Women: a divorce financial planner can help you fairly divide assets

Divorce is often one of those all-consuming life events that can have significant consequences and implications for a woman’s future. In many cases, the division of marital assets is a crucial process with many pitfalls. Due to the highly-charged emotions that often accompany a divorce, as well as the lack of financial knowledge by the attorney or the client herself, the potential for significant mistakes is huge.

Having a divorce financial planner on the divorce team can help, but if a divorcing woman knows the potential mistakes to watch for, she can help herself and her attorney to identify financial issues ahead of time and seek the advice of knowledgeable professionals to guide her in making sound choices and decisions. 


Do

Do get a complete inventory of all marital assets

The first step in ensuring a thorough analysis and good asset division outcome is to know all the assets on the table before the divorce process starts. Gather recent tax returns, statements for credit cards, investment accounts, IRA and 401(k) information, pensions, and other financial accounts. Include mortgage and line of credit statements and any other financial documents you can gather.

Pay particular attention to statements during the separation period or when the marriage started to go sour. Oftentimes a spouse having an affair will have unusual charges on credit card statements or a spouse anticipating divorce will start transferring cash or have separate accounts in an attempt to hide money or income. Getting a complete inventory will also help your attorney and/or your divorce financial analyst in their work for your divorce.

Don’t forget assets that you may not consider month-to-month, such as the contents of a safe-deposit box, collectables, jewelry, and life insurance/annuity policies, or unusual assets such as frequent flyer or credit card points, which can be exchanged for cash or purchases. 

Do decide if keeping the marital house is affordable

The marital home is a special asset, not only because it is often the most valuable one, but because of the myriad of emotional ties associated with it. As the usual home-provider for the family, the wife and mother in the divorce is often the spouse who wants to retain the home— emotionally, for the sake of stability for her and her children, but also due to the memories of happier times in the marriage and of the children growing up.

These are important considerations, but equally important is understanding the financial feasibility of keeping the house. While alimony and child support payments may help, if her total monthly income is not enough to support the mortgage payments and upkeep of the house along with the post-divorce living expenses of her family, a divorced mother or even a woman with no custodial children may find it hard to make ends meet. Therefore, she may be forced to liquidate bank accounts or even retirement accounts to keep the household afloat, which should not have be an option. 

Do get all defined-benefit pensions appraised

Pensions (including municipal, corporate, and military pensions) are often thought of as “future income” payments, but actually have present-day and potentially significant monetary value. When discussing asset division between spouses in divorce, a pension may actually be the most valuable asset in the marriage. Pension valuation is often done by actuaries using specific calculators, but may also be done by Certified Divorce Financial Analysts, using divorce-specific software calculators.

While Social Security benefits are indeed a pension, these benefits are prohibited from being included as divorce asset division by Federal Law. Be aware that pensions often have “pre-marital” as well as “marital” portions (if the pension-recipient spouse was earning pension benefits before or after the marriage). Pre-marital values are deemed “separate property” and need to be segregated from the marital portion. (Most calculators are able to do this.)

If pension benefits are to be divided between the spouses in a settlement agreement, a particular legal documents will have to be drafted, called a Qualified Domestic Relations Order (QDRO), often referred to as a “quadro.” This document must conform to the provisions of the pension plan and should be drafted by a legal profession who is very experienced in drafting these documents. 

Do know that not all assets are created equal

What is often missing in the divorce process is the understanding of how the division of assets will affect one or both divorcing spouses in the future. “Equal” or 50/50 may sound like a simple solution, but equal may not mean “equitable” (or fair). Not all assets are created equal, whether it’s because of tax treatment, liquidity, or suitability. Like anything else in personal finance, solutions in asset division need to be crafted with the particular circumstances and objectives of the divorcing woman (or of both spouses) in mind.

Do keep some liquid assets on your side

While negotiating for the tax-advantaged accounts and assets is often a good idea, be sure to include some liquid assets (cash) on your side of the balance sheet for short-term cash needs, such as paying your legal fees, a contingency fund and for those often unsuspected expenses that come up when establishing a new home and life post-divorce.

Do know that tax treatment of various assets can affect their value

As mentioned above, not all assets are created equal. Attorneys, judges, or the clients themselves may be content with just dividing everything 50/50, or horse-trading different assets and, as long as the bottom line is equal, consider the division fair and equal. Not so.

A $100,000 IRA account of mutual funds is a very different asset from a taxable brokerage account with highly-appreciated small company stocks. A home property with equity is also a different animal than a life insurance policy with significant cash value. When possible, knowing and discussing the “after-tax” values of different assets is a better way of arriving at an equitable asset division. This may take some time and money to analyze, but is often well-worthwhile in the end. 


