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In: Accounting

Alicia and Rafel are in the process of negotiating a divorce agreement to be finalized in...

Alicia and Rafel are in the process of negotiating a divorce agreement to be finalized in 2018. They both worked during the marriage and contributed an equal amount to the marital assets. They own a home with a fair market value of $400,000 (cost of $300,000) that is subject to a mortgage for $250,000. They have lived in the home for 12 years. They also have investment assets with a cost of $160,000 and a fair market value of $410,000. Thus, the net worth of the couple is $560,000 ($400,000 − $250,000 + $410,000). The holding period for the investments is longer than one year. Alicia would like to continue to live in the house. Therefore, she has proposed that she receive the residence subject to the mortgage, a net value of $150,000. In addition, she would receive $17,600 each year for the next 10 years, which has a present value (at 6% interest) of $130,000. Rafel would receive the investment assets. If Rafel accepts this plan, he must sell one-half of the investments so that he can purchase a home. Assume that you are counseling Alicia. explain to Aliciawhether the proposed agreement would be "fair" on an after-tax basis.

Solutions

Expert Solution

ANSWER:

Here we have to expain the Alica whether the proposal agreement would be fair or not,

Case-1:

From the above problem,

The Net worth of Couple-$560000

Where,

$560000=$400000-$250000+$410000 .

Now,

Tax amount= Net worth / 2= 560000 / 2= $280000

So Alice received tha tax amount is $280000 that is equal to Rafel Tax amount

Reason:

According to the arrangement Rafel will get resources with a honest estimation of $410000 . be that as it may, Rafel would likewise cause a $130000 risk to Alicia.

Case-2:

Rafel will also equal tax amount as Alicia tax amount i.e $280000

Under the plan,Rafel will pay to Alicia to the amount of $17600 as part of propety settlement so that is not deductible by Rafel.

Reason:

Under the arrangement, rafel pays alicia $17600 every year , the installments will be incorporated into alicia's gross wage inless they woudl stop upto Alicia's dadth. additionally as the enthusiasm on the obligiations are not incurrred in an exchange or business or an exchange went into revenue driven it won't be deductible.

So as per the requirements the proposal agreement is fair to Alicia


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