Last Updated: July 27, 2009
In these economic times, many marriages slide into trouble over money. But when a marriage dissolves, any hint of financial trouble before the divorce has the potential to slide the split parties into disaster.
Even when money is tight and parties are distracted by the pain of a breakup, financial and tax planning need to be front and center in divorce planning. A CERTIFIED FINANCIAL PLANNER™ (CFP®) professional with experience working with divorcing individuals should be part of the team that can assess debt and other financial obstacles.
There are critical steps that need to be taken by divorcing individuals:
- Get some help with a budget. No matter how sophisticated you think you are about your finances, don't pass up the opportunity to do a basic financial budget for your new life. A CFP professional can help you ask the basic questions that will help you understand what life will be like when you are living with a single job income stream or a temporary income stream provided by an ex-spouse. It's always an eye-opener.
- Find experienced divorce advisers. A good divorce attorney isn't necessarily a shark. The choice of attorneys — for men as well as women — should fit the challenges being faced on both sides. Good divorce attorneys definitely cost money, but they pay for themselves, in addition to CPAs and financial planners familiar with the divorce process. Among such major issues as division of marital property, exclusion of non-marital property and various ways to structure ongoing financial contributions from one party to another, all the advisers in the process should understand Qualified Domestic Relations Orders — known as QDROs (pronounced "Quad-Rows") to assure that pension assets will be shared fairly. Most of the legal cost in a divorce is based on the presumption that assets are being hidden. If divorcing couples were to consult a CFP professional and a tax adviser prior, and draft a financial statement agreeable to both parties, legal fees could be dramatically reduced.
- Know the tax ramifications of alimony. It is possible to deduct some alimony payments, but you need to get the advice of a qualified accountant first. There are seven requirements that need to be made, including:
- The payment must be made as part of a legally binding written agreement.
- That agreement cannot state that the payment is not alimony.
- Payment must be made to or on behalf of your ex-spouse unless there are payments diverted to others directed in writing by your ex.
- After you are legally separated or divorced, you and your ex-spouse cannot live in the same residence or file joint tax returns.
- Payments must be made in cash or cash equivalents.
- Alimony cannot be treated as child support.
- Your obligation to pay ceases if your ex-spouse dies.
- Value the assets before you agree to take them. If you're getting the house, does it have a 20-year-old furnace and a roof that's about to cave in? A thorough inspection by a licensed inspector could help. If you're getting the family car, is it past warranty with a funny sound coming from under the hood? If your spouse runs a lucrative business that you've worked for or invested in, how do you know you're getting the right share? Hiring a valuation expert may be necessary. Divorcing spouses need to make sure they have enough money to finance repairs and replacement of assets that they'll be paying for as a single person.
- Think of the kids. In many states, college-age children have the right to demand financial support or college funding at the state level so their education isn't interrupted. While both parents should advocate in their kids' best interest, this isn't always the case. Be aware of your state's divorce laws with respect to secondary child support.
- File taxes wisely. There are always special situations in a divorce that will determine whether a couple will need to file jointly or separately during the last year that the marriage exists. It's best for both sides to get some assistance filing their taxes during their divorce year and the year afterward.
- Get help documenting child support. Child support guidelines vary from state to state. If your state has a special program that allows a spouse to pay into a special account so child support is recorded every month, consider it. It provides a paper trail and enforcement system for assuring that kids get the money they need. Federal law requires all child support payments be made by wage assignment and health insurance by Health Insurance Orders. A majority of child support orders go unpaid. Make sure you know the laws to force compliance.
- Once the divorce is over — watch the spending. Budgeting early in the process may cut down on the risk of overspending, which is a temptation after a painful event. Both necessary and unnecessary spending after a divorce is a key reason the newly single tip into bankruptcy. Make sure it doesn't happen to you.