10-Step Quick Guide for Tackling Divorce Financial Issues

Tackling the financial issues of divorce can be overwhelming even for those of us who are comfortable with numbers. Sometimes the biggest challenge is figuring out where to start. Following this 10-step guide (including some additional resources) will increase your chances of a “win-win” financial outcome and a strong post-divorce financial foundation.

Step 1: Optimize the Separation Date and Timing of Divorce

Why is this important?

It becomes a determinant for the characterization of marital and separate property

The date of legal separation is important because prior to that date, any assets and income acquired are considered marital property (except for certain gifts and inheritances) and anything acquired thereafter is considered separate property. Due to this relationship, some situations can occur that could heavily influence the date you would want to separate.

Example(s): An impending sale of a business or a large payout or vesting of interest in significant assets of some nature which may drive the difference between whether significant and liquid assets are included or excluded in the marital estate.

It introduces new tax implications to you and your ex-spouse

The calendar year in which your divorce becomes final means you are technically divorced for the entire year for tax purposes. As a result, there may be short-term tax planning advantages to postponing to another year or completing a divorce in the current year.

Example(s): If a divorce becomes final on December 31st, 2017, parties can only choose filing status of “Single” or “Head of Household” for the full year 2017.

It could determine whether you’re walking away ahead or falling behind

Another aspect to keep in mind when planning your separation and divorce timing is the overall health of your net worth equation.

Example(s): Many couples decided to postpone their divorces during the housing meltdown because they were “under water” on their mortgages.

What should you do about it?

  • Discuss your situation with your attorney, CPA or CDFA® and determine whether any considerations exist that you should take into consideration when determining when to legally separate and divorce.

Step 2: Safeguard Assets and Take Steps Toward Financial Independence

Why is this important?

When divorce is on the table, sometimes people start making bad decisions. Cash, assets and records that have been around for years start magically disappearing out of fear and panic of the property division process. This behavior and approach can quickly impact a couple’s ability to handle a divorce in an amicable fashion and is one of the quickest ways to end up in a costly court battle. Often it occurs because an imbalance of knowledge and control of the couple’s finances is at play. This reality also means that if you’re the spouse with the lesser amount of control and knowledge, you’ll need to consider taking some important steps toward financial independence that are new and uncomfortable.

What should you do about it?

  • Make all attempts to be honest and transparent with your spouse about financial matters and processes.
  • At first signs of imminent divorce, proactively gather all important financial records (personal & business) and copy and store them in a safe place.
  • Take an inventory of all personal property of significant value (heirlooms, jewelry, antiques, firearms, etc.) including photos when possible and store in a safe place.
  • Ensure any gifts or inheritances received do not become commingled with marital accounts or expenses as doing so will characterize them as marital property.
  • If you have not been responsible for managing household finances, you may want to consider opening your own checking/savings or credit card account in your name only to build credit and should spend time to better understand your budget and monthly and annual expenses.

Step 3: Evaluate the need for a Certified Divorce Financial Analyst®

Why is this important?

Based on the financial complexity of your case, you may need to consider bringing in a qualified divorce financial expert. A Certified Divorce Financial Analyst® has the expertise to guide you through difficult financial decisions and to work with you and/or your spouse to come up with creative, actionable settlement structures that make sense. Affordable and flexible options exist to bring in a CDFA® that can work alone, or as a support function to other integral resources like attorneys, mediators or legal document preparers to help you and your spouse reach agreement on financial terms of the divorce. In addition, some CDFAs® can also support very focused issues through financial coaching or a la carte services.

What should you do about it?

  • 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 understand more about what they can offer based on your unique case.
  • Check out this link that explains some of the top reasons to hire a CDFA®.

Step 4: Determine your post-divorce financial priorities

Why is this important?

Whether you plan to work with a CDFA® or not, it will be crucial for you to be able to define what is most important to you coming out of the divorce. Is your top priority to stay in the marital home? Is it to ensure you have enough liquid assets that you can purchase a new home or handle an ongoing monthly rent payment? Are certain assets more important to you than others, regardless of value? These considerations will become important as you work with your spouse (or fight for) on a fair and equitable outcome and will give you a baseline to come back to if things become more complicated.

One pitfall I tend to see couples fall into is failing to reality check what they define as their priorities against their financial facts. Fair and equitable does not mean that one spouse “deserves” more than the other regardless of what has happened to give rise to the divorce, especially in no fault, community property states like California. To avoid finding yourself in this trap, it is important to keep in mind that your existing financial situation now will be split into two and without any new magical assets appearing out of thin air and that compromises will need to be made to make things work.

What should you do about it?

  • Use this tool to outline your and your spouse’s priorities and evaluate how they align and where challenges might exist. Take some time to reality check your list. It is important to spend your time and effort on the things that are both reasonable AND a priority to you rather than expecting to walk away with more than your fair share.

