By FPA Members Elaine King, CFP®, CDFA™ and Philip Herzberg, CFP®, MSF
Last Updated: January 17, 2011
Even though divorce is frequently a financially uncertain and emotionally-draining ordeal, you can alleviate qualms over your individual and family’s future wellness by being soundly educated on all aspects of financial planning issues pertaining to divorce.
As divorcing individuals, you can certainly amicably preserve your optimal interests and secure a financially suitable divorce settlement by knowing and following these essential and sensible insights:
Select seasoned divorce advisers and financial professionals to guide you with handling the divorce settlement.
- Evaluate the appropriateness of preparing a simple divorce settlement agreement compared to hiring a divorce attorney in dealing with diverse financial planning challenges, such as how property, assets, debts, child support, alimony, and other marital issues will be outlined and divided. Should you pay a retainer up front to hire a divorce attorney to best promote your intentions and communicate your interests? Keep in mind that while most legal fees and court costs for obtaining a divorce are considered personal expenses and are not deductible for income tax purposes, you can deduct items including fees for advice on receiving alimony and the tax consequences of property and payments.
Find a financial planning professional also certified in divorce planning or tax topics to collaborate with your team on formulating forward looking projections and analyzing the long-term financial impact of choosing a proposed settlement. Make sure your legal advisers understand important divorce-related issues on money matters, such as Qualified Domestic Relations Orders (QDRO), a legal document drawn up to divide pension assets.
Protect your assets by being cognizant of property classification.
- Most pivotally, you should know that assets acquired during marriage are divided according to rules specific to each state, with property either classified as separate or marital property.
Know that if you live in a community property state, you and your spouse will split marital assets. Alternatively, if you reside in an equitable division state, be aware that division of property takes into account you and your spouse’s financial situation and various other factors (i.e. length of marriage and any written agreements) relevant to settlement negotiations.
Evaluate the prominent guidelines and issues relating to child custody, support and alimony.
- Which one of you will live with the children and provide and enforce child support payments when the divorce is final? In addition, think about your desires and often stressful predicaments regarding child custody and visitation in coordination with support rules, which vary from state to state. Seek the guidance and experience of a tax professional in outlining the seven requirements of alimony and applying them to classification as alimony for federal income tax purposes.
Did you know that in many states, college-age children have the right to demand qualified higher education funding and monetary support at the state level so their education is not interrupted? With the collaborative direction of divorce attorneys and financial professionals, you should highly consider planning and negotiating to pay out-of-pocket expenses for college tuition at the time of the initial settlement agreement.
Familiarize yourself with all topics of property including marital residence, debt and retirement plans.
- Decide whether you should keep a relatively illiquid marital home as a valuable asset if you are the custodial parent. If the residence and other assets have little liquidity in this proposed financial divorce statement, make certain that you have steady and sufficient cash flow for post-divorce years to handle your living expenses. Be well-versed on the income tax ramifications of your concerning property and evaluate if you have enough liquidity to pay debt on whatever assets you keep.
- Do not overlook debt and credit rating dilemmas. Start by obtaining your most recent credit report, which will identify all joint accounts and assist you in addressing how any issues or inaccuracies will be fixed. Carefully review and evaluate its purpose and source.
Understand a large portion of your financial settlement comprises of retirement assets and that there are particular tax-related issues and possible penalties involved with premature distributions. Note that you can divide the qualified retirement assets with a QDRO, which can be utilized to transfer these assets to your ex-spouse as part of a divorce settlement.
File taxes, budget finances, and manage your risks prudently.
- What should you know about income tax filing once you become legally separated or divorced? You can start learning by acquainting yourself with the applicable tax provisions regarding filing status. Also, review all tax returns that have been filed jointly or separately by your spouse before filing taxes.
- Assess your income and liquid assets versus your expenses prior to the divorce settlement. Do strategize and follow an actionable financial plan to sustain you over the course of these challenging and evolving divorce conversations and proactively budget the family’s finances based on your new lifestyle post-divorce settlement. Keep fixed and discretionary spending in check after a divorce to avert debt and increase retirement savings.
As risk management is an integral facet of a divorce, you should check to see how health and life insurance, particularly the revision of selected beneficiaries, factor into your divorce settlement agreement. You may wish to change the beneficiaries on your policy once you and your spouse sign the divorce settlement.
Properly value and divide your family business.
- Does your state value family business assets at the time of separation or divorce settlement? Should the response be no, you can hire an independent valuation professional to determine the right share of the family business.
- Ascertain the value of your family business and all other assets by reviewing the business operation agreement and business buy-sell agreement for relevant divorce clauses.
Do not agree to any divorce settlement until you determine how it will affect your financial future! Ultimately, by proceeding with your financial life plan, you can achieve a settlement in which both parties agree.
FPA member Elaine King, CFP®, CDFA™, is the author of Family & Money Matters. FPA member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.