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CRAIN’S CUSTOM MEDIA ADVERTISING SECTION CRAIN’S CUSTOM MEDIA ADVERTISING SECTION A Roundtable Discussion FAMILY LAW: How would you describe the overall impact of IMPACT ON HIGH-NET-WORTH INDIVIDUALS the tax reform on divorce? JQ: The greatest impact is in the area of “The most significant aspect affecting high- What Divorcing Couples Should Know About Tax Law Changes maintenance. Historically, maintenance net-worth individuals is the elimination of deductions have been used by families to minimize the overall tax obligation for both the tax deductibility of maintenance, where parties, resulting in more available net income historically a high-income wage earner to be divided amongst the two households and would be able to shift income tax at the less tax being paid to the government. The new tax law has done away with this shifting highest bracket to the divorcing spouse in of income, so that all support obligations— the lower tax bracket.” maintenance and child support—are paid after being taxed to the person who earned that income. Also, the advantage of unallocated JAMES M. QUIGLEY, BEERMANN LLP support, which combines child support with maintenance, has been eliminated and therefore is no longer deductible. JQ: Section 505 of the Illinois Marriage and from $1,000 to $2,000 on each qualifying child With the elimination of the deductibility of Dissolution of Marriage Act outlines a formula younger than age 17. A tax credit offsets the maintenance, unallocated support has been to calculate maintenance, though there taxes owed dollar for dollar. This will impact eviscerated as well. appears to be discretion for the court to negotiations on child tax credits, as couples deviate from the formula where the guidelines will argue over who’ll be entitled to take each CM: Combine the complexity of the tax law would result in the payor paying 50 percent or child’s tax credit. The income levels at which changes with the changes a party must face more of his or her net income for maintenance the child tax credit is phased is now higher ILENE B. GOLDSTEIN CLAIRE R. MCKENZIE JAMES M. QUIGLEY and address while going through a divorce and child support. at $400,000 for married jointly and $200,000 Principal Senior Partner Partner and my response is simply, “It is likely going to for all other filers. Fifty dollars in child tax Katz, Goldstein & Warren Schiller DuCanto & Fleck LLP Beermann LLP be more challenging to reach settlements in What effect does it have on dependency credit is phased out for every $1,000 of igoldstein@kgwlaw.com cmckenzie@sdflaw.com jmquigley@beermannlaw.com the short term and until the entire family law exemptions and the child tax credit? adjusted gross income above the stated limits. 847-317-9500 312-609-5534 312-621-1225 community is comfortable with the new tax law.” There may also be a $500 credit available for Now, it is even more important for individuals JQ: The new tax law eliminates individual dependents who are not under age 17 children, contemplating or navigating through the divorce dependency exemptions until 2026. but whom qualify for the child credit. process to seek the advice of a knowledgeable family law attorney and at the same time IBG: While it eliminates dependency CM: To claim the child tax credit, you must engage the necessary outside professionals to exemptions, it increases the child tax credit have a child younger than age 17 at the end of assist them to achieve their ultimate goals both financially and for their family. IBG: While not unique to divorce, it makes it Beginning January 1, changes from the Tax results for her clients. Before law school, until 2019. The forthcoming statutory changes more difficult to creatively reduce a party’s Cuts and Jobs Act of 2017 will start to take she was a tax manager for an international regarding maintenance will have a more taxable income while achieving a net result effect, including new rules involving tax accounting firm and after law school, she was disparate impact on families with a higher- that’s better for both parties. The changes deductions for divorcing couples. One of the a senior trial attorney for the Internal Revenue income earner because individuals in higher brought about by the tax reform act impact biggest changes involves alimony payments, Service, U.S. District Counsel. A former chair tax brackets will no longer have the ability to settlement negotiations, thus making divorce which will no longer be tax-deductible to of the Chicago Bar Association Tax Committee transfer income to their spouse in the cases more complicated. Lawyers frequently payors, or tax-free to recipients. and current Maine Township Trustee, she has lower tax bracket via maintenance, thus use divorce software when trying to analyze been recognized by Best Lawyers, Leading lowering the overall amount of tax paid by the tax impact of various settlement scenarios; Three local family law attorneys, including one Lawyers and Super Lawyers. both spouses. however, it’s important to remember that who is also a CPA, shared their thoughts about some of the software used to calculate these the potential impact on divorcing couples, and JAMES M. QUIGLEY is a partner at Beermann Claire R. McKenzie: We hear questions tax implications—especially as it relates to those contemplating divorce. LLP, which has offices in Chicago and focusing on settlement agreements. Clients alimony and child support—have not been Bannockburn. Over the last 25 years, he has are asking, “Do I need to get divorced by updated to conform with the changes brought ILENE B. GOLDSTEIN is a principal at Katz, tried complex financial, allocation of parental December 31 to get the best settlement or about by the tax reform act, so people should Goldstein & Warren, a family law firm based responsibilities/relocation, maintenance, maintenance award possible?” “Does the proceed with caution. in Bannockburn. She focuses on divorce cases support and other family law cases involving new tax reform and repeal of the alimony involving complex financial matters, including business valuations, property disputes and deduction really matter?” “Isn’t it just math?” What’s the new process for