Step 5: Develop a complete inventory of your separate vs. marital assets and debts and gather all important documents

Why is this important?

The financial settlement or property division outcome is only as good as the information that goes in. It is to the utmost benefit of the couple to ensure all assets (and debts) are properly characterized as separate vs. marital, accounted for and addressed within the division. It is also important that any disagreements regarding characterization (marital vs. separate) are addressed as well as part of the property division process.

What should you do about it?

  • If you’re unsure where to start, you can begin by reviewing this financial document checklist I give to my clients.
  • I have also included an excel version of the California Court’s version of the Schedule of Assets & Debts (FL-142, which does not get filed with the court). This format will also help with your communications to attorneys, mediators, CDFAs or legal document preparers.

Step 6: Ensure significant assets are valued properly

Why is this important?

One of the biggest mistakes I see couples make is the failure to value significant assets they own properly. Significant assets to the marital estate are often real estate, qualified benefit plans and self-owned businesses. Failing to properly value these assets can result in huge mistakes in calculating the value of the marital estate which means someone is getting ripped off. It is so incredibly important to invest in valuing these assets and the cost is nominal compared to the upside.

Regardless of whether you intend or expect to be in court or not, you are going to need to understand the value of these assets so you know whether or not anything is being left on the table. Having a third-party perform these valuations can be extremely helpful regardless of whether you’re self-represented, mediating or litigating.

By working with an attorney or CDFA®, they can help you to identify and coordinate resources to calculate the values of these assets so that it is very clear what the value of the asset is, what the marital portion of the asset is and to provide actionable options for how these assets can be reasonably split in a division.

What should you do about it?

  • Determine whether you have significant assets with a marital component including but not limited to real estate, qualified benefit plans, executive compensation or business interests.
  • Seek a CDFA® or CPA for assistance to better understand what should be valued and to perform any necessary valuations.
  • Once valued, these asset values can be used for subsequent negotiation with your spouse on property division.

Step 7: Understand the tax implications that exist for certain activities

Why is this important?

The tax implications related to the division of property can influence how a couple might choose to divide marital assets and debts. One example is support. Currently, child support is not taxable to the payee and is not deductible to the payor, however spousal support is.  There are some opportunities to avoid taxes and penalties associated with early withdrawal of qualified contribution accounts in a divorce. There are benefits to how couples choose to allocate dependent exemptions for tax purposes. The list goes on and on, however, without the help of a CDFA® or CPA, you could easily overlook the implications presented by tax law on your divorce.

What should you do about it?

  • Ensure that you are reviewing your settlement agreements with a CDFA®, CPA or tax-qualified attorney for tax implications that may have detrimental impact or for creative solutions that take tax implications into consideration.

Step 8: Complete additional requirements necessary to complete and protect an asset division

Why is this important?

Sometimes property division is straightforward and sometimes it requires more work than meets the eye. Some 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 death of a paying ex-spouse. I have encountered situations where parties reach agreement about how to split assets in the settlement agreement, but because they are not executed correctly and completely the agreement can never be adequately enforced.

What should you do about it?

  • Ensure you have solicited the support of the right divorce professionals to ensure you are 1) dividing your assets (and debts) in an effective manner and 2) that you’re addressing all the requirements necessary to ensure assets (and debts) actually get divided the way they were intended to.

Step 9: Spend time understanding the reality of your new financial situation and prepare yourself for the post-divorce financial transition

Why is this important?

Transitioning after a divorce is often very challenging because both parties are typically forced to live a lifestyle less comfortable than it was prior to the divorce. Additionally, there is typically one spouse that did not handle or manage finances and is thrusted into the new world of managing their own personal finances. This can be frightening, but how this process is handled can make all the difference in the world to a successful future. It is extremely important to understand what the new financial environment looks like and to ensure that you’re entering the post-divorce phase with a good handle on your finances.

What should you do about it?

  • Develop a post-divorce financial budget reflecting the assets, debts, income and expenses you will have per your settlement agreement.
  • You can access this expense template package I created to document your expenses. It is made to look at pre and post-divorce expenses so you can use the tool at any point in the process.

Step 10: Implement your post-divorce budget and consistently revisit your progress as you transition over time

Why is this important?

Creating a budget one time and never using it is not the path to success. Elements are likely to change as time passes and it is important to continue to evaluate how well you are doing against your intended budget and to identify areas of improvement for future correction.  If you get a new job, a pay raise, or circumstances change in other ways, you’ll want to ensure you’re capturing those updates or changes in your budget going forward. Personal finance and budget management is an ongoing and iterative process.

What should you do about it?

  • Set a monthly date to review your budget for things that you accomplished, areas of improvement and adjustments required for the future.
  • Put together monthly and annual action plans to tackle the things you want to accomplish to hold yourself accountable.

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