1. Consider Your  Options

Learn about the divorce options that are available to you. You can choose a traditional process where both you and your spouse hire your own attorney, financial expert and any other experts that are needed. There are two other more “cooperative” approaches available, such as collaborative divorce or mediation.

In a collaborative divorce, you and your spouse create a team, which generally consists of “collaborative” attorneys, a financial expert and a divorce coach who work with you to provide legal, financial and emotional support. This “team” facilitates a settlement process that considers both you interests, as well as the needs of your children. In mediation, it is a mediator who takes a neutral position in an effort to facilitate the settlement process. When necessary, the mediation process can also utilize legal, financial and other divorce experts.

2. Identify Current Income For Both You And Your Spouse

For both of you, your income from all sources must be disclosed. If you don’t already know, you should take the necessary steps to learn about your spouse’s current income.

3. Identify Current Expenses For Your Family

Examine all of the current annual expenses for yourself, your spouse and children. Identify those expenses that will become your responsibility after the divorce is final as well as those expenses you will no longer have to pay.

4. Prepare a Budget That Meets Your Needs After The Divorce Is Final

In most cases, the combined expenses for a couple or family increase after a divorce. Having two households instead of one generally results in both you and your spouse having to pay for some the same expenses. Knowing this in advance provides an opportunity to identify potential additional sources of income, consider additional training or education and/or create a support arrangement to provide more funds to one party for a limited period of time immediately after the divorce.

5. Understand Community Property Rules

If you live in California, or one of the other 8 community property states, the community property rules will affect how your property is divided. You may have to account for separate and community property, going back to the date of marriage.

6. Take Stock Of Family Valuables

Don’t forget to include documents and property kept in safe deposit box or home safe. Keep a copy of all documents and make a list of jewelry, collectibles, and all other items of value.  Wherever possible, photograph these items.

7. Account For All Of Your Property

This includes all community and separate property. Make copies of all of your financial documents and statements as well as those of your spouse. This includes: tax returns, bank accounts, real estate purchases, loans, life insurance, investment accounts, retirement accounts, current credit report, credit card statements, social security benefits, vehicle registrations, wills, trusts and employee benefit plans.

8. Account For All Of Your Debt:

This includes all community and separate debts. Make copies of all documents, not just yours, also those of your spouse, as well as statements related to all loans and debt.  This includes: credit cards, car loans, home loans, recreational vehicles, student loans, personal loans, tax liabilities and any other debt.

Learning as much as you can before the process begins can lead to a more efficient and less costly settlement process.

Question #1: How do I know if we need to consider life insurance?

The most common reason for considering life insurance is to provide funds to replace support payments that can no longer be made, due to the death of the payer.

Question #2: Can we use an existing policy?

Possibly, if the amount of coverage is adequate to replace the loss of support, if the remaining term is at least as long as the period the support will be paid and if the appropriate beneficiary designations are in place.

Question #3:  When should the insurance be applied for?

The insured should apply for the insurance and complete the underwriting process before you agree and sign the final settlement agreement. If coverage will not be available due to health issues, or if the premiums are too expensive, other options could be considered.

Question #4:  How much insurance is needed?

Initially, the amount of coverage should be equal to the total amount of support payments due over the entire period that support will be paid. The amount of coverage can be reduced over time since the total amount needed is less as fewer years of support payments are due.

Question #5:  What type of insurance is needed?

The type of insurance depends on the number of years the support will be paid and if the insured spouse has other beneficiaries that he or she wishes to provide for, after the support obligation is no longer in effect. Term insurance is typically used when the support obligation is 10 years or less and “permanent” insurance is typically used for longer periods.

Question #6:  Who should “own” the policy?

The owner can change the beneficiary, reduce the amount of coverage or cancel the coverage at any time. If the policy has cash value, the owner can also decide how the cash value can be used.  If you are the party who is receiving the support payments, it might be in your best interest to be the owner of the policy. The next best option is to be named as a beneficial owner so that you will be notified if insurance premium payments are not being made, or if any changes have been made to the policy.

Question #7:  Who should be named as the beneficiaries?

