Divorce planning.

Editor's note: This case study has been adapted from "Guide to Tax Planning For Individuals," 2d Edition, by Anthony J. DeChellis, Douglas L Weinbrenner, Catherine A. Roecler and James F. Reeves, punished by Practitioners Publishing Company, Fort Worth, Tex. 1997.

Facts: The 1997 tax returns of your client, Christie Brickley, are currently on extension. Christie stops by your office in July 1998 to drop off additional tax information and mentions (for the first time) that she's going through a "messy divorce." Issues: What are some of the issues that should be considered in doing current and future tax planning for Ms. Brickley?

Analysis

The following checklist should aid the tax adviser in planning for a client undergoing a divorce.

Checklist for Clients Going Through a Divorce

Client name: Spouse name: Prepared by: Date: Reviewed by: Date:

I. FILING STATUS                                   Yes    No    N/A

A. Was the divorce finalized by year-end?          --     --    --

B. If not, does the abandoned spouse rule apply
(Sec. 7703)?                                       --     --    --

C. Determining whether the client should agree
to file a joint return with the spouse:            --     --    --

1. Is the client comfortable being fully liable
for any tax, interest and penalties due?           --     --    --

2. Are there tax issues that can be avoided by
a separate filing?                                 --     --    --

3. If a joint return is selected, will innocent
spouse status protect the client?                  --     --    --

4. If not, has the client been advised in
writing of the risk of filing jointly?             --     --    --

5. Is there a tax cost to filing separately?       --     --    --

D. Can a decree of separate maintenance (or the
equivalent) be obtained to permit filing as a
single individual or head of household?
                                                   --     --    --
II. PROPERTY SETTLEMENTS

A. Has legal title to all assets and their
classification as marital or separate assets
been determined?                                   --     --    --

B. Have the bases of all of the assets been
determined?                                        --     --    --

C. As to sales of any assets expected to be
disposed of shortly after the settlement, have
the tax consequences been computed and
communicated to the client?                        --     --    --

D. Have depreciation and other recaptures, if
applicable, been considered on such sales?         --     --    --

E. In determining the proper settlement, have
the after-tax values of the proposals been
computed?                                          --     --    --

F. Have any liabilities on the properties
transferred between spouses been considered?       --     --    --

G. If a trust is being used, have its tax
consequences been considered?                      --     --    --

H. If the settlement involves a series of
payments, should life insurance on the payor
be required? (See Temp. Kegs. Sec. 1.71-1T(b),
Q&A-6 and Rev.Rul. 70-218 for guidance on how
to treat the premiums.)                            --     --    --

I. Will any transfers of property that must
take place occur either during the marriage or
be incidental to the divorce (to qualify for
Sec. 1041 treatment)?                              --     --    --

III. PRINCIPAL RESIDENCE

A. If the marital residence is to be sold, will
it qualify as the client's principal residence
at the time of sale?                               --     --    --

B. Has the tax cost to the client of a sale of
the residence been computed?                       --     --    --

C. Will the residence be transferred to the
client as part of the settlement?                  --     --    --

D. If yes, has the basis been reviewed to
determine if it includes any improvements or
other additions to cost (and any needed
adjustment for prior deferred gain)?               --     --    --

IV. ALIMONY AND CHILD SUPPORT

A. Have the tax consequences of classifying
support payments as alimony or child support
been discussed with the client (including
the consequences of such classification on
the dependency exemption)?                         --     --    --

B. If the proposed payment is to be alimony,
are the following requirements met:                --     --    --

1. The payments are in cash (including cash
payments made to a third party on the payee's
behalf)?                                           --     --    --

2. The payments are made pursuant to a decree,
court order or written agreement?                  --     --    --

3. The payments are not designated as
nonalimony?                                        --     --    --

4. The parties will not file a joint return?       --     --    --

5. The parties are not members of the same
household at the time of the payments?             --     --    --

6. The payments terminate on the death of the
payee spouse?                                      --     --    --

7. The payments do not decrease by more than
$15,000 in either the second or third year
(Sec. 71 (f))?                                     --     --    --

C. If the payments are to be child support,
are the following requirements met:                --     --    --

1. The amount is specifically stated in the
agreement or decree as child support?              --     --    --

2. The amount is reduced based on events
related to or associated with a child?             --     --    --

V. RETIREMENT PLANS

A. Have the client's interests in retirement
plans been reviewed (including interests in
the spouse's plans)?                               --     --    --

B. Should an actuary be retained for further
analysis?                                          --     --    --

C. Have the retirement plan documents been
reviewed?                                          --     --    --

D. Will the final divorce settlement/decree
provide a payout from the plan to the client
or spouse?                                         --     --    --

E. Will the proposed settlement or decree
conform to the qualified domestic relations
order rules?                                       --     --    --

F. Does the client need to change retirement
plan beneficiary designations?                     --     --    --

VI. DEPENDENCY EXEMPTION

A. Have the parties addressed the issue of
the dependency exemptions?                         --     --    --

B. Should the client waive the exemption--

1. annually?                                       --     --    --

2. permanently?                                    --     --    --

C. Is there a copy of the executed Form 8332,
Release of Claim or Exemption for Child of
Divorced or Separated Parents, in our file?        --     --    --

D. Does the client obtain any benefit from the
exemption (due to the phaseout)?                   --     --    --

E. If no, should some other arrangement be
considered?                                        --     --    --

VII. OTHER ISSUES

A. Do the client's will and trusts need to be
changed?                                           --     --    --

B. Do insurance policy beneficiaries need to
be changed?                                        --     --    --

C. Should banks and other financial
institutions be notified of the divorce and
should signature authorities be changed?           --     --    --

D. Have the appropriate creditors been notified
of the divorce?                                    --     --    --

E. Have all guarantees and endorsements been
reviewed to determine whether the client has a
contingent liability that needs to be
addressed?                                         --     --    --

F. Do all bills for professional fees related
to the divorce include a reasonable allocation
of such fees between deductible and
nondeductible advice?                              --     --    --