So, divorce is complicated. (I know what you’re thinking: No sh*t, Sherlock!) But in my experience, the most complicated, often most contentious and certainly most confusing part of divorce has to do with finances and how to equitably separate everything – from assets and debts to retirement accounts to Great Grandma Fern’s antique Chinese porcelain vase collection – down to the penny.
That’s why I like to keep a few resources in my pocket to share with my clients. Here are a few of my favorite go-to tips and resources for divorce finances.
Jennifer Taylor, a Certified Divorce Financial Analyst and founder of Square One Financial Services, Inc., says, “I think a big part of the fear and uncertainty of divorce sprouts from the lack of understanding about what the financial picture will look like after the dust settles. Time and time again, I get the question, How am I going to make it? Because these uncertainties exist, I find that my clients are better able to manage stress and emotions encountered through the process if they can clearly articulate their financial priorities in terms of ‘must-haves’ and ‘nice-to-haves’ at the very beginning of the divorce process. Examples of must-haves may include being able to cover reasonable housing expenses, childcare expenses, etc., whereas “nice-to-haves” may include staying in the existing family home. Once these priorities are defined, it allows me to understand how close or far the couple is from alignment, and how much of a reality check will be necessary to reach a mutually attractive outcome.”
To think through community property, spousal property, assets and debts, I recommend downloading my free Property and Debt Division Cheat Sheet. I think you’ll find it to be a helpful tool to use to wrap your head around your full financial picture, so you can decide on those must-haves vs nice-to-haves.
“When divorce is on the table, sometimes people start making bad decisions. Cash, assets and records that have been around for years start magically disappearing out of fear and panic of the property division process,” Jennifer Taylor wrote in her 10-Step Quick Guide for Tackling Divorce Financial Issues for my website, Hello Divorce. Jennifer adds, “This behavior and approach can quickly impact a couple’s ability to handle a divorce in an amicable fashion and is one of the quickest ways to end up in a costly court battle. Often it occurs because an imbalance of knowledge and control of the couple’s finances is at play. This reality also means that if you’re the spouse with the lesser amount of control and knowledge, you’ll need to consider taking some important steps toward financial independence that are new and uncomfortable.”
In divorce as in the rest of life: honesty is always the best policy!
I agree 100% with this statement. Emotions and raw nerves can influence bad judgment. That’s why it’s important to remember that as soon as a divorce petition is filed, certain financial rules go into play. This is true in California where I practice as a Certified Family Law Specialist, but similar rules are in place in states across the country. After a divorce petition is filed, without written consent or permission from the court, you cannot:
Transfer, hide, or dispose of any real or personal property.
Cancel, cash out, or change the beneficiaries of any life, health, automobile, or disability insurance if the beneficiaries for the policy are your spouse or your children.
Create or modify any instrument (other than a will) that will cause your property to be transferred upon your death.
And in addition to these rules, in filing a divorce petition, both parties have a duty to accurately and completely disclose all assets and liabilities in which they have or may have an interest or obligation; and a duty to accurately and completely disclose any investment opportunity, business opportunity, or other income-producing opportunity.
Failure to follow these laws – designed to ensure couples play fair – could result in major financial penalties. So, in divorce as in the rest of life: honesty is always the best policy!
Dividing retirement plans is tricky and must be done correctly to avoid tax consequences such as an early distribution penalty for removing assets before the age required by the plan.
Your first step is to determine whether all or any of the retirement asset is community property. The asset is all or partially community property to the extent that employee or employer contributions were made during the marriage and before separation. The amount of the contributions during marriage plus any gains or losses since date of separation is the community portion. Community property is ordinarily divided 50/50.
If you and your spouse agree to divide the community portion of each retirement account separately, you can proceed directly to a specialist who can prepare the agreement and order that divides/segregates each of your interests in the benefit(s).
Most commonly, Qualified Domestic Relations Orders (QDRO’s) are used in a divorce proceeding to divide retirement benefits earned during marriage and/or a registered domestic partnership. After a plan determines that an order meets the requirements of a QDRO, the former spouse can expect the plan (not the ex-spouse) to directly pay his or her share of the benefits. So for example, if the plan is a pension, each party will receive their share directly from the plan without needing to go through the other. If the plan is a 401k, the community and separate property shares will be segregated with each spouse having their own retirement accounts. Each recipient is taxed only on the amount she or he receives.
A word of caution: after your divorce is finalized, ensure that your Qualified Domestic Relations Order (QDRO) is filed and implemented (if there is a provision in your Judgment that provides retirement account(s) will be divided by QDRO).
Most people incorrectly believe that when the divorce judgment is signed by the judge they are done. While their divorce is final, there is one more step that (usually) needs to be taken to ensure each party receives their respective share of retirement accounts. If you don’t handle this now, you will have to address it sometime in the future if you want to receive pension income or take 401k or IRA withdrawals.
Which brings me to my final piece of divorce financial advice:
You’ll be advised time and again to work with both a lawyer and a financial professional when it comes to separating divorce finances, and for good reason: professionals know what they’re doing! It won’t cost you a penny to set up an initial consultation to interview a Certified Divorce Financial Advisor or a lawyer, so know that you’re not locked in to working with the first person you call. (See my blog, How to Work with a Certified Divorce Financial Analyst.)
It truly is worth the cost to work with a professional now, rather than miss out on money you’re owed at settlement or have to pay for a costly mistake that could have been prevented by working with a professional from the outset. And it is critically important to ensure that your final divorce judgment is worded in a way that is enforceable, avoids unwanted tax consequences and that protects you and your family. Getting the right help from financial and legal experts will ensure that you secure the financial outcome you want from your divorce.
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