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Alimony and the Need for Retirement Income Stream
Jan L. Warner & Jan Collins

Question: My wife (age 57) and I (59) are in the process of negotiating our divorce settlement. Our two children have been educated and are self-sufficient. She is to receive our home (which is paid for), the contents, and 40 percent of the value of my 401k which is roughly $150,000. She will keep her 401k and pension. Although we are both employed, she earns about $10,000 per year less than she needs to support herself; and when she retires in about five years -- after considering her retirement, withdrawals from what had been my 401k and her 401k, and Social Security, she will still need about $10,000 per year more than she receives to support herself.

Since I plan on retiring in four years, I do not want to obligate myself to paying her alimony that will reduce my income. In addition to the assets we acquired during our marriage, I own nearly $500,000 worth of stock that was given to me by my parents 30 years ago. My parents paid about $10,000 for this stock, which pays me an average of $7,500 each year in dividends. It is my intention to leave this stock to our children, and I donít want to sell it. Our lawyers canít figure out how to get my wife the money she needs without cutting into my retirement income. Can you think of any other ways in which to resolve our dilemma?

Answer: One of the risks of paying traditional alimony is that, depending on the wording of your agreement, your obligation could be subject to being increased if your wifeís conditions change. Although we understand your desire to pass the stock your parents gave you to your children when you die, we donít think this is a good economic decision. In a good year, you receive only $7,500 from a half million-dollar asset. By using part of this low basis stock in a creative fashion, there is a way in which to deliver income to your wife without reducing your retirement income and without subjecting yourself to the risks of continuing alimony. We recommend that you and your advisors consider using a charitable remainder annuity trust -- sometimes called an ďincome maximization trust.Ē

If you decided to sell any of your stock, you will pay a federal capital gains tax which is calculated by multiplying the difference between the sales price ($500,000) and your cost basis ($10,000) by 20 percent or $98,000. In addition, if your state of residence has a capital gains tax, you can bank on paying an additional $20,000.

On the other hand, based on our very rough calculations, if you contribute $150,000 of this stock into a charitable remainder annuity trust (CRAT) and make your wife the beneficiary before you divorce, she will be able to draw $10,000 per year from the trust for the rest of her life, you will receive a charitable deduction of more than $34,000 which you will be able to use for up to the next five years to offset your income taxes, and there will be no capital gains taxes paid by you, Since the charitable remainder trust is tax exempt, it pays no income taxes, but your wife will be taxed on the income distributed to her as the beneficiary. At your wifeís death, the funds remaining in the trust will pass to one or more charitable organizations that you have chosen.

You might choose to use a similar trust when you retire in order to generate additional income for yourself and to put this asset to work. Then, instead of transferring the stock to your children at your death, you could use the additional income to purchase an equal amount of life insurance that could be delivered to your children free of income tax.

Divorce settlements often require innovative techniques often used in estate planning, such as the charitable remainder trust, in order to help resolve difficult economic situations.

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