Get your financial divorce ducks in a row TODAY
Once the decision to divorce has been finalized, most people pass through the stages of grief associated with the loss of a loved one. While no two people experience the same journey, we all experience the stages, with some people skipping a stage while others repeat some of the stages. Those stages are Denial, Anger and Resentment, Bargaining, Depression and Acceptance. You will likely experience most or all of these stages. Google the stages of grief. Understand them. Anticipate them. Make them yours, and then let them go.
Push through the pain to understand your financial condition. It is important for you to understand what that condition is, so you can be a helpful part of your legal team in looking after your best interests. Even if you are a team of one. No one knows better than you what is best for you, and to be a emotional wreck curled up in a fetal position will not help your future. Be a ninja. A warrior. Take no prisoners. Take no crap. Own your future. And, oh yes…do not overlook the need to update your will before the ink dries on the divorce decree.
Like the coach on the sidelines, you are ultimately the one person responsible for guiding your team toward its goals. Your legal or accounting teams are your quarterbacks on the field, where they execute the plays and physically move the team. You call the shots, however. You send in the plays. You direct the Big Picture. Be involved and stay involved.
Make certain you don’t put yourself into a position where you accept an unfair divorce settlement knowingly. Most partners who just want to walk away and avoid a fight usually do so at their own future peril. As tough as this emotional challenge is, see it through. Man up, or Wo(man) up. Be the Ninja.
Take a financial snapshot of yourself and your situation soon after separating from your spouse. Inventory everything you own. If possible, make a video of as many possessions as you can.
Trying to undo mistakes after the fact, especially after considerable time has passed, can be very difficult. If you give short shrift to any of the following, you run the risk of getting less than you deserve.
Create an interim budget based on what expenses you personally will need to maintain your life. Call this your separation budget. This budget will serve you (and any attorney) well when you begin discussing transferring assets with child support, alimony or any transfer of possessions.
Determine the fixed expenses you will incur over the short term, which will be comprised of housing, utilities, retirement, insurance payments or auto expenses. Make lists of expenses you will retain, expenses your ex will retain, and expenses that may need to be negotiated. Are there any assets that are at risk if the payments do not get paid? If so, identify them along with how long the creditor will remain open to payment. You may wish to hire a Certified Divorce Financial Analysts who can thoroughly sort out your marital accumulations.
Understand the degree of liquidity of your assets, and how they relate to the current economic conditions in society. Some assets like real estate or automobile collections can be highly illiquid if market conditions are bad, or if you and your spouse disagree on a price for those assets.
Know the liquidity difference between retirement accounts versus brokerage accounts. Retirement accounts are somewhat illiquid, in that assets removed from them result in tax consequences, and if the withdrawal occurs before age 59.5, an IRS early withdrawal penalty applies.
Get a complete picture on how much cash is on hand. Make sure you include any accounts used for specific purposes (vacation, Christmas, etc).
Personal collections, which can include autos, guns and the like, can be somewhat illiquid, with valuations speculative.
When fashioning a wish list of what assets you want from the marriage, don’t take on too many illiquid assets unless you are certain you can manage without being forced to sell those illiquid assets. If you get the house and he gets the cash, you could be at a disadvantage if you need to raise some cash in the future. Housing prices are not likely to improve much in coming years and could go significantly lower, so be careful getting the house that is upside down.
Assemble the marital assets according to cash flow from each. Here again, you may not want to assume (bargain for) assets that don’t produce cash flow. It depends on your cash flow needs.
If a particular asset should be sold, is the market good or not so good? In light of depressed current economic conditions, one asset may be preferable to sell over another. Or, perhaps you can agree on what to sell it for and when in the future.
Leave no stone unturned. Spouses have been known to conceal assets prior to or right after a marital separation. You (or your team) will need to be sleuths to be certain all assets are included. Some are hesitant to disclose a piece of art or jewelry, but if you’re forced to admit it exists and you lied to your attorney, it makes for messy relations.
On occasion a forensic accountant is hired to locate missing or hidden assets, and the costs are borne by the overall aggregate in most cases.
Be certain you have copies of tax returns. They provide the basis to begin the discovery process (most people are afraid to lie to the IRS). You or your team will want to go back 5-7 on tax returns, looking for evidence of trusts, partnerships, private placements, real estate holdings, and the like.
For couples involved in a business, tax returns can expose a spouse trying to cook the books in his or her own best interest. A common ploy is to put a friend on the payroll and, for a fee, return the salary back to your spouse.
Get copies of checking and savings accounts, going back several years. Reviewing statements can reveal the transfer of money or the payment for a now hidden asset. Income and/or capital gains will also appear on one’s past tax filings.
Brokerage accounts offer the same paper trail. Obtain copies of these statements going back at least 5 years.
Determine if there was ever an expense account connected with employment. Examine what was paid back and how it was categorized.