The beneficiaries should be those who received the support payments and would suffer financially if the support payments stopped, due to the death of the payer. Minor children should not be named as beneficiaries. A better option would be to have the funds paid into a trust that is managed by a trustee for the benefit of the minor.
Another consideration is to be named as an irrevocable beneficiary.  The policy owner cannot change an irrevocable beneficiary designation without the beneficiary’s consent.

Question #8:  How do I decide where to buy the insurance from?

If the party who is obligated to pay the support is also the one who is paying for the life insurance, they might be motivated to choose the cheapest policy. There can be a correlation between the cost of the insurance and the  financial strength ratings of the insurance company. A poorly rated company may offer lower rates. It is in the best interest of the party receiving the support to be sure the insurance is with a highly rated company.

Question #9:  Can we designate the life insurance provided by my employer to be used to “insure” support payments?

Employer life insurance is not recommended for purposes of “insuring” support. If the employer changes or eliminates the coverage or the insured party is no longer working for that employer, the  insurance may no longer be available.

Question #10:  Are life insurance premiums tax deductible?

For tax purposes, if life insurance premiums qualify as alimony (spousal support), the payments would be deductible by the payer and taxable to the recipient.  The payments would have to be made in accordance with the terms of the divorce or separation agreement AND the recipient spouse would have to be the owner of the policy.

The fees paid to attorneys for advice related to tax issues as well as alimony that is received or paid, may also qualify as a deduction. The fees paid to CPAs and tax preparers that are related to tax advice may qualify as deductions. You can deduct fess paid for advice related to federal, state and local taxes, including income tax, estate tax, gift tax and property tax.

If the fee you pay also includes other professional services, you must be able to substantiate the amount of the fee that is directly related to tax and spousal support. Ask the professional you are working with to provide you with a billing statement that identifies the amount of the fees that are directly related to tax and spousal support issues.

In addition, you may be able to receive a tax benefit if you pay for title fees, recording fees, surveys or transfer taxes, related to property you acquire as part of your divorce settlement. Your cost for these expenses would not qualify for an immediate tax deduction. However, the expense can be added to the “cost basis” of the property which will reduce the taxable gain at the time you sell the property.

You should always seek the advice of a CPA or other qualified tax professional for guidance related to your specific circumstances.

Regardless of what your settlement agreement states, the IRS and California Franchise Tax Board regulations dictate what is taxable, what is deductible and how much tax you will have to pay.

Here are some of the most common tax related issues that should be addressed:

Should I file as Married Filing Jointly, Married Filing Separately, Single or Head of Household?

If you are legally married on the last day of the year, you are eligible to file as Married Filing Jointly or married filing separate. In most cases, the combined tax is less if you file jointly. If you are no longer married as of the last day of the year, you have to file as Single, unless you qualify to file as “Head of Household.” You may qualify to file as Head of Household if you pay more than 50% of the cost to maintain a house for a “qualifying” person, such as a child or a parent.

Am I eligible to claim an exemption for my child/children as dependents?

The general rules require that your child must be under age 19 (or under age 24, if a full-time student), must have lived with you for more than half of the year and did not provide more than half of their own support. In the case of children of divorced or separated parents, there are special rules that allow either parent (not both) to claim a child as a dependent in any given year.

Who is responsible for the tax liability related to a tax return filed jointly?

If you are divorced you remain jointly and individually liable for any tax, penalty and interest related to a return you filed as Married Filing Jointly. This applies even if your divorce decree states that your former spouse will be solely responsible. There are procedures that allow for relief from tax liability in the case of an “innocent spouse”; however it is best to avoid filing a joint return if you have any concerns about the accuracy of the tax return.

Do I Pay Tax On Spousal Support (Alimony) and Child Support?

The general rule is that spousal support is taxable to the party who receives it and is deductible by the party who pays it – and the parties cannot file a joint return.

As with many provisions of the tax code, there are exceptions! For spousal support to qualify as a tax deduction for the payer and be taxable to the payee, the divorce decree must meet specific requirements. If the requirements are not met, the payments do not qualify as a tax deduction and are not taxable.

Child support is not taxable to the payee and is not tax deductible for the payer.

Understanding how the terms of your settlement agreement may affect your income tax liability, before you reach a final agreement, allow you to make decisions that can result in a better tax outcome for BOTH parties.

Working with a Divorce Financial Specialist during the divorce process can help you identify financial and tax related issues that may not be consistent with you best interests.

