Divorce & Money
How to Make the Best Financial Decisions During Divorce
The practical guide
Dale Fetherling, and Violet Woodhouse, CFP
December 2010, 10th Edition
Divorcing? Get everything you need to split assets and debts as fairly as possible.
When you're going through divorce, you have to make an overwhelming number of financial decisions. Should you sell the house? What happens to retirement benefits? How will you handle taxes?
Full of sensitive and practical advice, Divorce & Money guides you through the complex process of making these important, and sometimes life-altering financial decisions. It covers how to:
- decide whether to keep or sell the house
- protect yourself against misuse of joint accounts and credit cards
- avoid tax problems
- handle alimony and child support
- divide debts fairly
- avoid hasty decisions that could hurt you financially
- reduce risks to your investments
- understand how a court evaluates assets
- gain financial stability as a single person
The fully updated 10th edition provides the latest tax figures and data, plus new information on dealing with credit problems, bankruptcy, foreclosure, and the other varied effects of divorcing in a down economy.
“Reduces the financial complications of divorce into comprehensible strategies.”-Newsday
“An essential purchase for anyone contemplating a split...”-Los Angeles Times
“At the very least, you should read Divorce & Money so that you better understand your legal rights.”-Newark Star-Ledger
Financial Facts Checklist
What Must I Plan For?
Worksheet: Where I Do / Don't Want to be in the Future
Worksheet: What's Happening in My Life
Property and Expenses
Net Worth Statement: Assets and Liabilities Worksheet
Net Worth: Balance Sheet Summary
Cash Flow: Income and Expenses
What Will Happen to the House?
Monthly Housing Costs Chart
Find the Equity Value of Your House
Dividing Retirement Benefits
Calculating the Financial Value of Plans
Sample Letter to Spouse's Employer
Dividing Financial Investments
Real Estate Values
Value of Insurance Policy
Spousal Debt Chart
Alimony and Child Support
How Much Do You Need to Live On?
How Much Child Support Do You Need -- Or Can You Afford To Pay?
What Does It Cost to Rear Your Children?
How Much Alimony Do You Need -- Or Can You Afford To Pay?
Negotiating and Finalizing the Best Possible
Marital Balance Sheet
After the Divorce
Finishing the Business of Divorce
Worksheet: How Can I Move Beyond the Divorce?
Goal Setting Worksheet
Dale Fetherling has written, edited or co-authored more than a dozen nonfiction books. He's the former editor of the Los Angeles Times' San Diego County Edition and has taught writing and editing at four colleges and universities.
Violet WoodhouseViolet P. Woodhouse, noted author, lecturer, seminar presenter and consultant to the media in the areas of family law and personal finance, is a foremost authority on the financial and tax aspects of divorce. A practicing family law attorney as well as a Certified Financial Planner and Registered Investment Advisor, she pioneered the development of financial analysis of property settlements for financial planners, and often acts as a consultant to divorcing spouses and their mediator during mediation. Ms. Woodhouse is in private practice in Newport Beach, California, and has authored articles for the state and local bar associations and legal newspapers. Co-author of Nolo's Divorce & Money, she has also written articles for or has been quoted in such publications as the Wall Street Journal, New York Times, Working Woman, Lear's, Money Magazine and Kiplinger's Personal Finance Magazine. Worth Magazine has named her one of the top 60 financial advisors in the nation.
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Introduction: Your Financial Companion During Divorce
- A Note on Same-Sex Marriage and This Book
- If You Are Feeling Overwhelmed…
- Managing Your Divorce in Troubled Financial Times
- How to Use This Book
1. Legal vs. Financial Realities of Divorce
- Lessons in Legal Reality
- Your Best Strategy: Think Financially—Act Legally
- Legal vs. Financial Stages of Divorce
2. Financial Realities No One Talks About
- In Divorce, Everything Takes Longer and Costs More
- When You’re Connected to Another Person Financially, You’re at Risk
- The IRS Is Watching Your Divorce
- Cash Is King
- You’re Playing for Keeps
3. Emotional Divorce: Managing the “Money Crazies”
- Reduce Stress Whenever You Can
- Safeguard Your Sanity
- Watch Out for Sore Spots
- Be Prepared for Bad Scenes
- Develop a Financially Focused Mental Attitude
- Avoid the “All at Once” Syndrome
- Manage the Ebb and Flow of Emotions
- Don’t Let Financial Tasks Overwhelm You
4. The Hardest Part: Is My Marriage Really Over?
5. The Separation: What Happens When One Spouse Moves Out?
- The Separation Date
- Building a Better Credit Report and Credit Score
- Social Security Benefits After Divorce
- Questions to Ask an Attorney
6. Closing the Books: What Do We Do With Joint Property?
- Joint Account Checklist
- Questions to Ask an Attorney
7. Getting Help: Who Can I Turn To?
- Questions to Consider When Seeking Outside Help
- Selecting Professionals to Assist You
8. Financial Fact-Finding: What Must I Know and When Must I Know It?
- Advice to the Terminally Disorganized
- If You Think Your Spouse May Be Hiding Assets
- Don’t Forget the “Easy-to-Forget” Assets
- The W-2 and the Tax Return
- What About the Gifts You Gave Me?