calculating business and real estate valuation, cash flow prenuptial/postnuptial agreements. He has maintenance for those subject to Illinois analysis and matters involving the parental been recognized repeatedly by Best Lawyers guideline rules? responsibilities of children and parenting in America and Super Lawyers. He is among James M. Quigley: Clients want to know plans. With a career spanning more than three four Illinois lawyers elected by the American whether they’ll be able to shift maintenance CM: Since 2015, Illinois has maintained guideline decades, she has been repeatedly recognized College of Family Trial Lawyers, a national payments from a higher income tax bracket provisions that continue to be clarified and by Best Lawyers in America, Illinois Law organization within the American Academy of the paying spouse to the lower income modified. Beginning January 1, maintenance Bulletin’s Leading Lawyers Network, Super of Matrimonial Lawyers, and he is one of tax bracket of the receiving spouse in a way will be calculated by taking 33.3 percent of the Lawyers and Martin Hubble’s AV Preeminent three Illinois attorneys certified by the that would minimize the overall tax liability payor’s net—rather than gross—income, minus 25 Rated Attorneys. She is a certified arbitrator National Board of Trial Advocacy. of the family. Former clients also want to percent of the payee’s net income. and mediator, and a collaborative fellow with know whether the new tax law will impact the the Collaborative Law Institute of Illinois. deductibility of their existing maintenance What’s the most common question or concern obligation and whether they’ll continue to pay IBG: The amount of maintenance is capped so CLAIRE R. MCKENZIE, CPA, is a senior partner you’ve been hearing from clients since the tax tax deductible maintenance if the obligation is that the recipient’s own net income combined at Schiller DuCanto & Fleck LLP, a family law reform was enacted? modified or extended in the future. Statutory with the maintenance amount received firm with offices in Chicago, Lake Forest and language suggests that future modifications cannot exceed 40 percent of the parties’ Wheaton. She utilizes her skills in tax planning, Ilene B. Goldstein: Timing has become a prime to maintenance awards originally entered combined net incomes. Current statutes are financial discovery, forensic accounting, case question and concern. Clients ask if they prior to January 1, 2019 will remain deductible in the process of being implemented by the analysis and litigation to achieve favorable should finalize their divorce in 2018 or wait unless the parties elect otherwise. legislature to conform with the new tax laws.CRAIN’S CUSTOM MEDIA ADVERTISING SECTION CRAIN’S CUSTOM MEDIA ADVERTISING SECTION A Roundtable Discussion brackets will dictate the plus or minus effect A client’s life coach or therapist may assist us ADVISOR COLLABORATION FOR THOSE CONSIDERING DIVORCE on divorcing spouses. in making sure they have and maintain the support system needed to navigate this arduous CM: Another issue is premarital agreements, and contentious process. All of these advisors “It’s imperative for us to work collaboratively which high-net-worth individuals are more assist us and the clients in understanding their “In 2018, if you’re contemplating a divorce, with clients’ accountants and financial likely to have. These agreements may need to be alternatives and achieving their goals—economic run—do not walk—to consult with a professionals to ensure that everyone’s on the reviewed with a fi nancial advisor and the family and otherwise. The advisors are invaluable to law attorney who drafted the document to make both the clients and to us. knowledgeable and tax-savvy family law same page regarding short- and long-term sure that none of the new tax laws negatively attorney to explore all options, planning financial goals . . . support obligations, which affect the goals of the agreement. The sweeping What will be the impact on divorces fi nalized opportunities and alternative strategies to assets are being received by each party, and changes of the new tax law were intended to before year-end 2018? choose which options are best for you and benefi t low- and middle-income Americans at tax implications of divorce-related decisions the expense of high-net-worth, high-income IBG: Finalizing by December 31 will allow your family.” should all be discussed.” Americans, and it accomplished its goal. divorcing spouses to elect whether to have Although the marginal tax rate to high earners maintenance calculated and paid on each ILENE B. GOLDSTEIN, KATZ, GOLDSTEIN & WARREN didn’t increase, the elimination or restriction of party’s gross or net income. Finalizing a CLAIRE R. MCKENZIE, SCHILLER DUCANTO & FLECK LLP tax deductions negatively impact their effective divorce by year-end may be advantageous tax rate. Unfortunately, this includes those to both spouses as the deductibility of achieved. I’d also encourage individuals with or statute alone, if a party can demonstrate the year and that child had to have lived with of the tax deductibility of maintenance, where individuals going through a divorce. maintenance may result in more funds being existing divorce-related agreements to take other substantial changes in circumstances, you for at least one-half of the year. However, historically a high-income wage earner would available to both parties. a close look at theirs to determine whether there may be a basis to modify existing as was the case previously, you can only claim be able to shift income tax at the highest IBG: Many divorcing parties have interests changes in the tax laws impact the intent of agreements to a client’s benefi t. the child tax credit if you are entitled to claim bracket to the divorcing spouse in the lower in closely held businesses that need to be JQ: Finalizing prior to December 31 means their agreement. For example, a prenuptial the child as a dependent. So, for income tax tax bracket, thus minimizing the overall tax valued for purposes of divorce. The lowering parties can’t take advantage of the often-used agreement may include a maintenance formula JQ: Maintenance, as well as unallocated purposes, it