February 20, 2021 - 5:41 am
According to The Holmes-Rahe Stress Inventory, divorce ranks second on the list of most stressful life events. And while it’s natural to feel grief about the dissolution of a marriage, spouses also need to consider more practical implications, including the effect on their bank accounts.
From divvying up assets to claiming your children on your taxes, the path from wedded bliss to peaceful divorce can be a long one. But these experts can help you on your journey and ensure you don’t lose money in the separation.
1. Don’t let emotions dictate your financial decisions
People often want to take out their hurt feelings on their exes. However, it’s important that you don’t let emotions interfere with your finances or the business at hand. In the long run, being spiteful could hurt you — right in the wallet.
“Asking your lawyer to write a letter to your ex over who gets the $50 coffee table book is kind of nonsensical,” said Brendan Lyle, formerly the CEO of B.B.L. Churchill Group, a divorce finance firm. That short letter could cost you $500 in attorney fees, Lyle said.
2. Everything is fair game
Don’t make the mistake of thinking assets in your name can’t be claimed by your spouse in a divorce.
“Practically everything is divisible, including frequent flyer air miles or royalties from a book you wrote,” said Ann Narris, appellate panel support unit attorney at Committee for Public Counsel Services in Massachusetts.
Because the same holds true for liabilities, couples should consider all factors when doing their financial planning, including what is or isn’t a liquid asset.
3. Make big purchases before filing
Have a big purchase in mind, such as a new car? “Most states issue automatic financial restraining orders prohibiting people from making big purchases or liquidating assets after the divorce is filed, absent a court order or an agreement,” Narris said.
She advises those considering divorce to buy big items before filing.
4. Keep track of your spouse’s spending
If you’re thinking of filing for divorce or legal separation, take a look at your spouse’s financial situation. Narris said you should keep tabs on whether your spouse is taking out new lines of credit.
“People are more generous in their income reporting on credit or loan applications than they are in, say, their 1040,” said Narris, who went on to stress that loan applications could be crucial parts of a divorce discovery.
5. Gather key evidence before filing
If you’re thinking of filing for divorce, it can be tough not to walk out the door immediately when your spouse pushes your buttons. Narris recommends a tip perfect for this phase in your financial life: Take time to collect evidence before a split. Along with taking pictures of assets, make copies of account statements and jot down any important numbers. Preparation is key if you hope to come out ahead in court.
6. Get property appraised before you part ways
When it comes to divorce, almost all property is fair game. Couples can’t hope to get their fair share if they don’t know the value of their assets and whether those assets can increase their individual net worths.
“No sense in guessing on the worth of his baseball cards or your engagement ring — never mind a house or a business,” said Narris, who reminds couples that there are experts available who can appraise just about anything.
7. Don’t hide assets
Trying to deceive your spouse about money by hiding or concealing assets might also mean breaking the law. If what you’re hiding is discovered, you’ll lose credibility in court, Narris said. There could also be stiff penalties, including monetary sanctions. To protect yourself and your property during a divorce, declare all assets upfront.
8. Watch out for hidden tax implications
During a divorce, stay alert to hidden tax obligations — even on investments that are less than $500.
“A husband might have purchased stock for $50 during the marriage,” said Christian Denmon, founding partner at Denmon & Pearlman, a law firm that handles divorce, criminal defense and more. “The stock has gone up in value so that at the time of the divorce, the husband ends up transferring $75 to the wife. If not otherwise addressed in the divorce settlement, the husband will be on the hook to pay taxes on the $25 gain on the stock.”
Denmon said spouses who are receiving real estate, stocks or bonds need to understand that taxable gains can leave them vulnerable.
9. Get job training or update your education before filing
If your spouse is currently supporting you, consider taking the time to dust off your resume and freshen up your skill set before seeking a divorce.
“Even if you receive support, the courts can [assign] income and expect you to be working if your kids are school aged and you are not of retirement age or disabled,” said Narris, who cautioned against “depend[ing] too much on a hopeful spousal support award.”
