What is a Mystery Number? Often when spouses resolve their divorce issues on their own, they lump all the financial issues into one Mystery Number. For example, they may estimate values for real estate, retirement benefits, consumer debt, spousal support, child support, businesses, investments, etc., divide the assets and debts, and add up the offsetting amounts, resulting in one spouse paying the other X dollars cash or Y dollars per month. It sounds nice to keep things simple and resolve the matter with one payment or one monthly payment, but often this Mystery Number approach is too simple.
Consider the following:
How does the IRS treat each component of the Mystery Number from a tax perspective? For example, spousal support is usually taxable to the recipient and deductible for the payer, but child support is not. Another example is that, in many cases, paying interest on a primary residence is deductible, but paying interest on consumer debt is not. A third example is that one spouse buying-out the other’s interest in an asset is not usually a taxable event; whereas, selling an asset and dividing the proceeds may result in capital gains tax. If you have a Mystery Number without identifiable components, how will you do your taxes? How will the IRS treat your Mystery Number? (Please consult your tax professional regarding all tax issues).
If circumstances change, how should the Mystery Number be modified? Child support and spousal support are usually subject to change depending on the parties’ incomes and other factors. For example, if one party gets a job, loses a job, gets a raise or promotion, etc., support may be modifiable accordingly. However, a change in income should not have any effect on the amount of a family home buy-out or other offsetting payment for division of assets or debts. Thus, the Mystery Number creates problems down the road when circumstances inevitably change.
If payments are not made, how can the Mystery Number be enforced? There are different enforcement rights and options depending on the nature of the obligation. For example, if one party fails to pay court-ordered child support, the other party has the right to have the Department of Child Support Services (“DCSS”) collect the unpaid child support, plus 10% interest, for him or her, free of charge; the DCSS may garnish bank accounts, intercept tax refunds, suspend licenses, and garnish lottery winnings to collect. However, the DCSS only helps collect support obligations, not other obligations that may be components of the Mystery Number, such as offsetting payment for division of assets or debts. Thus, the Mystery Number creates problems down the road if enforcement becomes an issue.
To avoid the Mystery Number mistake, please specify and detail all the components of a settlement. This lack of simplicity will pay off later when individual financial components may need to be identified for tax, modification, and enforcement purposes.
I represent Family Law litigants in Contra Costa & Solano Counties, so, if you know someone who has been trying to do his/her own divorce and is having problems, have him/her contact me to discuss representation or consultation.