Scrutinizing a Proposed Divorce Settlement (Tax Liability & Responsibilty)

 KIMBERLY WEISUL for the Wall St Journal writes: The woman was in the midst of a divorce, but negotiations had stalled. Distrustful of her almost-ex husband, and not fully comprehending the settlement offer, she refused to either accept or reject it. 

Out of frustration, her divorce attorney recommended she talk to certified financial planner Dana Hanson, who could offer another perspective on the proposed divorce settlement, while providing some basic financial education to put her mind at ease. 

"This was a 60-year-old woman who had never written a check," says Ms. Hanson, principal and chief planning strategist with Relyea Zuckerberg Hanson in Stamford, Conn., which manages about $550 million for 87 families. "The divorce attorney came to me and said, 'My client is scared to do anything, and that means she can't move on with her life.'" 

Ms. Hanson began by examining the client's joint tax return with her husband, and then the proposed divorce decree. What she discovered was hardly equitable: The couple had a $3 million capital loss carryforward that the husband was planning to keep entirely for himself. As the adviser looked more closely at the stock portfolio, Ms. Hanson also noticed that the husband was getting all of the high-cost-basis stock positions, while the wife was getting all the stocks with a low-cost basis. 

Ms. Hanson, a certified public accountant and a certified divorce financial analyst, specializes in helping divorced women who are on their own for the first time. So she anticipated an uncomfortable conversation with the divorce attorney. 

"I said, 'I know this is a little awkward, and I don't know if you noticed this, but the capital loss carryforward is all going to the husband if we don't do something about it,'" says Ms. Hanson.
The divorce attorney was shocked, but not defensive, because it was a financial detail that she didn't even know she should consider. When the wife learned she was exposed to a huge tax liability if she ever sold those shares, she was furious, says Ms. Hanson.
That anger inspired the woman to start taking the settlement negotiations much more seriously. She asked Ms. Hanson to review all the paperwork for other red flags. For example, she'd never thought carefully about would happen to her husband's pension--and now she wanted to know. 

"Now she knew to pay attention," says Ms. Hanson. "She was paying for everyone else to do the work and just putting her head in the sand. She was shocked at what her husband had done, but it was the impetus for her getting educated faster. And she learned quickly."
After additional review, Ms. Hanson helped the divorce attorney achieve a more equitable settlement for the client: The husband agreed to split the high- and low-cost-basis stocks equally. 

The woman also got half of the loss carry forward, which meant that when the client eventually had to rebalance her portfolio, it didn't generate any capital gains. The husband's proposal to split his pension by writing a check to his ex-wife every month was replaced in the settlement with a qualified domestic relations order, automating the payments.
Now, thanks to her adviser's careful scrutiny of the divorce settlement, the client expects to be financially secure throughout her retirement. She's also in a new relationship. "She's doing great," says Ms. Hanson. "She has a whole new life."