Companies often grant stock options to employees. These stock options are usually listed with benefits statements from the employer. Make sure your side demands to know about any stock options and the potential value of them in the future.
Are there any children’s accounts? UGMA, UTMA, 529 plans (College Savings Accounts) or other accounts? Stock dividend reinvestment plans (DRIPS)? It’s wise to get copies of these account statements too, because assets can be moved around, or accounts can be liquidated and residual value returned to the parent. These accounts can be great places to park money until after the divorce. Who are the custodians? If it is not you, that can be a problem.
If there were previous marriages between you two, and assets were owned before your marriage, they will likely be treated differently than marital assets. Your Financial Planner or Forensic Accountant can explain how each are treated.
Home and vehicle insurance should be reviewed, and consider contacting your agent to request notice of any changes.
Life insurance annuities or other insurance contracts, including business-related 2nd-to-Die insurance policies or Buy-Sell agreements, should be examined. If you and/or your spouse have owned a business, be sure to explore all insurance policies. If your spouse has a partner, depose him. There’s gold in them there hills.
Retrieve copies of your credit report from each of the three national credit-reporting agencies. Federal law allows us all to receive one free credit file per reporting agency per year. Determine your FICO score(s) and scan each file for any unrecognizable account listed on each.
If it makes sense to do, consider placing locks or holds on credit files to prevent further credit being applied for. Speaking with a divorce lawyer on this one would make sense.
Close all joint accounts. Doing so early on in the separation and divorce process can get tricky. Closing them in most cases can be done just by yourself. If you close a joint bank account and remove cash, consider giving your spouse half, or less than half if you intend to reserve some cash for joint bills. As long as you retain, and spend the money fairly, you likely will not get into hot water with the court. Some might be tempted to leave more than half in the account, being considerate that your spouse will use some of it for your half of expenses. Don’t assume this will happen. Many spouses will take the money, consider it all theirs, and then demand your half.
Your marital status at year’s end will determine how you file next year’s taxes. Whether you file married filing jointly or married filing separately can be determined by you and your spouse, or your attorneys, but in no case should be left out of your final written agreement.
Have a contingency in the final decree that should there be any penalties, interest or further taxes owed by either, that it be spelled out who pay, when they pay, and how they pay.
A Qualified Domestic Relations Order (QDRO) is a court order mandating that certain assets in a retirement account be transferred from one spouse’s account to the other. You need to fully understand the many tax ramifications and penalties associated with not using a QDRO or distributing from a retirement account. Use a third-party QDRO evaluation.
IRA Accounts. Regular IRAs, Roth, rollovers etc. Know how these accounts are treated tax-wise. Removing assets often involves taxes and penalties before age 59.5 and 70.5. 401(k)s and 403(b)s are most often the accounts that receive QDRO’s.
If there are significant assets, consider an accountant to determine what tax obligations would be incurred selling any of your assets.
Knowing one asset incurs a much larger capital gain tax if sold rather than another asset may cause a decision to choose one asset over the other. If either of you were married previously, and one of you moved into your spouses home, and that home is sold, a capital gain calculation will be different than if you two bought the home together. Speak with your team to determine which tax filing status is more advantageous to you, and negotiate toward that end. Insert language that spells out exactly how an asset is to be sold, how the taxes are claimed or distributed, and how any taxes must be paid.
If you sold a home prior to 1997 and rolled that capital gain over to an existing home, and then sold that home, the old rules apply to determine the cost basis for the current capital gain amount. This would increase your gain and possibly influence when and how much you might sell the property.
Begin by establishing your own credit file. Federal Law requires that each credit customer be allowed one free credit report from each of the three national credit-reporting agencies. You’ll want to request the file individually, but the reports will likely result in joint information. Requesting the report individually actually establishes an individual file. You are allowed to place a statement on your credit file. Consider a notice that you were divorced from so-and-so on a particular date.
If you have an inadequate amount of individual credit history, you’ll want to establish several accounts as soon as possible. Keep in mind that you only want credit cards that you’ll actually use, so don’t go crazy trying to accumulate credit cards.
Retrieve the budget you created during the early part of your divorce, and revise it based on your new circumstances. Make sure fixed costs appear there (housing, utilities, car payments, contractual payments, etc.) and include any new spending pertaining to your single needs.
Be flexible. Your new life, especially if it includes raising children, will offer more surprises than expectations. Remember that while you personally endured the divorce, children suffered through an event too.
Attend to beneficiary concerns. You must name them as soon as possible, because if you don’t, and you die, your state will impose a will on your heirs (intestate) that can result in your wishes not going fulfilled. Wills, Trusts, retirement accounts, bank accounts and insurance contracts will need to be revised. Don’t put it off.
If you haven’t already, create a personal blueprint that lays out goals, wishes and aspirations you’ve developed over the years. Be sure to include the dreams and desires you may have developed in a marriage that didn’t allow them being fulfilled. And for goodness sake, relax. You now are in full control of your future.
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