10. Familiarize Yourself With Your Finances Before You Split
Often, one person in a household manages the finances. But such an arrangement can create a “power imbalance when it comes time to negotiate settlements,” Narris said. So, what can you do to protect yourself?
Seek professional help to guide you in making more informed decisions about finances before filing for divorce. Doing this will help you come out swinging when you get your day in court. Take everything into account, even things that might not occur to you, like Social Security benefits.
11. Consider mediating your divorce
It’s no secret that divorce can be expensive. In fact, the average cost of legal fees in a divorce is $15,000, according to Narris. One way to cut down on these expenses is to use a mediator.
A mediator doesn’t work on behalf of any one party, just facilitates agreements. If you want to keep your divorce details behind closed doors while cutting costs, a mediator might be the best bet for both you and your bank account.
12. Know what your biggest asset is
Many people mistakenly believe their house is their biggest asset — when it’s actually a retirement or pension account. Even if your retirement account is less than robust now, the court will likely consider its future value when dividing assets.
“There are many ways to divide your portion of your spouse’s retirement asset — called a qualified domestic relations order — so give that due consideration,” Narris said.
13. If your lawyer recommends a private investigator, hire one
Many individuals are hesitant to shell out for a private investigator or forensic accountant when going through a divorce, but sometimes these professional services are necessary.
“Private investigators are useful for investigating people who own small businesses, as independent data about the number of customers, employees and resources can give a much fuller picture of a person’s true finances,” said Eva Cockerham, an attorney with Burke & Jaskot law firm.
Likewise, Cockerham noted that forensic accountants can give “insight as to whether a person going through a divorce is getting accurate information from their soon-to-be ex-spouse.” By spending a little more now, you might be able to save yourself a bundle in the future.
14. The most expensive lawyer isn’t always the best
Pick your divorce lawyer wisely because your choice could save your bottom line. “Find one that is experienced and knowledgeable but is also a good fit for you,” Narris said. “You have the power to set the tone for your divorce. The attorney should advise you but also respect your position on how to approach the negotiations.”
Just because an attorney has a high hourly rate doesn’t necessarily mean they will honor your wishes. For best results, go with your gut.
15. Understand debt obligations
Heather Sunderman, an attorney with KDR Law Group P.A., said too many clients assume partners’ debts — and savings accounts — are joint when they’re not.
“Some states do not divide marital debt if it’s just in one person’s name, so if possible, during separation you may want to pay down that debt preferentially,” she said.
16. Don’t forget about beneficiary designations
Divorce attorneys note that many clients fail to remove former spouses from their beneficiary designations. If so, “those amounts may end up being paid out to a former spouse,” Sunderman said. “Usually that’s not the result you want.”
For best results, handle beneficiary designations and other tedious paperwork that involves or protects your assets — including your will — as soon as possible.
17. Pay court-ordered attorney fees
Court-ordered attorney fees are no joke — and whether you’re an ordinary citizen or a celebrity going through that divorce, those costs can really add up. “The court can order one spouse to contribute to the other spouse’s attorney fees,” said Denmon, who went on to explain that this type of debt is treated in a special manner. When it comes to court-ordered attorney fees, the judge can even throw the offending spouse in jail for failing to pay.
In light of these regulations, Denmon advises that spouses who are receiving financial help have language drafted into agreements clarifying how much money must be paid and by what date. Doing this gives spouses the ability “to enforce the agreement, should the paying spouse fail to follow through with his agreement,” Denmon said.
18. Consider your income before asking for all deductible items
Clients typically strive to get as much as possible in a divorce. However, according to Russell Luna, a certified divorce financial analyst, higher incomes can disqualify individuals from important tax deductions.
In light of this fact, you might not want all the items you originally requested in a divorce. For best results, speak to a financial professional about your specific situation and options.
19. Take advantage of free legal advice
Most attorneys will offer free consultations, said Narris, who advises clients to “take advantage of that and get some basic information, see if the lawyer is the right fit.”
To ensure you make the right choice, consult with a few attorneys before coming to a hiring decision. After all, what happens to your money after your divorce depends in large part on the quality of your legal advice.