Don't

Do not forget that “professional expertise” can be a marital asset

In many long-term marriages, one spouse—often the wife—has given up their career to remain at home, or to work part-time-only, in order to raise the children and provide a comfortable home for the family. Such a move leaves the so-called “working spouse” the time and flexibility to concentrate on their job, profession and career. Over the course of the marriage, the working spouse often develops professional competency, resulting in a higher income, career prestige and earning capacity. This also may mean a partnership in a professional firm or practice business (often seen with doctors or lawyers).

This professional development has, in economic terms, “intrinsic value” and has been considered having monetary value in many divorce negotiations, so there is case history to back this consideration up. While determining such value takes specialized analysis, and despite the potential protests of the professional working spouse, don’t overlook this aspect of asset division. This could be a valuable asset to include in the discussion. 

Do not leave joint accounts open during the divorce process

Divorcing spouses often leave joint bank, investment, credit card, and other accounts open during the divorce process either due to convenience, lack of time to change accounts, or the belief that both spouses will remain honorable during the divorce. Bad idea. Many times, one spouse may decide the divorce isn’t going their way and decides either to run up the credit card charges or clean out the joint checking account to “get back at” the other spouse. Correcting these actions in the divorce process is time-consuming and often expensive.

Better idea: once divorce seems to be imminent, immediately take half of the money in joint banking and investment accounts and open your own individual account. Get your own personal credit card and cut up your card to the joint credit card account (save the last statement, too, from when you cut up your card to prove what charges were not yours afterward). 

Do not draft the QDRO after the divorce is finalized

Qualified Domestic Relations Orders (QDROs) are specific legal documents that are needed to divide “qualified” assets such as pensions and employer-sponsored retirement plans such as 401k, 403b, and 457 accounts. Both the plans and the QDROs are complex technical matters and require careful analysis and process for the division to go smoothly. 

One aspect not often understood by many (including attorneys) is that the QDRO must conform to the Plan provisions of the pension or retirement plan. The Plan Administrator is under no legal obligation to accept the QDRO if it does not follow the Plan’s procedures or rules for division.

In some cases, such as Federal government pension plans, a “lump-sum” division between the pension-recipient and ex-spouse may not be possible where only a percentage division of the future income payments is allowed. In this case, a QDRO drafted to request a payout of a lump-sum to the ex-spouse would be rejected by the Administrator and, if after the divorce and asset settlement agreement was finalized (after the final decree date), it may mean either a trip back to court or an entire re-negotiation of the divorce agreement. 

Do not overlook potential hidden assets when suspected

As mentioned above, spouses who anticipate divorce likely may try to transfer cash, establish secret accounts, and otherwise try to hide assets (and income) to gain a financial advantage over their ex in the divorce negotiations. Since husbands are often the chief earner in the family and also handle the larger money matters, it’s the wife that may be financially hurt by such covert measures.

Such tactics often include secret bank accounts, deferring bonuses and other compensation at work, transferring cash and investments from joint accounts to other single owner accounts, and diverting or hoarding income within a closely-held business. The value of such hidden assets is significant and sometimes can be found through forensic accounting or cash-flow tracing. Some tactics may unwittingly also involve under-reporting to the IRS and, if so, merely the discovery of tax law violations can get the secretive spouse to come clean. 

Do not forget to change beneficiary designations

Not changing the beneficiary designations on life insurance policies or annuity contracts, retirement accounts, and bank Transfer-On-Death designations—as well as changing Last Wills and other estate-planning documents during or after divorce—can have significant consequences. Just the mere fact that your assets and estate might go to someone who you no longer want to receive them should be enough of a reminder to change them. The U.S. Supreme Court recently ruled in 2013 (Hillman vs. Hillman) that an unchanged life insurance beneficiary designation to an ex-spouse still trumps a re-marriage to a new spouse, even if State law dictated otherwise. So be sure to change your beneficiaries after divorce.


Summary
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Aside from the emotional aspects, divorce is essentially the dissolution of “an economic partnership” and must be carefully done to ensure an equitable division of assets between the “partners” in the marriage. Since financial assets come in many shapes and stripes, with varying degrees of tax and other complexities, the resulting division could take a significant toll on the financial future of the divorcing woman.

It is critical that she (and her attorney) understand how the proposed division of assets will affect them as well as the inherent pitfalls with dividing these assets. Consulting a financial professional—such as a Certified Divorce Financial Analyst (CDFA)—who is well-versed in divorce finance would be beneficial to help understand these issues. 


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Kevin R. Worthley, CFP®, CDFA™Vice-President, Certified Financial Planner™

Kevin is a Certified Financial Planner™ practitioner and college planning specialist with Wealth Management Resources, Inc., a Registered Investment Advisor, in North Smithfield, RI. He has been helping families of all income levels with college...

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