a licensed realtor, he also earns $15,000 a year in commissions from working with a broker.
“My goal when I was married was to buy five or six properties and liquidate them to pay for our kids’ college education. I see real estate as a passive investment with long-term gain,” he says. “I want that to be a big part of my portfolio, much like my dad. That’s how he did it -he made money by renting out properties.”
In a divorce, the basic divvying up of property is equitable distribution (or community property under some states). Assets, earnings, and debts are split fairly, although that doesn’t necessarily mean that they are split evenly. The spouse with the higher earnings can get two-thirds of the assets, but also acquire more of the debt. One of Vaughn’s biggest mistakes was not notifying creditors and the three major credit bureaus that he was in the middle of a pending divorce. Another mistake was not removing his former spouse as his beneficiary, says Michael M. Smith, a certified financial planner based in Phoenix.
BLACK ENTERPRISE asked Smith to consult with Vaughn and help him map out a new game plan for financial life after divorce. The following are his recommendations. In addition, an estate planning attorney, Lori Douglass of Kurzman, Eisenberg, Corbin, Lever and Goodman L.L.P., weighed in on some of the legal issues that Vaughn is facing:
Lease with the option to buy a house. Vaughn’s apartment lease is up in October. He should look for a home or town house that he can lease, for about the same amount he is renting, with the option to buy. The advantage is that you don’t have to pay the 20% down payment right away. In fact, you can negotiate with the owner that a portion of your lease payment be accumulated and applied toward the down payment for future purchase of the home.
Create a single-member limited liability company. Vaughn currently owns a home, which is listed on his tax return, under a schedule E, as rental income. He should form an L.L.C and transfer the home to the newly formed L.L.C. Have the L.L.C. taxed as a sole proprietorship. When he purchases the next property (or properties), he should put it into the L.L.C. This way, the passive income or losses he would have had become ordinary income or losses. Also, there are special ownership allocation rules with an L.L.C. that would allow him to apply income to the children, but all the tax appreciation would go to the father. This way, the children would have ownership and interest in the property, which could be used to fund their college education.
Buy more life insurance coverage and establish an irrevocable life insurance trust. Vaughn needs at least $750,000 in term life insurance. He should split the beneficiary arrangement between the three children. Since he is divorced with children, he needs to set up a life insurance trust. By doing so, he can designate a guardian to oversee