20. Be mindful of the date when initiating divorce
While you might be tempted to file as soon as possible, note that property division is based on the date of marriage separation in some states. Typically, the court uses a formal date of separation to determine property division and the value of certain assets.
“If you are expecting a large increase in the value of a major asset upon a certain occasion, be mindful of that when you decide to initiate the divorce,” Narris said.
21. Design a joint parenting arrangement wisely
Unlike claiming a child as a tax dependent, claiming head of household is not assignable, said Narris, who went on to explain that individuals either meet the criteria or do not.
If you’re negotiating who will claim a child as a dependent, Narris said, “you can include a provision that the right to claim the child is dependent on the parent being up to date on their support obligation.”
22. Plan finances for after the divorce
Clients often neglect to consider how their financial planning can change after a divorce. “Your risk aversion may be very different than your former spouse, and you do not need to keep the same investment trajectory you had before the divorce,” Narris said.
If you don’t know where to begin, hire a financial advisor. Remember to think long term when planning finances after divorce.
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23. You can’t write off alimony payments on your taxes
People who formerly wrote off alimony payments on taxes no longer have that opportunity due to new laws. That’s because the Tax Cuts and Jobs Act (TCJA) eliminated alimony deduction from taxes.
24. If you receive alimony, you don’t have to report it
On the other hand, if you are the one who receives alimony, you do not have to report such payments as income on your taxes.
25. Have a paper trail
While most assets are divisible in divorce, there are some exceptions to that rule. Documents can help preserve what you believe to be separate property when it comes to divorce proceedings and should be collected beforehand.
“Too many times the necessary documents seem to disappear after a divorce starts, so to the highest degree possible, gather those documents before you start the divorce,” said Jeff Anderson, a divorce attorney at Orsinger, Nelson, Downing & Anderson.
26. Division of property can be complex
Dividing assets and properties isn’t always a simple numerical transaction. “Negotiating the division of property is an art form all its own,” said Keith Nelson, an attorney and partner at Orsinger, Nelson, Downing & Anderson. “It’s a three-step process: Characterize the asset, value it, divide it.”
After the asset is identified as community property, separate property or both, figuring out the value can be tricky. “For instance, a bank account with cash in it is pretty easy to value — look at the balance,” Nelson said. “But a retirement account, a house or securities can have more complex issues.”
27. Retirement accounts are not worth the balance
Just as it can be difficult to value assets, couples often struggle to determine the true value of their retirement accounts. One reason that retirement accounts pose problems is that deferred tax will have to be paid at some point. In light of this fact, Nelson cautions that retirement accounts might be worth even less than the balance minus tax.
“If one of the parties will be liquidating a retirement account early, then the highest marginal tax rate and the early withdrawal penalty might need to be subtracted from the value of the account,” said Nelson, who went on to explain that the value of these assets is often drastically reduced as a result.
“Even if the account is not going to be liquidated, the taxes which will be paid on the money at the time of retirement can be considered, and a reduction of the overall value of the asset might (be), and very often is, appropriate,” Nelson said.
28. Division of property depends on where you live
When a divorcing couple heads to court for a property dispute, state law is used to divide it using one of two classifications: community property or equitable distribution. With community property, both spouses own income and assets equally, and items can be divided evenly. Additionally, individuals can keep separate property.
According to Nolo, a legal advice website, community property applies to the states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Every other state uses equitable distribution, which involves “fairly” divvying up assets and money accrued during the marriage. Knowing the law of the land can help you avoid surprises during your divorce proceedings.
29. Some states are better for getting a divorce
According to a GOBankingRates study, the least expensive states for divorce are North Dakota, Mississippi, Wyoming, South Dakota and Kentucky. If time and cost are of the essence, you might want to consider where you live before filing divorce papers.
30. Be mindful of the worst states for divorce
The same GOBankingRates study rates the worst states for divorce as follows: New Jersey, Texas, Florida, Connecticut — and in last place, California.