As reported by the Los Angeles Times, the McCourts could spend close to $35 million in legal fees and costs based on figures included in filings in Los Angeles County Superior Court.

While this is not the typical divorce, it does illustrate how costly a contested divorce can be.

There is a better way.

Most divorces can be settled more cooperatively with an approach that addresses the needs, concerns and goals of both parties. By contrast, litigation takes a competitive approach, focused on how much each party can get from the other.  This typically leads to both partners feeling as though the other received a fairer settlement.

Every divorce involves any number of financial issues, including:

• How much each of you will need to meet your future living expenses,
• How much support you can afford to pay or how much you will need to maintain your standard of living.
• Dividing property in a way that that best meets each of your immediate and long-term needs.
• The potential tax consequences of any particular financial agreements.

These common financial issues are generally not adequately addressed in a contested divorce.  The time to address the financial issues are during the divorce – - consulting with a financial advisor. It’s too late once the settlement is final.

A cooperative divorce process is the ideal setting for including the services of a neutral divorce financial analyst who is specially trained to work with both of you in an effort to reach a fair agreement on the financial concerns relative to your marital dissolution.

Since divorce financial analysts take a neutral and unbiased position, they are able to work with you as a couple to address the most important financial issues that affect you both. This results in less cost by only having to pay for one financial professional rather than two.

If you are interested in learning more about how a divorce financial analyst can help you reach a fair and balanced settlement agreement and spend less on professional fees, contact me for a free consultation.

Within a cooperative divorce process, the role of the divorce financial professional is to work with you towards reaching a fair and equitable settlement. The professional who specializes in the financial issues related to divorce is able to provide education, analysis and reports that present alternatives, consistent with your concerns, needs and objectives.

During the divorce process, there are many decisions you will make that can potentially affect you and your family for the rest of your lives. We strongly believe that you will be best positioned to make prudent decisions when you have the benefit of legal advice and information specific to your situation.

Divorce is a legal process and both you and your spouse should understand and consider all of your rights and obligations before agreeing to a final settlement. Many of the financial issues that are addressed in the divorce process are directly related to one or more legal issues. Only attorneys can provide legal advice.

Each party should retain a “consulting” attorney to advise them of their legal rights and responsibilities. Unlike the neutral financial specialist, who advises both of you, each consulting attorney only represents one of you and works within a confidential structure.

Beware that not all attorneys have experience working in a “cooperative” divorce model. It is recommended that your attorney should have comprehensive training and experience specific to family law, divorce mediation and collaborative divorce.

In a previous blog I listed 8 common financial mistakes made during the divorce process – here are more:

- Not considering potential long-term financial and income tax consequences:

Ideally, you should focus on reaching a settlement that is consistent with your long-term financial needs and objectives. The terms of your settlement agreement will affect your financial well-being for the rest of your life. Divorce financial specialists are trained to look at potential alternative long-term financial outcomes. Even a qualified financial advisor can’t predict the future; however, based on our training and experience, we can help you identify those critical financial considerations that can help you reach the decisions that are most likely to be beneficial for you.

- Not considering the potential “penalties” on retirement plan distributions.

If you are taking a distribution from a 401(k), or other qualified plan, pursuit to a Qualified Domestic Relations Order (QDRO), take the cash distribution before rolling the balance into an IRA account. Once it goes into an IRA, you may be subject to a penalty for early withdrawal. Be sure to calculate the exact amount you need because you can only do this one time.

- No plan for paying off joint credit cards and other debt.

Not identifying all jointly held debt or agreeing to keep a card open and accessible to both of you could be a costly mistake. If everyone is “cooperating”, it works, but when a payment is not made on time or new debt builds up, the other spouse remains liable.

- Not establishing credit in your own name.

Before the divorce is finalized, you should have a plan in place for your future credit needs.

- Not acquiring life insurance to “insure” spousal and child support.

Require your ex-spouse to maintain life insurance to ensure continued support payments upon their death. This should be part of your written divorce settlement agreement. If existing policies are designated to be available to “insure” support, the beneficiary designations have to be reviewed to be sure they are consistent with the intent of the support agreement. Also, be sure that the death benefit is adequate to replace the amount of support that will no longer be available. In order to not let policies lapse accidentally – request that you receive a duplicate premium notice to avoid a lapse of coverage. For absolute assurance, consider taking a policy out on your ex-spouse where the premiums are paid by you and you are named as the beneficiary.

