Divorce is difficult. You are both figuring out what your new lives will be once the divorce agreement is signed. One of the hardest aspects to resolve during divorce is just how to face your new financial picture.
Facing Your New Financial Picture After Divorce
Mark Zandi, a chief economist at Moody’s Analytics, who has researched divorce and corresponding demographic trends has found, “Divorce generally results in a significant financial setback for all those involved.”
What used to feel like a joint effort between two people can turn into an all out war. Because of the potential to start World War III, there are things that you can do to prepare yourself for at least the financial aspect of the end of your marriage. Careful planning in advance can help you avoid getting to the battlegrounds unarmed.
Preparing Your Finances for Divorce
The first thing you want to do is create an inventory of all of your assets. This includes your debts too. You need to understand your families assets and liabilities. Have copies or at least access to tax returns, statements from all accounts, household bills and any other important records. Additionally, put together a list of valuable property that includes shared real estate, collectibles, furniture, and antiques or pieces of artwork.
You will want to put everything in writing, in a qualified domestic relations order, or QDRO. This is a legal document that spells out how you and your spouse have decided to divide certain retirement assets such as 401(k) accounts, says Page Harty, a financial planner at wealth-management firm SignatureFD.
It’s crucial that you do not overlook anything valuable. This could cost you significant amounts of money when it comes time to divide marital assets. There are often cases when a spouse will hide an asset from the other in an attempt to get more money or retain ownership of something they hold valuable. Sometimes this cannot be avoided, but sitting down, finding a clear head, and making a list of every asset you are aware of can help prevent this from happening to you (unless of course your spouse has never made you aware of the asset he or she is hiding).
Your shared debts are important too. Just because the marriage is ending, that does not mean that the debt will just go away. Try to pay these debts off before the divorce is finalized. If that’s not possible, make sure you have a clear agreement on which spouse will pay which debt.
The House
It’s tempting to want to keep the house. This is especially true for couples that have school-aged children. It can already feel as if you’re destroying their lives, let alone forcing them to move out of the house they used to feel so safe in. But remember that a house is a big expense and one that might not be worth fighting for. It’s often advised that splitting couples sell the house and split the proceeds. This way, both parties share in the risk and cost that is associated with a selling a home, says financial planner, Matt Mikula.
Mikula shares this example of a client of his. The mother of four had been awarded custody of the couple’s four children in addition to the family’s $1.5 million home and $500,000 in other assets. Not wanting to disrupt her children’s lifestyle, she wanted to keep the house.
But taxes, utilities, maintenance, and other expenses amounted to about $50,000 a year. The client had little other means, in terms of assets and income to cover those costs. As a result, according to Mikula, “she was going to run out of money.”
In the end, the client decided to sell the house. This was six years after the divorce, and due to economic reasons, she received 20% less than what it had been valued at during the time of the divorce.
Additional Expenses
Housing is a huge expense, but it’s not the only one. Other expenses will need to be taken care of, including how much your family spends on food, clothes, and other essentials, like health insurance, which according to financial planners, can be steep.
There are also the unknown expenses. Ms. Church, a financial adviser at Raymond James Financial shared this story. After her divorce, her daughter was invited to play on a volleyball team that traveled extensively. Suddenly she needed to come up with about $400 to $500 a month to cover the hotel rooms, meals and other expenses associated with her daughter playing on this team. Ms. Church says, “there will be unforeseen expenses.” Because of this, she advises her clients to be aggressive when they sit down and figure out their post-divorce cost of living. This is especially true if there are children involved. She also advises to include the impact of inflation.
Stop Seeking Revenge
It’s obvious from almost every tabloid story on divorce that divorce can get ugly when it comes to finances.
One key reminder to keep in mind: The less you spend, the more you keep.
What that translates to is: the more you argue about petty things, the more time you will spend, which automatically translates to the more money you will spend.
Regardless of how terrible the reason is for your divorce, try to remember that the more money that gets put towards divorce is less money that will be available for the settlement.
Financial planner Rose Swanger has this example to share: Her client was married for more than 20 years to a surgeon that earned a seven-figure income. He had cheated on her, and as a result, the two were divorcing. The woman was seeking $300,000 a year in alimony. According to Swanger, the amount she sought was unrealistic due to the fact that the couple owned two heavily mortgaged houses in affluent neighborhoods, and were also paying private-school tuition for their children.
The woman had already worked with two lawyers, running up tens of thousands of dollars in legal fees by the time she consulted Ms. Swanger, who ultimately dropped her as a client. As a result of the ever-increasing legal bills, the woman’s credit score suffered a large hit.
“I don’t blame her for trying to retaliate, but I warned her that a calm divorce is the best divorce,” Ms. Swanger says.
Every dollar spent during the divorce process is a dollar that cannot be split 50-50. It’s advised that you look at your divorce as a way to strike a favorable business deal rather than a chance to seek revenge.
Taxes and Divorce
Before the divorce paperwork is signed you need to make sure you review what your agreement will mean around tax time. There are different tax laws regarding alimony and child support, depending on what side of the agreement you are on. Be sure that your lawyer or financial adviser explains this before you finalize the financial aspects of your divorce. An agreement that looks equal on the surface might be completely unfair when it comes to tax time.
Financial planner Monica Garver, worked on a case where the husband proposed a division of assets that worked out to be roughly an even split at face value. He proposed keeping $2 million from after-tax investment account and giving his soon-to-be ex-wife $2 million in tax-deferred retirement accounts.
“Each and every dollar [in the retirement accounts] had to pass through the hands of the taxman before the spouse could put it in her pocket,” says Ms. Garver. She encouraged that her client seek more of the couple’s assets to compensate for the money lost to the taxman.
Don’t Forget!
Before you can consider yourself free from your spouse there are some other financial matters that might not seem obvious.
Be sure to update your will, says Ms. Vasileff, a financial planner. Not doing this can put your intended heirs in a difficult situation, she says. She advises you will also need to update a health-care proxy or a power of attorney that names your former spouse.
Lastly, transfer any titles for any real estate, cars, investment accounts or other assets that were held jointly into your name, says Harty of SignatureFD. She also advises a big thing: change the passwords on your accounts, too.
Also, if there was something agreed to in your divorce, like a requirement that your former spouse purchase a life-insurance policy and name you as the beneficiary, you should make sure that the premiums are being paid and that you remain the beneficiary, Ms. Harty says. One option to ensure this is being done: Ask for periodic confirmation from the insurance company.
A Family Law Attorney
There are a number of things that need to be considered during a divorce. You and your spouse will need to come to an agreement that settles every aspect of your marriage. Child support, spousal support, marital property division can all be agreed to through the process of mediation. Working with a skilled mediation attorney can help ensure you get a fair case. For advice on divorce, child custody determinations, setting up a co-parenting agreement, dividing marital property, and spousal support you need the expert law firm of Divorce Law LA. Schedule a consultation today.
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