Divorce Financial Planning
Preparing for a divorce can be a confusing and often frightening experience. It’s like preparing to take a trip to a foreign country where the customs and language are completely unknown to you. As with any trip, it is essential to know where you want to end up before you plan out your itinerary. There are many different ways to get from one place to another, but there are easy ways and hard ways.
In a traditional divorce, couples rarely end up with the kind of representation they actually want and need. Collaborative divorce, like mediation, puts the emphasis on reaching a settlement without acrimonious and costly court battles. In a collaborative process, both spouses coordinate the search for attorneys who are trained in settling cases through collaborative strategies.
The collaborative divorce frequently involves other professionals who work with the attorneys in the collaborative process and who provide support or expert analysis on financial issues or what’s best for the children. By working in collaboration with attorneys we can develop creative solutions, and provide a clear picture of how settlements can work for an entire family. This approach can provide parties with complementary resources and dispute resolution methods that are simply unavailable in court. In the end, both parties get what they want.
It is important that both parties in a divorce understand the long-term effect of financial decisions made today. What appears to be a good settlement now may not be beneficial in the long-term.
I analyze the financial issues of a divorce and provide clients and their lawyers with data to strengthen their case. I can help clients avoid the common financial pitfalls of divorce by evaluating the tax implications of dividing property and the financial impact of various settlement options.
The areas of analysis that I can assist include the following:
- Who should keep the house?
- How much will it cost to live post divorce?
- How much and how long would alimony be needed?
- How to value retirement accounts in qualified plans and how should the amount be divided?
- What are the short term and long term financial impact of different settlement scenarios?
Financial considerations for your divorce
Must have a game plan - know what you want and why.
Before filing for divorce, think about your goals for the future, both personally and financially. This will not only give you something to work toward, but it will also help to determine the best way to proceed. It is important to consider the alternatives to court, such as mediation or collaborative divorce. Make sure you have reasonable expectations on how the divorce proceedings will go. Being unreasonable will only draw out the process and costing you a lot of time and money. Don’t fight over the sentimental stuff - jewelry, china and stuff you got on the vacation. You can easily end up spending more on attorney fees than the item is worth.
Get educated - do your research.
Preparation is the key to success. In order to be mentally prepared, you must be familiar with the state laws. Look into the average costs associated with divorce. How much does an attorney charge? Most attorneys charge by the hour as well as a retainer. Knowing these facts up front can help to prepare you for the road ahead.
Determine what you own and what you owe. Start collecting bank statements, mortgage statements, insurance information, vehicle registration and the deed to the house. Make copies of these documents and keep them in a safe place. You may also want to consider getting a post office box where you can send any important, private and legal mail. Take inventory of your valuables and take pictures.
Know what your marital assets are.
During the course of your marriage, you have accumulated both assets and liabilities. Basically, everything earned or purchased during your marriage are community assets and must be divided during a divorce. Gift and Inheritance are the exceptions. If you received gift or inheritance and kept the property separate without comingling with your marital assets, then it will not be subject to division during a divorce.
Avoid fixating on a specific asset.
Can you afford to keep the house? Make an “after divorce” budget and carefully list all your expenses. Does it make financial sense to keep the house if it means refinancing and assuming more mortgage debt to buy out the other party? A house may also come with high repair and maintenance bills that can undermine your long term financial health. Be realistic, if it is unrealistic to keep the house, consider hiring a real estate agent and getting your home appraised.
Protect your credit rating.
- Get a copy of your credit report. Your credit report will help you discover any outstanding debts that need to be addressed as part of the divorce process
- Close all account that you do not use
- Apply for a credit card in your name only if you don’t already have one
- Close all joint accounts and credit cards. If you are in the position to pay off the balances owed with marital assets, do so. If you are unable to do that, contact your creditors and let them know you are going through a divorce. You will need to be notified if the card was reactivated, any change of address or any unusual purchase.
Understanding how different assets are taxed upon withdrawal can make a big difference on your tax bills.
You need to know that not all assets are equally taxed. Most retirement assets are tax deferred so it will be taxed upon withdrawal. A non retirement account comprised of stocks, bonds will be taxed on the appreciation only.
Selling the house while still married
or include the house in both names will entitle you to $500,000 gain exclusion instead of $250,000 exclusion as a single individual.
A Qualified Domestic Relations Order (QDRO)
is an order from the court to the retirement plan administrator spelling out how the plan benefits are to be assigned to each party in a divorce. QDRO should be completed before divorce is finalized. IRAs don’t require QDROs.
- If you have children, what is your ideal custody scenario? 50/50? Keep track of how much time you spend with your children and how much time your spouse spends with them. During the divorce negotiations, you will have to make decisions as to where the children will live as well as who makes decisions for the children.
- Update wills and trusts and beneficiary designations on the retirement plans and insurance policies so the ex-spouse does not end up inheriting an unintended windfall.
- Your attorneys are there to provide you with legal advice and not marriage advice. If you treat them as your therapist, it will become very costly. Additionally, it will be important for you to hire a financial professional for your divorce team. A Certified Divorce Financial Analyst has been trained specifically to handle the finances in divorce cases. Having a CDFA professional on your team can ensure you understand the financial implications of any proposed settlement.
- In order to make sure spousal support and child support do not get disrupted upon the death or disability of the payer, consider taking out a life insurance policy and disability income policy on the paying spouse.
- It is important to stay both physically and mentally healthy during this stressful time. It will be important for you to decompress by making an appointment for a message, go for a hike, eat healthy food and get enough sleep. By removing as much stress as possible, you can think more clearly during divorce negotiations.
The Collaborative Way to Divorce by: Stuart G. Webb and Ronald Ousky
The Divorce Source Book by: Dawn Bradley Berg JD
How to File for Divorce (without Children) in California by: John Talamo and Edward Haman
Divorce without Court, A Guide to Mediation & Collaborative Divorce by: Katherine E. Stoner
Divorce & Money by: Violet Woodhouse
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