31. When in doubt, seek a professional
Todd Huettner, a financial analyst and founder of Huettner Capital, said that would-be divorcees should seek professional help at all costs.
“A simple mistake that drops your credit score 40 points can cost you thousands on your next mortgage,” Huettner said. “Making a mistake separating accounts, renaming beneficiaries or not setting up life insurance properly can cost you hundreds of thousands and impact you for years.”
32. Make sure you actually implement the divorce
Despite their eagerness to get divorced, many people actually fail to complete all the steps needed to make their divorces legal, Huettner said. For best results, clients should make sure all their bases are covered and check up on spouses, as well.
“You don’t want to find out that your ex-spouse never refinanced the house five years ago like he was supposed to and (it’s) now in foreclosure,” Huettner said. “By the time you find out about it, your credit will be destroyed for years.”
33. Compromise could help you
You win some, you lose some, right? Unfortunately, divorcing spouses often refrain from compromising out of spite.
While you might be tempted to fight every battle that comes your way, agreeing to compromises could save you a lot of headaches and money on legal fees when going through a divorce. As an added bonus, your decision to compromise could encourage your spouse to do the same. And before marrying, think about securing a prenuptial agreement.
34. Don’t forget about health insurance
Although federal law might dictate that you have health insurance access under your former spouse, Narris cautions clients against relying on COBRA coverage long term due to the high cost.
Her advice: “Start doing (the) legwork for available options that may be less expensive. Better yet, find a job for yourself that has benefits.”
35. Belts are always tightened during a divorce
While individuals tend to factor the price of getting divorced into their budgets, they don’t always consider other everyday expenses incurred during the process.
Narris recommends that clients carve out a little extra money to care for their personal needs during this difficult time. “Factor in a gym membership, therapy co-payments, massages,” Narris said. “You will want to be as healthy as you can to help your kids through the process, and you never know when you may have a bad day.”
36. Take action but be wary
Savvy divorce attorneys advise their clients to be cautious when filing for divorce.
Luna said it’s important to make sure you have the current statement for your spouse’s brokerage account before announcing and filing for divorce. After all, a deceitful spouse could very easily liquidate the account with no paper trail by neglecting to cash checks until later. The last thing you want is to find out your spouse set up a new account after the divorce settlement while leaving the current brokerage statement with a zero balance. And just in case of emergencies like that, be sure to establish a personal emergency fund.
37. Avoid underestimating living expenses
You need to know what your spouse earns monthly, as well as where the money goes. When considering the cost of future living expenses, it’s important to take into account the effect of inflation.
Narris recommends keeping receipts so you have a good idea of what everything actually costs. Doing this will help you maintain quality of life after a divorce.
The cost of living varies across the U.S. — if you’re seeking a fresh start in a new city after a divorce, consider how expensive it is in that state.
38. Don’t keep or sell your home on a whim
Whether you have an emotional attachment to your family home or are just being vindictive toward your former spouse, be sure you’re thinking wisely about your decisions with regard to shared property and what you’re going to do with your property if you need to move into a smaller space. You don’t want to later discover that you gave up other assets just to keep a home in which you can’t afford to live.
39. Know what you value
When contemplating divorce, it’s important to consider what assets you value most and be prepared to let some things go.
“A major mistake in divorce that everyone can get trapped into is spending hundreds or thousands of dollars fighting for something that you don’t even want,” Narris said. Take your time so you can make the most rational and intelligent decisions, and to truly survive this new financial challenge.
40. Dress appropriately for court
It might seem like a small matter, but buying nice clothes for court can boost one’s confidence. “You will feel better and likely fare better with the judge,” Narris said.
Of course, clients should remember to keep it professional and avoid dressing in a manner that’s flashy or overly pompous. Play it safe by keeping clothing neutral and accessories to a minimum.
It’s important to remember that divorce law varies by state, and some of the previous tips might not be applicable in your region. Be sure to find a divorce attorney in your area who can advise you on how to get a divorce. Doing this will help protect your assets and property while ensuring the process goes as smoothly as it possibly can.
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