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For Better or For Worse
By
Jeffrey Landers
When
you took those vows 10, 20, 30 years ago you never dreamed
it would come to this. You are now getting divorced and you
feel like the rug has been pulled out from under you. All
the plans you made for your future must now be rewritten.
Your life is about to change and you have no idea how to
even begin this process of divorce.
First, take heart. You are not alone, although it may feel
that way. Fifty-two percent of all first marriages end in
divorce…so you are in the majority!
Second,
take a deep breath and gather your thoughts. Try to put your
emotions aside and think financially. Someone once said,
“marriage is all about love and divorce is all about money”
and I couldn’t agree more. Therefore your focus should now
be about securing your (and your children’s) financial
future.
So
don’t throw up your arms and surrender just to get this over
with. Instead, arm yourself. Understanding the following
information could significantly increase your chances for a
financially secure life, both now and in the future.
The Top 6 Important issues
for Women During Their Divorce
1 - Believing that an equitable division of property means
a 50/50 split.
Equitable
Does Not Mean Equal!
When going through a divorce, most people assume an equal
50/50 split of all assets is the typical and accepted rule
of thumb. But look a bit closer and you’ll see that this
absolutely does not have to be the case.
A
30 year-old women with a degree will probably rebound
financially much faster than a 55 year-old homemaker that’s
been out of the workforce for many years. The harsh reality
is that it would be very difficult for the homemaker to find
a job that will allow her to maintain her current lifestyle.
The job prospects for someone over 50 with rusty business
skills are not too great. Nevertheless, her financial future
should not be jeopardized because she put her career aside
and spent the last 30 years raising a family while helping
her spouse advance his career.
Under this scenario, with such a disparity in income
potential, it would certainly be fair and equitable for her
to receive significantly more than 50% of their assets.
Conversely, the 30 year old would, most probably, receive
less than 50%, especially if her marriage was of short
duration.
The
following are some of the factors that are taken into
consideration when deciding how to divide marital property
(see # 2 below for an explanation of marital and separate
property):
·
Length of the marriage
·
The
age and health of the parties
·
The
standard of living during the marriage
·
Any
prenuptial or postnuptial agreement made between the parties
·
The
income and future earning capacity of each party. Their
educational background, training, employment skills and work
experience will be taken into account, along with the amount
of time they have been out of the job market to help the
other spouse’s career and/or raise a family
·
The
time and expense necessary to acquire sufficient education
or training to enable the less-advantaged spouse to become
self-supporting at a standard of living reasonably
comparable to that enjoyed during the marriage
·
The
contribution by each spouse to the education, training or
earning power of the other
·
The
extent to which one spouse deferred or delayed her education
and/or career goals
·
The
tax consequences of the proposed distribution to each party
·
The
need of the spouse that has custody of the children to own
or occupy the marital residence and to use or own the
household effects.
·
The
debts and liabilities of the parties
Depending on the state and the
individual circumstances, the property split in most
long-term marriages will probably be in the range of 50/50
to 60/40.
A larger split of 65/35 might
even be possible in very long-term marriages where the
less-advantaged spouse is older, in poor health, with few
job skills and little chance of gainful employment.
The amount and duration of
alimony (also called maintenance) is usually determined
after the property division has been decided.
If the less-advantaged spouse receives a
substantial portion of the marital assets, that could
possibly reduce (and in some cases eliminate) her need for
alimony. Nevertheless, in many jurisdictions, the purpose of
alimony is to enable the
less-advantaged spouse of a
long-term marriage to enjoy a standard of living reasonably
comparable to that enjoyed during the marriage.
In
marriages of short duration, it is often common for the
less-advantaged spouse to receive what is known as
rehabilitative maintenance. This is often a modest monthly
payment for a relatively short amount of time that will
enable that spouse to go back to school or receive
additional training that would allow her to become
self-supportive.
2 - Not knowing the difference between Separate and Marital
Property.
Although there are differences from state to state, in
general, separate property includes:
·
property that was owned prior to the marriage;
·
an
inheritance received by one spouse solely;
·
a gift
received by one spouse solely from a third party (not from
the other spouse);
·
the
pain and suffering portion of a personal injury judgment
Warning: Separate
property can lose its separate property status if it is
mixed or commingled with marital property or vice versa. For
example, if you re-title your separately owned condo by
adding your spouse as a co-owner or if you deposit the
inheritance from your parents into a joint bank account with
your spouse, then that property will most likely now be
considered marital property.
All other property that is
acquired during the marriage is considered marital property
regardless of which spouse owns the property or how the
property is titled.
Marital property consists of all income and assets acquired
by either spouse during the marriage including, but not
limited to: Pension Plans; 401Ks, IRAs and other Retirement
Plans; Deferred Compensation; Stock Options; Restricted
Stocks and other equity; Bonuses; Commissions; Country Club
memberships; Annuities; Life Insurance (especially those
with cash values); Brokerage accounts – mutual funds,
stocks, bonds, etc; Bank Accounts – Checking, Savings,
Christmas Club, CDs, etc; Closely-held businesses;
Professional Practices and licenses; Real Estate; Limited
Partnerships; Cars, boats, etc; Art, antiques; Tax refunds.
In
many jurisdictions, if your separately owned property
increases in value during the marriage, that increase is
also considered marital property. However some
jurisdictions will differentiate between active and passive
appreciation when deciding if an increase in the value of
separate property should be considered marital property.
Active appreciation is appreciation that is due, in part, to
the direct or indirect contributions or efforts of the other
spouse (e.g. you helped your husband grow his business by
giving him ideas and advice; you entertained clients with
him; you raised the kids and managed the household, which
allowed him to stay out late entertaining clients; etc.).
