First Things to Ask
Divorce is a life-altering event, impacting individuals not just emotionally but financially, both immediately and long into the future. One of the most contentious and complex aspects of divorce is the division of property. The financial decisions have lasting consequences, thus navigating the financial landscape during and after a divorce requires careful consideration and strategic planning. What to expect can vary greatly from one state to the next state. Here are three crucial aspects you and your professionals need to understand at the onset of a divorce.
How is Property Defined in Your State?
The way property is defined and divided in a divorce varies significantly depending on whether you live in a community property state or an equitable distribution state.
For example, Becky and John, going through a divorce in Minnesota, an equitable distribution state, had flexibility in dividing their property. Working with a mediator like myself, their job was to divide their assets and liabilities fairly. Despite the heartbreak, they managed to amicably split their home, savings, and retirement, each walking away with a new beginning, valuing fairness and respect over lingering bitterness.
In equitable distribution states like Minnesota, the goal is to divide property in a manner that is fair, though not necessarily equal. This can involve negotiations and considerations of each party’s financial needs and contributions. In contrast, community property states, such as California and Texas, require a 50/50 split of all marital assets. Knowing which type of state you reside in is essential as it dictates the approach and strategy for property division. Researching and understanding these laws will help you prepare for the property distribution process in your divorce.
Expect to Disclose All Property and Debts to Your Spouse and the Court
Full financial disclosure is a mandatory part of the divorce process. Not only does the court require it, but it also promotes trust and fairness, ensures accuracy in settlements, and provides legal protection. Hiding assets can lead to legal penalties, the reopening of the case, and increased hostilities.
Sarah and Bill, who came to me before filing for divorce, learned this firsthand. I explained the necessity of full disclosure. Initially hesitant, Bill eventually disclosed his bitcoin investments, and Sarah revealed the money she had been putting in a savings account she set up in their children’s names. Bill and Sarah’s honesty led to an equitable settlement and fostered mutual respect. Despite the end of their marriage, transparency helped them part ways with a sense of integrity and fairness.
Disclosing all assets and liabilities, even those considered pre-marital or non-marital, is critical. This comprehensive disclosure allows for an equitable distribution and helps avoid future legal issues. It also ensures that both parties can make informed decisions about their financial futures post-divorce.
Divorce Money Doesn’t Work Like Regular Money
Divorce finances operate differently from regular finances for several reasons. First, not all property has the same value in a divorce context, and second, IRS tax rules change with marital status. This is why there can be a right (or better) and wrong way to divide assets in a divorce.
Take the example of Laura and Mike, who were divorcing after fifteen years. They agreed on splitting their home and savings but faced complications with their retirement accounts. Laura suggested taking a larger share of the 401(k)s while Mike retained his print shop business. As their Certified Divorce Financial Analyst (CDFA), I warned them that the future taxes on Laura’s retirement accounts would make her share less valuable. Realizing this, they consulted their CPA, who confirmed my assessment. They were advised to equally divide the retirement accounts and compensate Laura with additional liquid assets. This plan balanced immediate tax-free division with future taxable income, leading to a fair and financially sound settlement, allowing both to move forward amicably.
Understanding the tax implications of asset division is crucial. Different types of assets can have varying tax consequences, and failing to consider these can result in one party bearing an unfair tax burden. Professional guidance from a CDFA or CPA can ensure that the division of assets is tax-efficient and equitable.
Conclusion
Divorce property division and the associated finances are inherently more complex and emotionally charged than regular financial management. The divorce process requires a comprehensive understanding of legal, tax, and financial implications, along with strategic planning to ensure fairness and financial stability for both parties. By recognizing these differences and seeking professional guidance, spouses can navigate the financial aspects of divorce more effectively, paving the way for a secure and independent financial future.
Divorce reshapes your financial landscape, demanding a meticulous approach to asset division, transparency in financial disclosures, and strategic tax planning. Understanding your state’s property division laws, the necessity of full disclosure, and the unique nature of divorce finances will help you achieve a fair and equitable settlement. With the right professional support, you can transition smoothly through this challenging phase, laying a solid foundation for your future financial security.
Please note, the above client examples are for illustrational purposes only. Please consult with an attorney for advice on what you should or shouldn’t do for your particular situation.
