There are lots of moving parts in a divorce, and this can feel overwhelming. You may need to discuss splitting a lot of the things that you accumulated through the marriage – these could be collectibles, investments, even the house. We’ve pulled together the top 6 items to be aware of while you’re working on your divorce settlement.
1. What an asset is worth on paper is not the same as what it is worth TO YOU
Taxes
Your investment account may show that you have $100,000, but, if you want to start liquidating that to live on, you’ll have to pay the taxman first. Any investment gains in your investment accounts are taxable – so understand the after-tax value of your account before you agree to a split.
Assets grow differently or may provide income
On the other hand, assets that are expected to grow in value or that provide income (rental property or bonds) may be worth more than their current value on paper. If you don’t need to live on these investments now (or your spouse will not), their growth will provide income in the future that should be taken into account.
You can’t spend your house
If you trade off the house (let’s say it’s worth $500,000) for the investment accounts (worth $500,000), you’ll find yourself in trouble if your support and income doesn’t cover all of your expenses (and, it rarely does).
2. The family home may not be your best investment.
It’s often a very emotional decision whether or not to keep the family home, especially when children are involved. But, if one thing is clear, it’s probably true that you are living on less now than you were pre-break-up and your home is an expensive investment. Even if the mortgage is paid off, owning a home comes with major cash expense (taxes, repairs, heat and electricity). As a child of divorce, I know how important it was to my mother to stay in the family home, but, staying put might not be the best financial decision. No matter how attached you are to your home, it’s critical to have a realistic sense of whether you can afford it.
3. The retirement plan.
Many times I meet couples whose biggest investments lie in their retirement plans. And, while retirement accounts are typically titled in one spouse’s name, they are generally still considered marital property if they were earned or acquired during the marriage. This puts all of that money on the table to be split. Determining the best way to divide this asset could be crucial for a spouse who has left the workforce for a while to care for the children. That partner will most likely never be able to build up their retirement plans in the way the working spouse did. It’s not unreasonable to ask to split these accounts un-evenly to give the non-working spouse a head-start.
But, if you need the retirement account because you need spending money now, beware when you start to trade off the value of the retirement plan for another asset – for example one partner gets the non-retirement investments (worth $600,000) as fair trade for the retirement plans (worth ~$600,000). In this case – liquidating retirement accounts early – it essential that both sides understand their true value, which is actually considerably less than the balance. Because the money’s taxed upon withdrawal, and may be penalized at an additional 10% for early withdrawal, the real value of the account is only about 65% – 75% of what the statement says.
4. Protect what you’ve worked so hard for by securing alimony, property settlement and child support payments with life insurance.
Premature death or disability of your ex can result in loss of maintenance, child support, college tuition or property settlement. Life and disability insurance can guarantee your payments. It’s not enough be the beneficiary on your former spouses’ life insurance plan — the beneficiary can be changed at any time. You want to own the policy outright.
But, also beware that sometimes payments stop for other reasons – your ex loses a job, starts a new family (and wants to put you in the rear view mirror)…This is a reason to investigate the option of getting payments up front, in a lump sum, even if you get less in total (this needs to be calculated and discussed with a professional).
5. In debt, what’s “yours” is “ours”
Any credit card debt you may have accumulated during the marriage and before the date of separation is “family debt.” That means that even if your partner ran up the credit cards taking out the new squeeze, you are both responsible to pay it off. The credit card company does not care if your divorce settlement stated that one of you pay all the card bills – they have you both down as liable parties. You cannot afford to have your credit affected negatively, now more than ever. So, make sure that all credit cards are paid off in full and closed and your credit is frozen before the divorce is finalized.
6. Re-Plan your estate
After going through a divorce settlement, the last thing you want is for it to be all undone because you didn’t re-write your will or update your beneficiaries. Beneficiary designations are legal designations that determine how your assets are conveyed to your heirs…if you forgot to take your ex off the IRA beneficiary form, it doesn’t matter if you’ve been divorced for 30 years, guess where the money goes.
Important documents to update include will, living will, trusts, and, HIPAA documents at your doctor’s office. Documents that have beneficiaries include retirement plans, insurance and annuities.
If you are in the midst of a divorce or contemplating divorce, get your ducks in a row and be better prepared for the best outcome for you – consult with a lawyer as well as a Certified Financial Planner to put yourself on solid ground.
Beth D’Andrea, CFP is the Founder of PlumTree Financial Planning, an independent, fee-only, financial planning company, where we believe your finances are personal. What defines you and your goals should drive your financial decisions – we at PlumTree call this “human-advisory.” Find more financial articles to help you reach your goals in our Knowledge Center at plumtreefinancialplanning.com.