Tackling the financial issues of divorce can be overwhelming, even for people who are comfortable with numbers. Sometimes, the biggest challenge is figuring out where to start.
Follow this 10-step guide to increase your chance of a win-win financial outcome and a strong post-divorce financial foundation.
Step 1: Optimize the separation date and timing of your divorce
The timing of your separation could significantly impact your finances. For example, if there is an impending sale of a business or vesting of interest in significant assets, your separation date could impact whether the funds are included in the marital estate.
Prior to legal separation, any assets and income acquired are considered marital property (except for certain gifts and inheritances). After separation, assets and income acquired are considered separate property.
For tax purposes, you are technically divorced for the entire calendar year in which your divorce finalizes. As a result, there may be short-term tax planning advantages to postponing your divorce. For example, if a divorce becomes final on December 31, 2022, parties can only choose the filing status of "Single" or "Head of Household" for the full year 2022.
In the interest of your net worth equation, you may wish to postpone a divorce in certain situations. For example, many couples decided to postpone their divorces during the housing meltdown because they were underwater on their mortgages.
What you should do
Discuss the timing of your divorce with your attorney, CPA, or certified divorce financial analyst (CDFA).
Step 2: Safeguard your assets and move toward financial independence
When divorce is on the table, sometimes people start making bad decisions. Cash, assets, and records that have been around for years may start magically "disappearing" due to property division fears. This behavior can sour a relationship even further and lead to a costly court battle. Often, such behavior stems from an imbalance of knowledge of and control over the couple's finances. If you are the spouse with less control and knowledge, consider taking some important steps toward financial independence. Note that these steps may be new and feel uncomfortable.
What you should do
- Be honest and transparent with your spouse about financial matters and processes.
- At the first sign of imminent divorce, gather all important financial records (personal and business). Copy and store them in a safe place.
- Take an inventory of all personal property of significant value (heirlooms, jewelry, antiques, firearms, etc.). This includes photos, if possible. Store them in a safe place.
- Make sure any gifts or inheritances received do not commingle with marital accounts or expenses. If they do, they will be characterized as marital property.
- If you have not been responsible for managing household finances, consider opening your own checking and savings account or credit card account. Do this to build better credit.
- Spend time acquainting yourself with your budget and monthly and annual expenses.
Step 3: Evaluate your need for a certified divorce financial analyst (CDFA)
Based on the financial complexity of your case, you may decide to hire a CDFA. A CDFA uses their expertise to guide clients through difficult financial decisions and create actionable settlement structures that make sense. Affordable and flexible options exist to bring in a CDFA who works alone or in tandem with other professionals such as an attorney, mediator, or legal document preparer. In addition, some CDFAs provide focused support through financial coaching or a la carte services.
What you should do
- Search the Institute of Divorce Financial Analysts website for a CDFA in your state or local region.
- Schedule a free consultation with one or more CDFAs to learn about your options.
- Check out this link that explains some of the top reasons to hire a CDFA.
Step 4: Determine your post-divorce financial priorities
Whether you work with a CDFA or not, take time to define your top financial priorities after divorce. Is your top priority to stay in the marital home? To ensure you have enough liquid assets to purchase a home or rent an apartment? Do some assets matter more to you than others, regardless of value? These considerations will become important as you work toward a fair and equitable post-divorce outcome. They will also give you a baseline to return to if things get more complicated. Tip: Regardless of what has happened, a fair and equitable settlement does not mean one spouse "deserves" more than the other. This is especially true in a no-fault community property state like California. Compromise may be required to make things work.
What you should do
- Use this tool to outline your priorities and your spouse's priorities. Note where they align and where they don't. Take time to reality-check your list.
- Rather than expecting to walk away with more than your fair share, spend time and effort on the things that are both reasonable AND a priority to you.
