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Ten Financial Essentials You Need Know For Your Divorce

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financial divorce preparations | divorce support | Since My Divorce

Whether or not you’re using attorneys, to get started on your divorce, you will have to gather all of your financial information and share it with your spouse (and vice versa).

Many people, inadvertently skip this step and jump straight into discussions about who’s going to keep the house and how other assets should be divided.

That’s not smart and it can lead to deadlocks and breakdowns in the negotiations. You’ll also be making life-changing decisions with incomplete information.

Yet, when people do start gathering this information, frequently it’s overwhelming and confusing so they put it off and procrastinate.

The reality however is that the sooner you do this, the better it is for you. You’ll have a much more accurate assessment of the financial impact of divorce on your lifestyle, you’ll have more clarity, more certainty and you’ll be in a better position to make the decisions that are right for you.

So what financial information are we talking about? Where do you start? How do you value different assets? And what can you learn from different documents?

Joining me for this Conversation are financial advisors, David Chwalek and Renee Senes who are co-authors of the book, Money & Divorce: Costly Mistakes You Don’t Want To Make. Listen in below (email subscribers, click here) to learn the ten financial essentials you need to know to get started on your financial preparations. And if you prefer, keep reading for a synopsis …

Get The Big Picture

Everything changes with divorce so it’s not surprising that you want to figure out where you’re going to be living, what’s going to happen to your retirement savings or how your monthly income is going to look like after divorce. But you’re getting ahead of yourself if you dive into these details before you know the totality of your finances. It’s like going for hike before you’ve put your shoes on.

Chwalek identifies this as mistake #2 in Divorce and Money.

“People want to meet with an attorney or a mediator and they want to get right into what can I expect in alimony and child support and who gets the house,” said Chwalek. “But the first thing we do with everyone we meet with is not only to make sure we identify all the assets but also appropriately value them.”

If you are working on your own, try going to your state’s judicial website and looking for the financial disclosures you’ll be required to make as part of the legal process. There’s likely a financial statement you’re going to have to complete and this is a great document to help you identify all the information you’re going to need to collect.

Your Name On An Account Doesn’t Make It Yours

Just because an account is listed solely in your name, such as your 401(k) account, doesn’t make it your separate property. This is a difficult concept for many people to grasp and learning about this when your marriage is unraveling makes it a challenge to accept.

“You need to understand that just because you earned it or it’s in your name doesn’t mean that it’s yours for the purpose of divorce,” said Senes.

So the first step is to list every account on which you are listed even if it is an account that you share with your mother or your kids. Then you can identify what are marital assets and what are separate assets.

Generally speaking, anything that was acquired or maintained after the marriage with marital funds is going to be considered in whole or in part, a marital asset. If you had any separate assets coming into the marriage, or you’ve had an inheritance, then you’ll likely have questions that will be best answered by a consult with an attorney in your local area. This doesn’t mean you have to retain the attorney – many attorneys will work on an unbundled or a la carte basis and this is a great way to get your questions answered.

Knowing whose name is on an account is important for a couple of reasons. First, it can help in deciding how to divide assets. “Part of identifying who owns an asset is that we try and advise our clients to move the least amount of assets they possibly can,” said Senes.

This makes a lot of practical sense because it cuts down on the amount of work involved in implementing your divorce agreement and if you are using an attorney, it’s also going to help save on post-divorce attorney fees. There may also be fees for dividing or transferring accounts so it makes sense to minimize these.

The second reason, is that post-divorce, we want to see that accounts are listed to the person who has assumed ownership and we like to see this done as quickly as possible. Listing the correct titling of the account at the beginning stages helps to understand the work that will need to be done for post-divorce implementation.

Get Your Tax Returns

You’re going to need at least three years of tax returns. When we talk about tax returns, that means not just the Form 1040 but also all the supporting schedules. If you and your STBX usually work together on your tax returns or if you’re the one who’s handled the taxes in the past, that’s great. You probably know exactly where they are.

If you don’t know where the returns are, you have a couple of options. The easiest one is probably to ask your STBX however, you may not be ready to explain why you need them. Another option is to file a Form 4506 with IRS and the IRS also offers a transcript of your returns. Getting the actual returns as opposed to a transcript is probably going to make it easier for you to understand the numbers. The process does take time and of course, there is a fee. Don’t let that deter you because you do need these documents.

If you’ve used a CPA, then you have another option.

“This is a great time to make friends with your CPA so not only do you have your tax return but you also have a good explanation for what the numbers on your tax return mean,” said Senes.

A word of caution however. If your CPA is more closely aligned to your STBX or you have not yet told your STBX about the divorce, then use this option carefully.

“In a perfect world, once a couple starts discussing divorce we hope there’s open disclosure and sharing of documents,” said Chwalek.

But divorce is rarely a perfect world and you may need to rely on the legal process to get the tax returns from your STBX along with statements for accounts that are solely in their name.

Read Your Tax Returns

Getting your tax returns is not enough. If you haven’t been involved in the preparation of the returns you will learn a lot about your finances by reviewing them especially the schedules.

Schedule A will show you all the real estate taxes and mortgage interest.

Schedule B will give you all the bank accounts and brokerage accounts that pay interest.

Schedule C is where you’ll find details of self-employment.

