Divorce is a tumultuous time where couples race to the finish line. Although the temptation is understandable, it is important to slow down and prevent as many post-decree disputes ahead of time. The following tips will help save a tremendous amount of brain power and money that is better served during the healing and recovery phase:
1. Details and Dates
There is no place more dangerous to make assumptions then divorce. Playing nice doesn’t always pay off when someone else could be angry, vengeful or even destructive by disengaging from the process. Be specific, include details and deadlines. Listing assets and their respective values may not be enough to prevent someone from dragging their feet when fulfilling an agreement. Include account numbers and division instructions including valuation dates. Address how gains and losses associated with the assets will be handled at the time of division. Make sure to include specific dates as to when certain events will occur after the divorce, such as when debts will be refinanced, homes will be listed on the market to sell, items will be returned, parties will move out, etc.
2. Attorney Review
Statistics reveal a growing trend where couples are forgoing legal representation and either utilizing mediation or going through the process on their own (pro se). The fear of escalating conflicts and incurring unsightly attorney’s fees is pushing many cases away from the traditional litigation method. Although these thoughts can be terrifying for some, it is imperative to speak with an attorney and, at a minimum, have your agreements reviewed with an attorney who offers unbundled services (i.e., client determined limited scope engagements where fees are charged by the hour). There is a reason attorney’s fees are expensive, it is worth it. Finding the right attorney is crucial to your bottom line.
3. Financial Review
The process of dividing financials equitably is usually not as easy as creating a spreadsheet with values and dividing in half. Important concepts that should be analyzed that affect your outcome are before and after tax considerations, liquidity issues, valuations of assets such as businesses, pensions or stock options, budgeting items, transferability and how these effect the needs and priorities of each individual, etc. The divorce process is the starting ground for a new tomorrow. Therefore, it is highly recommended to review your agreement with a Certified Divorce Financial Analyst™. When working with a divorce financial professional it is possible to answer questions such as ‘What will this look like for both of us 10 years from now?’, ‘Will I be okay financially?’ or ‘Do I have what I need?’ before an agreement is made final.
4. Tax Information
Usually couples are not aware that they might need tax information from an ex-spouse in the future. Ideally, it is recommended to get copies of all tax returns from the marriage and any other tax information before the divorce is finalized, however, this is not always practical based on the situation. Therefore, it is important to include in an agreement that any tax information associated with the financial division in the future will be provided upon request. Items that could be necessary include retirement contributions, investment gain/loss and purchase information (cost basis), investment loss carry forwards, rental property information such as expenses and depreciation, etc. Mortgage interest is regularly left out of separation agreements leaving the couple arguing over it during tax time. Other tax items and their effectiveness should be reviewed because some individuals may not qualify to utilize a tax benefit based on their income level or tax filing status.
5. Securing Obligations
It is imperative to review all agreed upon financial obligations that will take place after the divorce is finalized. If a significant amount of spousal or child support is involved, a life insurance policy should be mandated in the agreement to secure the obligation in the event of the payor’s death. Typically, most divorce attorneys address this, however, it is worth double checking as you can imagine the financial disaster avoided by implementing this! A Certified Divorce Financial Analyst® can help structure a life insurance policy to protect you from an ex-spouse changing the beneficiary or not making premium payments. It is also worthwhile to review with a professional if there are any other obligations that should be secured for financial protection.
6. Closing Joint Debts
A divorce decree appointing an ex-spouse as responsible for paying a debt titled in your name or joint name does not give creditors grounds to hold you harmless for late or non-payments. To protect your credit, make sure all joint accounts are retitled (or refinanced) into the responsible party’s sole name. Don’t forget to include previous accounts with zero balance. An angry ex-spouse could take the opportunity to create financial damage. Check your credit report to see if there are accounts you may have forgotten! Don’t forget to include a date with a deadline from tip 1 of this article!
7. Mortgage Qualification Review
If refinancing or purchasing a home is in your future after your divorce is finalized, it is imperative to review the divorce settlement with a Certified Divorce Lending Professional to make sure that the agreements you have in place will hold up to refinancing and purchasing guidelines. For example, for spousal or child support to be considered as income in the mortgage process you must receive payments for 6 months as well as have an additional 3 years of support payments due in the future. If the agreement includes 3 years of spousal support, then it will not qualify as income for mortgage lending purposes. Mortgage guidelines are constantly changing so it is important to review your agreement with a professional to avoid unexpected roadblocks later.
Take your time before signing on the dotted line – your future will thank you!
Disclosure: Divorce transition/financial planning services offered by A.M. Financial. Investment advisory services offered through WealthSource Partners, LLC ("WSP"). A.M. Financial and WSP are independent and unaffiliated entities. The statements and opinions expressed are those of A.M. Financial and Amy Mahlen and do not represent the views and/or opinions of WSP or any other associated or affiliated person of WSP. Furthermore, the statements and opinions expressed are for informational and educational purposes only and should not be construed as legal, tax, accounting or investment advice. All statements and opinions are current only as of the time made and are subject to change without notice.