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Case Study

The Joneses

The Joneses

After 15 years

One Become Two

Jenny

Jenny

42-year-old Student
$21,000 per year after finishing school in 3 years
$14,400 in child support from Jason

Jason

Jason

43-year-old Veterinarian
$57,570 per year income from his small veterinary practice, which has been valued at $200,000 

Case Summary

Jenny and Jason have been married for 15 years and have two children Chad (9) and Nicole (5).  Jenny is 42 and Jason is 43. Jason will be paying child support of $14,400 to Jenny. Jason takes home $57,570 per year from his veterinary practice. Jenny will earn $21,000 per year after finishing school in three years.

Business

Jason has a small veterinary practice, which has been valued at $200,000.

Primary Residence

They own a matrimonial home with $90,000 in equity. The balance on the mortgage is $130,000.

Rental Property

They also own a rental property with $60,000 in equity. The balance on this mortgage is $30,000.

Jason's Lawyer's Proposal

Jason’s lawyer has proposed that the property be divided as shown here. Jenny and her lawyer thought it looked fair, so Jenny signed the papers based on this division. They’re dividing the property equally – $281,000 each – so what could be wrong with this “solution”?

Let’s take a look at how this plays out

in graphical illustration

Although Jason is doing much better than Jenny, her future doesn’t look too bad. Let’s take a look at her working capital to see whether her situation is really as positive as it looks here.

As you can see, her situation is quite a bit worse than what was shown on the net worth statement. She will run out of cash at age 48 – she will still have the matrimonial home, but she can’t sell a window to put food on the table.

Looking Ahead

What Really Happened

Immediately after his divorce, Jason married his girlfriend, Holly. Then, two years later, he died in a car accident.

No More Support

Since the divorce, Jenny has been spending more than she makes. Jenny now has $500 in her checking account and the money market account is gone.

Since Jason’s death, there has been no more child or spousal support, which will make Jenny’s situation even worse.  Jenny has not taken any money out of her IRA yet, so it is still worth $17,000.

Unfortunately, the QDRO was not filed when Jason died. As a result, his second wife became the beneficiary of his 401(k), worth $80,000. Jenny could sue Jason’s estate, but as you can see, she has no money to do so. Jason’s pension is now valued at $35,000 (it was initially valued at $30,000). 

Jenny has just withdrawn the assets from the Variable Annuity. After paying surrender charges and taxes, she ended up with $26,000 of the original $30,000. A better option might have been to annuitize the Variable Annuity to pay the insurance premiums.

Options Expired

The Stock options expired and were never exercised. They were worth $15,000. Jenny couldn’t afford the Variable Life Insurance. She canceled it and ended up getting $13,000 shortly before Jason’s death. The insurance was originally worth $25,000.

Jason’s business is still valued at $200,000. The equity in the matrimonial and rental homes has remained the same.

The autos have declined in value. Prior to his death, Jason had been making regular payments on the Visa and his car loan. The car loan was solely in Jason’s name. The Visa debt was a joint debt; Jenny will now be responsible to pay the balance, which is now $15,568.

Unfortunately, there was a notice from the IRS for an understatement of tax on Jason and Jenny’s joint tax return for $43,612. Jenny will now be responsible for paying this debt as well.

The Result

1 %
Jenny

In the end, Jenny is left with approximately $92,321 in assets – a far cry from the $281,000 she was supposed to receive.

1 %
Jason's Estate

While Jason’s estate is left with approximately $379,759 plus any accumulations not reflected here.

What is Jenny's outlook?

in graphical illustration

Things could hardly look worse for Jenny; instead of $281,000 in assets promised her, she is left with next to nothing after paying Jason’s share of the liabilities after his death. Let’s take a look at her working capital to see what she was left to live on post-divorce.

Jenny’s funds are depleted immediately, and she never recovers financially from the mistakes made during the divorce settlement – a settlement both attorneys originally considered equitable.

You need to

Turn insight into action

Most attorneys are looking for help in the same two areas: tax issues and issues surrounding pension and retirement plans.

Although this is no longer the case for all your clients, the house and the pension are often the most significant portions of the community property. Tax considerations can help you structure tax-efficient settlements. The pension area, which is constantly changing, is possibly the largest area of malpractice among lawyers.

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