurance through COBRA, you will want to know how much your premium will be.  The employee can find this out by contacting HR or the benefits department.  You will need to let the employer know that you are going through a divorce and that you need to know the cost of COBRA for your soon-to-be-ex spouse to maintain health insurance.  The employer will know what you are talking about and should be able to provide you with a rate sheet which shows the cost to maintain COBRA coverage.

COBRA allows a former spouse to maintain health insurance for up to 3 years as long as all premiums are paid on time.  The Oregon law that applies to smaller employers lasts for a shorter duration.

COBRA used to be more important than it currently is because it used to be that health insurance could be very difficult to obtain.  Currently, the Affordable Care Act allows anyone to obtain health insurance, regardless of pre-existing conditions.  It remains to be seen whether there will be changes to the Affordable Care Act.  Depending on how the law changes (if it changes), COBRA could once again be very important in the divorce context.

Paying for Health Insurance.  A common question is whether a person who is paying spousal support “has to” provide health insurance for a former spouse.  There is not a rule that health insurance must be provided.  However, this is usually addressed via spousal support.  A person who is receiving spousal support will typically include the cost of health insurance in his or her budget.  This doesn’t necessarily mean that the total budget will be covered by support (there might not be enough money to cover everything), but it will at least get factored in.

Tip: If you are going through divorce and going to lose health insurance coverage, you should determine the cost of COBRA coverage and also get a quote for health insurance through Healthcare.gov so that you can compare the two.  If you are employed, check to see whether health insurance is offered through your employer and what the cost is.  Employer-provided health insurance is often the most cost-effective option.

What is Tax Discounting?

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“Tax discounting” is a (relatively) simple but important concept that frequently comes up in the divorce context.  Although the concept itself is fairly straightforward, as with many things, the details can be pretty complicated.  This article is designed to give you a general overview of the topic of tax discounting.  Your mediator, attorney or CPA will be familiar with these concepts, so don’t feel like you have to remember all of this!  This article is provided as general introduction to this topic and should not be construed as tax advice.  You are encouraged to discuss tax discounting further with your CPA or tax professional if it may be relevant to your situation.

Tax discounting refers to reducing the value of an asset by the anticipated tax liability associated with the asset.  Think of it this way: If you had to pay a $1,000 bill tomorrow, would you rather have $1,000 in cash or $1,000 in your 401(k)?  The (likely) answer is that you’d would rather have the cash.  This is because if you had to cash in $1,000 from your 401(k), you would not receive $1,000 – you would receive much less after taxes.  (There would also be a 10% penalty if you were not 59.5 years old, but that typically does not get factored in.)

When it Matters: Equalizing Pre-Tax with Post-Tax Assets.  If you are trading pre-tax assets (401k’s, IRA’s, etc.) for post-tax assets (cash, Roth IRA’s, home equity, etc.), then tax discounting will usually be applied.  For example, imagine your only two assets are $50,000 in retirement and $50,000 in cash.  Are these assets equal?  If you apply tax discounting, then the answer is ‘no’.  Again, this is because if you cashed in the $50,000 in retirement you might pay 25% taxes, which would leave you with $37,500.  It should be noted that not all professionals agree that tax discounting is appropriate.  Oregon lawyers and mediators usually apply tax discounting, although not always.

Other situations where some version of tax discounting may apply include:

  • Taxable investment accounts.  If you have stocks, bonds, etc., that are not held in a retirement account, these investments might have either short-term or long-term capital gains.  Short-term capital gains are taxed at ordinary income rates.  Long-term capital gains are taxed at capital gains rates (0%, 15% or 20%).
  • Rental/Investment Properties.  Real estate that is held for investment is subject to capital gains taxes when it is sold.
  • Businesses.  Businesses that are sold are subject to capital gains taxes at the time of sale.

Note: In Oregon, tax discounting usually only applies to the sale of businesses and real property if the sale is certain to happen in the relatively near future.  As with just about everything, the specifics of your situation should be discussed with your attorney.

Importance of Tax Rate.  When we are dealing with tax discounting, the assumption that you make about the tax rate is very important.  Sticking with the $50,000 retirement example, if we assumed a 19% tax discount (10% Federal, 9% State), then $50,000 is only “worth” $40,500.  If we assumed a 42% tax discount (33% Federal, 9% State), then $50,000 is only “worth” $29,000.  Using this example, you can see the importance of choosing an accurate tax rate.  Unfortunately, this is not necessarily the easiest thing to determine accurately, particularly since it requires speculating what someone’s future tax rate will be, not just their current tax rate.  The following terms may be helpful in understanding some of the complexities of determining your tax rate.

Marginal Tax Rate vs. Average Tax Rate.  When people think of their tax rate, they usually think of their “marginal” tax rate.  Marginal tax rate is the tax rate that applies to all dollars earned in a particular tax bracket; this is your “top” tax rate.  However, you don’t pay your marginal rate on all money that you earn – you pay a lower rate on amounts you earn in a lower tax bracket.  For example, in 2016 someone filing “single” will pay 25% federal income tax on amounts earned between $37,651 and $91,150.  But, that same person pays 10% on earnings between $0 and $9,275, and 15% on earnings between $9,276 and $37,650.  So a person who earns $40,000, will only pay 25% on $2,349 ($40,000 – $37,651).  Note: This example does not account for dependency exemptions, personal exemptions, itemized deductions, etc.

The average tax rate is the total tax you paid divided by your total income.  So if someone earns $40,000 and pays a total of $5,500 in taxes, then their average tax rate would be 13.75% even though their marginal tax rate is 25%.

You should discuss whether to apply your marginal tax rate or average tax rate with your tax professional, attorney or financial advisor.

“Grossing Up.”  Often someone will owe a property settlement and the only asset available to pay the settlement with is an IRA or 401k.  Since we know that retirement accounts are worth less after you discount them for taxes, the question is, what is the amount needed to get someone a certain amount after taxes are factored in?  Luckily, there is an equation for this.

The equation is: (Amount owed) / (1 – Tax rate)

Example: $50,000 / (1 – .24) = $65,789

This means that if we need to get someone $50,000 and that person’s assumed tax rate is 24%, then it would require transferring $65,789 from a 401k.

Avoiding The Issue.  In practice, we usually try to divide assets in a way that evenly distributes tax consequences between the parties so that you can avoid having to deal with tax discounting.  If both people evenly share the tax consequences, then we don’t necessarily care what the tax consequences are because they will apply (more or less) evenly to both people.

Based on the above examples, you can probably see the significance of assuming an accurate tax rate.  Unfortunately, this is a difficult thing to accurately predict.  It requires us to accurately assume 1) someone’s future income and, 2) what tax rates will be in the future.  If the assumptions are inaccurate, then someone can potentially ‘overpay’ or ‘underpay’ significantly.  How can we avoid this?  This can be avoided by not trading one kind of asset for a different kind of asset.  In other words, this can be avoided by splitting each type of asset class in half.  Note: It may not always make sense to split an asset in half.  Further, “splitting the asset” refers to splitting the “marital portion” of the asset.  If someone has a premarital retirement account, the premarital portion wouldn’t typically be split (although it could be).   

Continuing with the above example, we can avoid tax discounting if each person receives $25,000 in retirement and $25,000 in cash.  If each person receives half of each of these assets, then no tax discounting is required because each person is getting half of everything, including the tax consequences.

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This is a general overview of this subject which is designed to give you a basic understanding of the issue of tax discounting.  This article is not tax advice and should not be construed at such.  If you need tax advice, you should consult with your CPA or other tax professional.  Further, it is important to realize that all situations are different and that it might not be appropriate to apply a tax discount in a particular situation.