Preparing for divorce means not only adjusting to life without a spouse, but also unraveling finances.
Before entering the paperworked-filled divorce process that is sure to bring out emotions and has the potential for a communication breakdown, individuals should empower themselves by conducting a household financial biopsy and evaluating the household’s cash flow, savings and any other money-related issues.
Preparing for financial separation can reduce your legal bills and make both parties more educated on the financial situation. Financial planning experts across the country offered the following five tips every soon-to-be-divorced couple should take to help ease the division.
Evaluate your assets. The home tends to be the biggest asset of a married couple, but there are also many other possessions and investments that classify as marital assets. Even assets that aren’t necessarily owned jointly can come into consideration during a separation of assets, depending on state laws.
“I find very often that people forget about retirement accounts or pensions from past jobs,” says Cynthia Zagorski, founder of Cynthia Zagorski Financial Consulting and a certified divorce financial analyst in Bethesda, M.D.
Other assets people often forget about include stock options, deferred compensation and implied benefits, says Jerry Cohen, CPA and founder of California Divorce Financial Planning.
“Those assets have values that are paid in the future,” he explains, “not values that you can look at today and divide in half.” Tax implications should also be taken into consideration when valuing assets. Each party may be awarded an equal dollar value in assets, but down the road the assets may carry varying tax responsibilities.
Weigh debts. Separating debt can carry just as much stress as divvying up assets. Having a 12-month history of all credit card and utility bills and personal and jointly held loans will help parties figure out who will take on what debt.
“One of the challenges we’ve seen in the last year or two is that whether it is a credit card or loan or line of credit, it is harder to take one party off of the debt unless it is paid off,” warns Cohen. He recommends couples pay the debt off as much as possible prior to the divorce.
“Try to not be liable for something you don’t have the property for.”
For example, if you are responsible for paying the car loan, you should be the one driving the car.
Run a credit check and history. Regardless of marital status, everyone should conduct an annual credit check with all three agencies. And knowing where your credit stands prior to divorce could prevent headaches down the line.
Lili Vasileff, a certified financial planner and president of Divorce and Money Matters in Greenwich, Conn., suggests people run credit checks to find out if debts exist in their name.
“Often there are surprises, like a second mortgage to your house, or a credit card in your name,” says Vasileff, “It’s important to know your credit rating and correct inaccuracies while you still have one household and joint source of income so you can remedy any inaccuracies and strengthen your financial position in advance.”
Track how much you spend. Making an honest assessment of spending habits will help create a realistic budget to live on post divorce.
“If the cash flow is divided into two, a couple needs to determine if they can they live the life that they live now or if they need to make an adjustment, like selling a home,” says Mark Seruya, executive director at Morgan Stanley Smith Barney.
People tend to underestimate how much they spend, says Vasileff of Divorce and Money Matters. “If you are going into a process where you have to say what your needs are, you better know what your spending is.”
Identify income sources. Knowing how much money is coming in and from where is key to determining how much alimony or child support will be paid, if either two financial commitments are factors in a divorce.
This not only means knowing the income from an employer, but also looking at income from ownership stakes in other business entities and annual payouts from investments. Parties considering divorce should have copies of tax returns, which reflect this information.
Accurately measuring source of income is even more important when a spouse is self-employed, as services can be paid for by check, credit card or cash. A forensic accountant may need to come in to value the business and look for hidden assets, since the value of the assets in a business and even the future value of a professional license could impact a divorce settlement.