- Not considering your needs and options related to your health insurance and long-term care insurance –
If you are currently covered on your soon to be ex-spouses’ employer health plan, find out if you are eligible for COBRA coverage. If your spouse’s employer qualifies for COBRA, you might be eligible for extended coverage on their plan. However, you may be responsible for the premium payments, so check the monthly cost. If you are healthy, your own individual coverage may be more cost effective.

- Not reviewing your will, trusts and estate plan

Revise your will and make any changes for the beneficiary selections on trusts, IRAs, retirement plans, life-insurance policies and any other asset that requires a beneficiary, assuming you no longer want to leave it all to your ex-spouse. Also, change the executor named in your power of attorney and will.

- Not preparing a complete inventory of property and documents in safe deposit box.

This is commonly overlooked during the settlement process and not discovered until after the divorce is final.

Have you made one of these mistakes? Or are you about to? If you are in the process of going through your divorce, I highly recommend that you consult with a divorce financial planner who can help you avoid these mistakes.

The financial decisions you make during the settlement process will significantly affect your financial future. That’s why it’s crucial to understand and consider the potential long-term financial consequences of your decisions before you agree to a final settlement.

Here are common financial mistakes made during the divorce process:

- Not preparing a complete and accurate accounting of income, expenses, assets and debts:

Divorce financial specialists are trained to follow a comprehensive process in order to gather all of the necessary financial data needed to prepare meaningful reports and provide recommendations based on your specific needs and objectives. By considering all of the pertinent financial data during the early stages of the process, it is much more likely that your long-term financial needs will be met.

- Not identifying separate and community property.

California is a community property state so having a basic awareness of the community property rules will allow you to understand your financial rights and obligations. With the exception of inheritances and gift, everything acquired from the date of your marriage to the date of your separation is generally considered your community property. Any debts you incurred during the marriage are also typically considered community debts. If you owned separate property prior to marriage and kept that property “separate” from the community property, it will most likely remain separate. There are exceptions to these rules so it is in your best interests to seek legal and financial advice with regard to community and separate property before you agree to a final settlement.

- Seeking financial and tax advice from professionals who are not experts on financial and tax issues related to divorce.

Despite a lack of formal financial training, attorneys and mediators have been thrust into the roles of financial analyst and adviser. Most couples will benefit from the services of a divorce financial specialist who is trained in dealing with the short-term as well as the long-term financial issues related to divorce. When dividing assets and planning for your financial future, a specialized divorce financial advisor can be particularly helpful. Many attorneys and mediators lack formal training in accounting and financial planning, but they are expected to negotiate financial settlements that will have both a short and long-term tax and financial impact on their clients’ lives.

- Keeping the house when you can’t afford to.

The family residence carries strong emotional feelings for many couples going through divorce, especially when there are minor children involved. As difficult as it might be, keep your focus on the long-term financial consequences of keeping a house you may not be able to afford.

- Not identifying income available for support, from all sources.

California law defines the factors that are considered in calculating the amount of spousal support. Legal and financial divorce professionals have the expertise to help you identify how those factors might be applied to your specific circumstances.

- Not taking into consideration the appropriate value for a business.

California law defines the factors that are considered in determining the value of a business for purposes of a divorce. As with the family residence, business ownership can also trigger strong emotions. Each spouse often has a significantly different opinion as to the value of the business. Consider hiring a “neutral” business valuation expert to provide you with an independent opinion regarding the value of the business.

- Not considering the income tax consequences related to spousal support.

Alimony (Spousal Support) is deductible for the spouse who pays it and is taxable to the spouse who receives it. Child support, on the other hand, does not qualify as a tax deduction for the spouse who pays it and it is not taxable to the spouse who receives it. The federal tax code specifies eight requirements that must be met in order for the payments to be considered alimony (spousal support) and therefore qualify as a tax deduction. Consider consulting with a divorce financial specialist, who is qualified to provide tax advice and to review the support agreement. The financial specialist should be able to confirm if the spousal support should qualify for the tax deduction and whether there are other options available that might result in less tax for either spouse.