Step 5: Develop a complete inventory of separate and marital assets and debts, and gather all important documents
Your financial settlement or property division is only as good as the information you put into it. It is to a couple's benefit to make sure all assets and debts are properly classified as separate or marital. Disagreements about how things are classified should be addressed, as should the property division process.
What you should you do
- Begin by reviewing this financial document checklist.
- Read this version of the California Schedule of Assets & Debts (FL-142). It does not get filed with the court. The format will help you communicate with attorneys, mediators, CDFAs, and legal document preparers.
Step 6: Make sure your significant assets are valued properly
Significant assets to the marital estate may include real estate, qualified benefit plans, and self-owned businesses. One of the biggest mistakes couples make is failure to properly value their assets. This failure could result in huge mistakes in the calculation of the marital estate value. In other words, someone gets ripped off.
Hiring a third party to perform these valuations can be extremely helpful regardless of whether you're self-represented, mediating, or litigating. The cost is nominal compared to the upside. And, regardless of whether you go to court, you need to understand the value of these assets so you know whether anything is still on the table. An attorney or CDFA can help you to identify and coordinate resources to compute the value of your assets. They can also provide actionable options for how to reasonably split the assets.
What you should do
- Determine whether you have significant marital assets. This may include real estate, qualified benefit plans, executive compensation, and business interests.
- Consult a CDFA or CPA to learn what should be valued and to perform any necessary valuations.
- Once valued, use your assets for subsequent negotiation with your spouse on property division.
Step 7: Understand the tax implications of certain activities
Tax implications related to the division of property can influence how a couple divides marital assets and debts. One example is child support. Currently, child support is not taxable to the payee and is not deductible to the payor. However, spousal support is taxable. Some opportunities to avoid taxes and penalties are associated with the early withdrawal of qualified contribution accounts. Further, there are benefits to how couples choose to allocate dependent exemptions for tax purposes. Without the help of a CDFA or CPA, you could easily overlook the implications presented by tax law on your divorce.
What you should do
- Review your settlement agreements with a CDFA, CPA, or tax-qualified attorney. Look for tax implications that could negatively impact you.
- Seek creative solutions that take tax implications into account.
Step 8: Adhere to additional requirements necessary to complete and protect asset division
Sometimes, property division is straightforward. Other times, it requires more work than meets the eye. Examples include the need for a Qualified Domestic Relations Order (QDRO) to split retirement plans and life insurance policies to cover support payments in the event of the death of a paying ex-spouse. The fact is, if an agreement or settlement is not executed correctly and completely, it cannot be adequately enforced.
What you should do
Harness the support of the right divorce professionals. These pros should divide your assets and debts effectively while helping you address all the legal requirements.
Need assistance with your QDRO? Our trusted partner, SimpleQDRO, can help.
Step 9: Acquaint yourself with the reality of your new financial situation, and prepare for the post-divorce financial transition
The post-divorce transition can be challenging. Both parties are likely living a lifestyle less comfortable than it was before the divorce. Additionally, there is typically one spouse who did not handle or manage the finances in a marriage. This person is now thrust into the world of managing their own personal finances, which can be downright frightening. Understand what your new financial environment looks like to make sure you enter the post-divorce phase with a good handle on your finances.
What you should do
- Develop a post-divorce financial budget reflecting the assets, debts, income, and expenses you will have per your settlement agreement.
- Access this expense template package to document your expenses. Because it looks at both pre and post-divorce expenses, you can use it at any point in the process.
Step 10: Implement your post-divorce budget, and consistently revisit your progress over time
Creating a budget once and never using it is not a path to success. Personal finance is an ongoing process. Things change over time. Continue to evaluate how well you are doing against your intended budget, and keep noting areas for improvement. If you get a new job, a raise, or if circumstances change in other ways, reflect those updates in your budget.
What you should do
- Set a monthly date to review your budget. Look at things you accomplished, possible areas of improvement, and adjustments required for the future.
- Assemble monthly and annual action plans to tackle the things you want to accomplish and hold yourself accountable.
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