Passive appreciation is appreciation that is due to outside
forces such as supply and demand and inflation (a parcel of
land increases in value even though you and your husband
made no improvements to it or did anything else to help
increase its value). However, if your husband used marital
income and/or assets to pay the mortgage and/or taxes on
this parcel of land, you might have a very good argument
that this property, or at least the increase in value during
your marriage, should now be considered marital property.
As you can see, this can get quite complicated and
convoluted.
It
is also very important for you to know if you reside in a
Community Property State or an Equitable Division State.
There are nine Community Property States - Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington and Wisconsin.
Community Property states consider both spouses as equal
owners of all marital property (a 50-50 split is the rule).
The
remaining 41 states are Equitable-Distribution States, which
consider factors such as the length of marriage, the age and
health of the parties, the income and future earning
capacity and many other factors (see # 1 above) when
determining a settlement. And remember, settlements in
Equitable Distribution States do not need to be equal, but
they should be fair (equitable).
You
should completely understand this very important distinction
between separate and marital property so that you do not
inadvertently do anything that might cause your separate
property to be construed as marital property.
3 - Forgetting assets – The following are some
commonly forgotten assets:
Pensions, 401Ks, IRAs, stock options, restricted stock,
deferred compensation, life insurance, annuities, value of
professional licenses, tax refunds, time shares, country
club memberships and other executive perks, accrued vacation
time, etc.
4
- Not analyzing how your various divorce settlement options
will impact your future financial security
You
need to have a competent financial professional that can
analyze both the short- and long-term financial and tax
implications of your various divorce settlement options so
that the best divorce settlement can be structured to secure
your financial future. A Certified Divorce Financial Analystä
(CDFAä)
is a financial professional that is specially trained and
experienced in this highly complex area.
For
example, how do you divide the various assets - the house(s),
rental property, retirement and pension plans, stock
options, brokerage accounts? What happens if there are
closely held businesses involved? How much alimony should be
paid, by whom and for how long?
This type of financial analysis (projecting 5, 10, 20 or
even 30 years into the future to make sure that you will be
financially OK) is not something that most attorneys are
capable of doing (they just don’t teach that in law school).
Attorneys focus on the legal aspects of the case (including
all negotiations), while the divorce financial expert would
focus on the financial aspects and projections that would
provide the attorney with all the supporting information
they need to justify their negotiating positions.
Unfortunately,
you often have only one chance to get things right in a
divorce settlement. Once your divorce decree is signed, it
may be difficult, or even impossible, to make changes, so
you want to do everything in your power to get this right.
5 – Not understanding why some assets that are valued the
same are not worth the same. What is cost basis & why you
need to know?
It’s
important to understand that not all assets that are valued
the same are actually worth the same.
For
example, let’s say you’re trying to decide whether to keep
the $500,000 bank account or the $500,000 house that’s
completely paid off. You really love that house and you’re
leaning in that direction. Great idea? Maybe yes, maybe no.
You need to remember a few things that will impact your
bottom line - Like real estate taxes that need to be paid
every year, upkeep and maintenance, fuel costs, etc. And if
you eventually sell your home you may be hit with a big
capital gains tax bill. (e.g. you bought the home for
$200,000 [your cost basis] and it’s now worth $600,000. Your
capital gain is $400,000. Subtract your $250,000 capital
gains exclusion as a single person and you’ll have to pay
capital gains tax on $150,000. At next year’s capital gains
rate of 20%, that’s a $30,000 tax bill!).
So
which asset would you prefer now – the house or the cash?
6
- Not securing alimony, property settlement and child
support payments with life insurance
In
order to secure your divorce settlement payments (alimony,
child support, etc.), it is highly recommended that you
purchase a life insurance policy on the life of your paying
spouse
BEFORE your
divorce has been finalized. You want to be both the owner of
the policy and the beneficiary. That way you can be sure
that the premiums will be paid on time and the beneficiary(s)
won't be changed without your knowledge and consent.
Why Life Insurance?
Alimony payments will end upon
the death of your ex-spouse! (In many jurisdictions, child
support and property settlement payments will not end on the
death of your paying spouse and will become the obligation
of his estate, assuming the estate has sufficient
assets/income to continue making those payments.) The
proceeds from the life insurance policy will make sure that
you receive a tax free, lump-sum payment of what you would
have received over time from your divorce settlement
payments.
Why
BEFORE
the divorce has been finalized?
If your paying spouse
refuses to cooperate in getting the required
medical exam or if your paying spouse is uninsurable due to
health or other reasons, you need to know this before the
divorce is finalized so that you can find an alternate way
of securing your divorce settlement payments.
Remember,
divorce is a process. Be prepared for a bit of a
roller-coaster ride. Getting the right professionals on your
side is one of the most crucial things you can do. It is
important for you to understand the facts, but it is your
Certified Divorce Financial Analyst and attorney that must
present them is a cohesive way. While you may be walking
around in an emotional haze, it is the job of your
professionals to advocate for you and secure your financial
future.
You
are not in this alone!
--------------------------------------------
Jeffrey A. Landers
is a Certified Divorce Financial Analystä
and the founder of Bedrock Divorce Advisors, LLC
www.bedrockdivorce.com
, a divorce
financial strategy firm that specializes in helping women
who are going through a financially complicated divorce. The
firm also advises women business owners nationwide in
divorce-proofing their companies – both before and after
they say “I do.”
He can be reached at
landers@bedrockdivorce.com
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