- Not considering your post-divorce housing expenses:

Before you can truly evaluate whether or not you should keep the family home, it is important to understand the true cost of home ownership. It is also crucial that you consider the following: who will pay the mortgage, property tax, repairs, homeowner insurance and other home related expenses, such as: landscaping, lawn care, homeowner’s association fees, replacement of major appliances, replacement of heating and air conditioning, basic maintenance and major repairs and improvements.

Look for more common financial mistakes made during the divorce process in my next blog post.

The ideal time to begin working on the financial issues related to your divorce is before the formal process begins. Deciding not to do anything or acting impulsively without knowing the potential long-term financial and tax consequences can be disastrous for your financial future.

Here are common financial mistakes to avoid even before the divorce process begins:

- Breach of fiduciary duty between husband and wife: The California Family Law code states that a husband and wife are subject to the general rules that govern fiduciary confidential relationships. “The relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take unfair advantage of the other.” This duty requires that each of you provide access, at all times, to all records kept. Both of you are also expected to provide each other with an accounting, and hold as trustee, any benefit or profit derived from any transaction which concerns the community property. The “penalty” for breaching this duty can be severe, including loss of your entire share of your community property interest.

- Not identifying your goals, objectives and needs at the beginning of the process: Knowing what you want to achieve will help you to stay focused on what is important to you, and will keep you from being distracted by the emotional challenges inherent in the divorce process. Having a written plan can also help your attorney and other advisors understand how they can best meet your needs.

- Not considering all of the divorce process options available to you: Going through a divorce can often feel like you’ve lost control, especially when you are relying on a third party, such as a judge, to make a decision. Consider an alternative process such as Mediation of Collaborative Divorce.

- Not identifying the source of funds to pay for divorce professional fees: The amount of professional fees you can anticipate having to incur are directly related to the process you select. Typically, you can anticipate that going to court will cost more than working within a mediation or collaborative process. Regardless of the process you select, you can anticipate incurring substantially higher professional fees when one or both of you withhold information or records that are required to be disclosed, and you do not actively participate in the process and/or behave in an honorable manner.

- Not considering your needs for any career training, education and/or credentials: As you move beyond divorce, and look towards the future, it is in both of your best interests to be financially self-sufficient. Identifying needs and costs for any career training and/or education at the very beginning of the divorce process provides an opportunity to structure the settlement to include these needs. Addressing this at the outset and allocating funds to cover the cost can result in both of you having more funds in the future.

- Seeking financial and tax advice from friends and family: Having supportive family and friends to turn to for advice during your divorce can be of great benefit to help you get through a difficult time; unless they are financial experts, however, don’t rely on their financial advice.

Have you made one of these mistakes? Or are you about to? If you are in the process of going through your divorce, I highly recommend that you consult with a divorce financial planner who can help you avoid these mistakes.

1. Making financial decisions before you have complete information. Divorce financial specialists are trained to follow a comprehensive process to gather all of the necessary financial data and then prepare meaningful reports and recommendations based on your specific needs and objectives.

2. Taking financial and tax advice from friends and family: Having supportive family and friends to go to for during your divorce can be of great benefit to help you get through a difficult time, however, unless they are financial experts, don’t rely on their financial advice.

3. Making financial decisions based on emotions: You will be faced with many difficult financial decisions during the divorce process. These decisions will affect your financial well-being for many years into the future. Decisions that are made without a well thought out approach typically lead to costly financial mistakes in the future. Don’t give in to the pressure to settle just for the sake of getting the process over with.

4. Taking a narrow-minded position during the settlement process: There is no right or wrong solution. Ideally, you should focus on reaching a settlement that is focused on your long-term financial needs and objectives. You are more likely to reach a settlement that benefits you financially, in the long-term, if you approach the process with an open mind.

5. Reaching a settlement agreement without understanding the potential long-term financial consequences. Divorce financial specialists are trained to look at potential alternative long-term financial outcomes. We can’t predict the future; however, based on our training and experience , a qualified financial advisor can help you identify the most crucial financial considerations that can help you reach the decisions that are most likely to be helpful for you.

If you feel as though you made one of these mistakes, contact a divorce financial specialist who can help you rework the situation and set you up for a more secure financial future.