Schedule D is where you can look for gains and losses from stock, bond and mutual fund trading.

“I like clients to lay the years out side-by-side so you can scan across the return to look for any major discrepancy,” said Senes. This also helps to see what’s happening now that didn’t happen before.

“We don’t assume anyone is going to do anything illicit and very rarely do we see it,” said Chwalek. “But it does happen where one spouse in preparation for divorce may want their income to look lower than it has been in previous years.” That’s especially true for the self-employed who have more ability to control their income.

Review Your Bank Account and Credit Card Statements

You should have access to statements for any bank accounts and credit cards you share with your STBX and you will want to review the transaction detail on these especially on your credit cards.

“Not only do assets get divided, debt gets divided also,” said Senes. “You really want to be looking at this and saying, ‘is this marital debt?’”

Spending that doesn’t seem to be for the benefit of the family e.g. an engagement ring for the new girlfriend, subscriptions to dating services, would call for an adjustment to the division of assets.

People do often set up a separate, individual bank account in anticipation of divorce but it is still a marital asset and it does still need to be disclosed. This points to checking through bank statements to make sure that transfers in and out are to accounts that you know. And if you find an account that hasn’t been disclosed, avoid jumping to conclusions that it’s malicious or intentional. People do often forget about an account that they haven’t used in years or even accounts where the transactions are automated.

If you have concerns, then through the discovery process you should be able to get up to three years of statements and again, this might be an indicator that you need to be working with an attorney.

Understand Your Pay Stub

You might check your pay stub to see your net pay but there is a wealth of information on there so you’ll want to see your STBX’s pay stub too. Pay stubs tell you if someone is salaried or hourly paid, earning commissions or bonuses or overtime. The deductions will tell you to look for a retirement account and approximately how much is being contributed annually. You’ll also see deductions for health insurance and for other benefits such as stock options, union dues and expense allowances.

“When you are looking at the pay stub you will know very clearly what your spouse’s work life looks like and where there might be assets you hadn’t thought about,” said Senes.

Value Your Cars

When it comes to valuing your vehicles, the go to resource is Kelley’s Blue Book or Edmunds. You’ll have different options for valuing such as trade-in or private sale. Which one you use is less important than making sure that all the vehicles are valued on the same basis unless there is good reason for a different valuation basis. For the most part, vehicles don’t get sold in a divorce.

“What we see a lot is that husband has a car that he uses, wife has a car that she uses,” said Chwalek. “Rarely is it a sticking point for asset division.”

The bigger problem, according to Senes is that the cars are often not titled in the way they are used. And that has to be addressed in the divorce agreement.

Leased cars often don’t have a value since they get turned in at the end of the lease but there are times when the projected value is higher than the lease end value and that does mean the car has a value that needs to be disclosed.

Understand The Difference Between A 401(k) And A Pension

Pensions are very different from 401(k)s. The value of the latter is what you see on the statement. There are no promises or guarantees about future benefits. A pension however is a promise of payments in the future and often times the value that is shown on a pension statement is a cashout value and not a true pension value which is the worth of that future stream of payments.

“Clients are typically surprised to find out how much their pension is worth,” said Senes. “When we do the pension valuation we figure out what part was earned inside the marriage and what was earned outside the marriage, and the part that was earned during the marriage can be divided.”

The options for dividing a pension are plan-specific so you have to contact the institution to find out what they will allow. An alternative to dividing the pension is to offset the value through a transfer of other assets.

Check for 401(k) or 403(b) loans

Loans against retirement plans can complicate the financial picture. Unlike another debt such as a credit card debt, as the loan is repaid, the value of the 401(k) increases because you’re paying the interest and capital repayments to yourself.

In deciding how to handle the loan, Senes and Chwalek recommend looking at the reason for the loan – was it for a child’s college education, home improvement? If the loan is not going to be repaid from other assets at the time of the divorce, then Chwalek recommends using the value of the account net of the outstanding loan amount.

Establish A Best Guess Value For The Home

Given that the home is often the most valuable asset, you need to have an estimated value of the home as a starting point. If you and your STBX are agreed that the house is to be sold and the proceeds to be divided equally, that’s the simplest of scenarios but if one of you is going to keep the house, then having a value will help you figure out the buyout for the other party and how much refinancing will be needed.

Chwalek says one way to do this is to ask a local realtor for a Competitive Market Analysis. Most realtors will offer this as a complimentary service. Sometimes, each spouse will get a CMA from a realtor and that’s OK. If you can’t agree on a value ultimately you’ll get a formal appraisal but in the beginning, having an approximate figure is all that is needed.

You can also get this from services like Zillow, Redfin and Homesnap. Senes also suggests looking at your real estate tax bill or looking at the listing for your home with the local assessor’s office. This approach may work if home values in your area have been relatively stable and if you understand the basis of valuation. For my house, for example, I got my revised valuation in May 2017 effective for the 2018 tax year. The value of the house however is based on home sales July 1, 2014 through June 30, 2016. We’ve seen significant increases in house prices since then and so using the assessed value would be an understatement.

David Chwalek and Renee Senes are financial advisors and Certified Divorce Financial Analysts. Their book is David Chwalek and Renee Senes is available on Amazon. You can find a CDFA near you through the Institute for Divorce Financial Analysts.

 

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