Archive for September, 2016

Financial Moves When Facing Divorce

Heading to divorce is either like staring at an oncoming train or getting hit broadside in an intersection. Either way, it is devastating. But you can choose how you move forward.

For some, divorce includes a desire to get even or to embarrass the soon-to-be ex-spouse. We caution couples not to go that route. All it typically does is lead to self-inflicted damage, emotional harm to both sides (including yourself) and financial ruin for everyone – especially the children.

Divorce is the time when you need to put on a business hat and get to work on what is ahead.

The legal part of divorce is three things. Divide the assets, determine support arrangements and focus on how to raise the children (if there are children involved). Everything else is on the emotional level – which is more real than the money at times. But the emotional side is not of interest to the courts.

So what can you do?

1. Get Smart About Your Financial World.

Gather information about everything your own. Start with the tax returns and what accounts are listed in them. Look at assets on the return like stocks (if there are dividends, there are stocks). Look at interest (if there is interest there are accounts somewhere). Review the Schedule E if there is one (that tells you where the real estate is, other than your residence). Look at the Schedule A (that tells you about the home through the property taxes and mortgage interest; DMV fees paid for cars tells you how many cars and gives an idea of value; what charities that the family is involved with; expenses for things like work-related expenses and tax preparation). Look at the front of the return and see if money is going into an IRA or pension. Look deeper into the document to see is there are non-deductible contributions to Roth IRAs or non-deductible contributions into any IRA.

With that as a base start gathering account statements from brokers, pension and retirement accounts, banks and any other place that may hold money either of your names.

If there is a business, get ahold of that tax return as well. It provides a significant amount of information about the operations, the assets and debts as well as personal expenses that may have gone through the company books – most businesses do that to some extent.

Gather all this and, if it is confusing, get a financial pro to sit down and go through it with you. Become an expert in your financial world.

2. Check Credit

Check with the credit agencies to see about your credit score and credit history. That will show you what is owed, to whom it is due and who is responsible. Then open your accounts so that you have your credit file, and you can isolate your future debts from those of your spouse.

3. Get Organized

Once you have all this information, put it together in a clean file system. Then determine if there are items that need to be evaluated. Going on Zillow for property values may be ok if you both agree. Otherwise, an appraisal for complex and high-value assets, like the house, should be completed.

4. Know The Tax Difference Between Assets

Once you have everything pulled together, they should be separated by their taxable nature. For example, pension plans tend to be pre-tax which means that for you to get those funds, there is going to be a tax consequence to pay. That amount of tax may be different for you versus your spouse. Items, like an after-tax savings account, are of value because they do not have a tax consequence to them. So you need to recognize that a $200,000 IRA is not the same as a $200,000 saving account.

5. Make-Up Your Personal Budget

Do not consider this as a current household budget. Your budget is for your future lifestyle. It is important since this document is what will be used to determine temporary support amounts as well as the final support figures. Both sides need to do this.

Don’t just think that your new life will be half of what it was. You will have your utilities, gas, the internet, rent or mortgage as well as possibly added costs of child care and travel. It is more than you think.

Rarely will either side be able to keep up the standard of living that they were at before the divorce.

6. Stand Still And Take A Breath

Stopping to catch your breath in the middle of a storm is hard. But that is wisdom from seeing many people move through this process. Too often someone will make an irrational choice that leads to significant problems down the road.

Do not make major purchases before you are ready to commit to the obligation. Do not take money from a pension before you understand the long-term consequences. These are just a couple of warnings that we see couples ignoring when they are in the middle of their divorce.

Divorce does take a toll on you. We get that. There is no denying the pain people go through. But compounding the problem with bad choices along the way will only make the other side of divorce that much harder to reach.

 

Armand and Robbin D’Alo