is important to negotiate the paid by the family. With limitations on the of the federal corporate tax rates could result strategy of delaying until the new year to based on the presumption that maintenance support, are concepts that should be allocation of the dependency exemptions or deductibility of property taxes, higher-net- in higher business valuations for closely held take advantage of joint tax fi ling. However, if would be taxable in the event of divorce. Since contemplated immediately before the benefi t who is entitled to claim any of the children as worth individuals are likely to pay more tax businesses. Having a larger percentage of a they do delay until 2019, those families with maintenance will no longer be deductible as is lost at the end of this year. We also advise dependents. and as a result, will have less net income. divorcing couple’s net worth as illiquid can a high wage earner shifting maintenance to of 2019, the prenuptial agreement may be clients to immediately consult with trusted That potentially will reduce their net income make negotiation of property settlement a divorcing spouse in a lower tax bracket will impacted. Further, many divorce judgments advisors such as wealth advisors, CPAs and What aspects of the new tax reform especially for purposes of calculating maintenance, agreements even more challenging. lose the ability to minimize the overall tax negotiated before the tax law changes others to develop a strategy designed to affect high-net-worth individuals going thus resulting in lower maintenance awards. being paid through deductible maintenance. included the ability to claim exemptions which maximize the benefi ts of the new tax law through a divorce? Obviously, this can’t be viewed in a vacuum as How do you and your colleagues work with It’s imperative for divorcing individuals to have been eliminated or devalued. While and/or avoid any detriments of the new tax there are many other tax provisions in play, your divorce clients’ other advisors? consult a divorce attorney and a CPA to courts won’t modify any prior judgments or law that may have an impact on the overall JQ: The most signifi cant aspect affecting including those for divorcing parties who own analyze which scenario is the most benefi cial. agreements based on the change in the tax law fi nancial effect of the divorce. high-net-worth individuals is the elimination businesses. Additionally, the individual tax IBG: In light of recent tax law and statutory changes, it’s imperative for us to work CM: Alimony or maintenance will still be collaboratively with clients’ accountants deductible for the payor and the recipient and fi nancial professionals to ensure that must include the alimony or maintenance everyone’s on the same page regarding short- received in their taxable income as long and long-term fi nancial goals. Considerations as they continue to receive it. Even if the such as support obligations, which assets maintenance terms in an agreement entered are being received by each party, and tax on or before year-end are later modifi ed, implications of divorce-related decisions the alimony or maintenance paid remains should all be discussed. Other topics tax-deductible by the payor and included in include calculation of income—taking into income by the payee. In those cases, parties consideration business deductions—capital must still be mindful of the alimony recapture gains taxes, real estate tax deductions, child rules associated with deductible maintenance care credits, value of investments, timing of awards; individuals should consult an attorney divorce, future earning capacity, business for more details. valuation and retirement. Direction, In light of the new tax reform, what advice to you JQ: We have clients’ fi nancial advisors and CPAs have for individuals contemplating a divorce? when you run hypothetical projections and pro forma tax returns to understand the different scenarios CM: Normally, I’d never suggest rushing to a to ascertain the most tax advantageous and family law specialist for divorce consulting. But need it most. cost-effective resolution. We also work with in 2018, if you’re contemplating a divorce, run— our clients’ advisors to ascertain basis points on do not walk—to consult with a knowledgeable assets such as stock portfolios and real estate and tax-savvy family law attorney to explore to determine which assets to shift to the other all options, planning opportunities and party in a way that’s most advantageous and alternative strategies to choose which options benefi cial to our clients. are best for you and your family. The expiring deduction for alimony could have a signifi cant Clients in Lake and Cook Counties look to the law firm of CM: We may work with the client’s fi nancial fi nancial impact on many families. Clearly, Katz, Goldstein & Warren for excellence, integrity, and advisor to establish the individual’s marital divorce is not a one-size-fi ts-all model. It is quality results in the area of family law. lifestyle, household and personal needs as important to understand what’s best and most well as the amount and confi guration of the advantageous to you and your family, before Our team, which is comprised of tough and compassionate property settlement needed to support their you begin the divorce process, settlement divorce attorneys, understands the impact family related post-divorce lifestyle. We may also work with a negotiations, mediation or collaborative matters have upon clients and their children. We are strong vocational expert to help the client determine divorce meetings. 2345 Waukegan Road, Suite 150 advocates in protecting our clients’ interests. Through our Bannockburn, Illinois 60015 how to become self-supporting. Often times collective efforts, we offer thoughtful and creative solutions 847.317.9500 we engage the client’s fi nancial advisor or IBG: Individuals contemplating a divorce to meet the needs of our clients. www.kgwlaw.com planner to determine how a client can structure should collaborate with their attorney, a property settlement or buyout of a spouse fi nancial advisors and tax accountant to to achieve both parties’ goals and objectives. ensure that the maximum tax benefi t is