Q Dear Rick:
After over 20 years of marriage, three years ago my husband and I got divorced. The divorce was pretty amicable and we used the same attorney and everything was pretty much divided equally. In the divorce he got our house and he had three years to pay me my share of the equity. At the time of the divorce the house was worth about $350,000 and we had $150,000 mortgage. My ex’s game plan was to refinance the house and to use the proceeds to pay me my $100,000 equity. The problem is he has been having difficulty in refinancing and has been rejected by a number of different companies. He has given me two options and I hope you can help me select the best one. The first, he has three traditional IRAs that basically equal my share of the equity. He’s offered to turn those accounts over to me. Option two, he’s offered to turn over to me shares of Apple stock which he bought in the mid-90s. The number of shares of Apple stock that he’s willing to give me equals the equity in the home. My question to you, what option do you think I should select?
A Dear Kate:
My advice is to not accept either option as I do not believe they are equivalent to what you are giving up. My reasoning is very simple and that is taxes. When your ex assigns the IRAs to you, you assume your husband’s basis in the IRAs. Since these are traditional IRAs, it means his basis is zero. Therefore, when you withdraw the money from the IRA, you’re going to have to pay ordinary income taxes on that money. When you factor in state and federal taxes, you can lose a third of the money. Therefore, if the IRAs are worth $100,000 today they really are only worth about two-thirds of that ($66,000), because you would lose a third of the money in taxes.
Option two also has tax issues. When your ex turns that stock over to you, once again, you assume his basis. His basis is what he paid for the Apple stock back in the 90s. Therefore, once again, once you go to sell the stock you’re going to be hit with substantial taxes. Although you would pay capital gain taxes on the gain, you would still lose a substantial amount of money in taxes. Therefore, I don’t like that option either.
My recommendation is that you tell your ex that whatever he offers to turn over to you, the net after taxes has to be the $100,000, not the gross amount. After all, the money you would have received from the house would have been tax free; why should you be burdened with the additional tax liability. I’m not sure that he took taxes into consideration in offering you the two options; however, it is a major issue.
There’s also a third option that you haven’t mentioned where you net the $100,000 after taxes, you can potentially force him to sell the home. I recognize that this may cause him some difficulties; however, it is not your fault that he cannot refinance the home. If he cannot come up with an option that nets you the $100,000, why should you suffer the loss as opposed to forcing the sale of the home?
If you decide to pursue the route of forcing him to sell the home, my recommendation is that you seek the advice of an attorney. Not necessarily the attorney that you used in your divorce, as I believe he may have a conflict of interest , but rather, an attorney, who works for you and only you. The attorney who handled your divorce could have mixed loyalties between you and your ex.
One question I’m frequently asked is whether or not it is okay to use the same attorney. My general answer is no. Divorces are adversarial proceedings and as a result, both parties should have their own attorney. Of course, they’re situations where one attorney may be able to handle the situation but they are rare. I believe in adversarial proceedings you need your own attorney who represents you and only you.