- Financial Facts Checklist
- Questions to Ask an Attorney
9. Facing the Future: What Must I Plan For?
- Major Upcoming Life Events
- Anticipated Financial Commitments
- Major Goals That Will Cost Money
- Where Does the Money Come From?
10. Protecting Against Risks to Life, Health, and Property
- Property and Estate Protection
- Questions to Ask an Attorney
11. Taxes: How Do I File and Pay?
- Get a Rough Estimate of Your Tax Bill
- What Status Is Better to Use When Filing Tax Returns?
- When in Doubt, File Separately
- What to Know If You File Jointly
- Dividing the Joint Tax Liability—Or the Refund
- Tax Issues Involving Temporary Alimony or Child Support
- Get Your Tax Agreement in Writing
- Questions to Ask a Tax Adviser
12. Property and Expenses: Who Owns and Who Owes What?
- Who Owns What—Marital Property and the Laws of Your State
- Who Knows What—Using Legal Discovery
- Net Worth—What Do You Own and What Do You Owe?
- The Difference Between Assets and Income
- Cash Flow—Where Does the Money Go?
- Questions to Ask an Attorney
13. What Will Happen to the House?
- Financial Versus Legal Realities
- The House—Keep It, Transfer It, or Sell It? Now or Later?
- Steps Toward Settling the House
- Questions to Ask an Attorney or Financial Adviser
14. Retirement Benefits: Who Gets What?
- Understanding Retirement Plans
- Qualified Domestic Relations Orders
- The Legal Value of Your Retirement Plans
- The Financial Value of Your Retirement Plans
- Calculating the Financial Value of Plans
- Additional Financial Factors Affecting Retirement Plan Divisions
- The Division Decision: Now or in the Future
- Questions to Ask an Attorney
15. Financial Investments: How Do We Divide the Portfolio Pie?
- Concepts to Consider
- Steps to a Settlement
16. Evaluating Employee Benefits and Stock Options
- Employee Benefits
- Stock Options and Nonqualified Deferred Compensation Plans
- Questions to Ask an Attorney or Tax Specialist
17. How Will We Divide Debts?
- General Rules on Who’s Responsible for Debt
- If You Live in a Community Property State
- Listing Your Debts
- Marital Debts and Bankruptcy
- Dividing Debts at Divorce
- Dividing Debts When There’s Nothing to Fight Over
- Questions to Ask a Divorce Attorney
- Questions to Ask a Bankruptcy Attorney
18. Child Support and Alimony: What Might I Pay or Receive?
- Child Support—Legal, Financial, and Emotional Realities
- Steps to a Settlement
- Alimony—Legal, Financial, and Emotional Realities
- Steps to a Settlement
- Questions to Ask an Attorney
19. Negotiating and Finalizing the Best Possible Settlement
- Have You Done Your Financial Homework?
- Tallying Your Marital Balance Sheet
- How Are the Offers and Counteroffers Made?
- How Do You Finalize the Settlement?
- Divorce Ceremonies
20. After the Divorce: How Do I Get From “We” to “Me”?
- How Do I Finish the Business of Divorce?
- Can I—Or My Ex-Spouse—Change the Settlement?
- What Do I Want to Do With My Life?
- If You Find a New Love, Protect Your Old Assets…and Your Alimony
- How Can I Move Beyond the Divorce?
Legal vs. Financial Realities of Divorce
Lessons in Legal Reality............................................................. 11
Most Divorces Are Settled Out of Court................................... 12
Divorce Law Is Local................................................................. 13
Don’t Expect the Legal System to Take Care of You............... 14
Your Future Is in Your Hands—Not the Court’s........................ 16
It’s Easier to Write Laws Than to Enforce Them....................... 17
Your Best Strategy: Think Financially—Act Legally............... 18
Legal vs. Financial Stages of Divorce....................................... 18
Sooner or later during your divorce, you will discover one insight that is central to this book and to the successful outcome of your settlement:
Legal reality and financial reality are fundamentally different.
A seemingly simple idea—but you’d be surprised how long it takes to sink in. To help you understand why this concept is so important, take a few moments to consider the following real-life divorce stories. In each, read the Legal Reality first. Then, see the true outcome in the Financial Reality side.
Jonathan and Penny were married for five years before they divorced. During that time, Penny frequently ran their credit cards to the limit buying clothing and had trouble balancing their checkbook.
When they reached the final settlement hearing, Jonathan was greatly relieved when the court made Penny solely responsible for paying the $10,000 in credit card debts she had accumulated during their marriage. The settlement was included in the final divorce judgment, which made Jonathan feel safe.
After the divorce, Penny didn’t pay off the credit cards, and creditors began hounding Jonathan for the money. Jonathan ended up footing the bills, because a divorce settlement assigning debts—even one included in a divorce judgment—cannot change a couple’s original joint obligation to their creditors.
Had Jonathan raised the issue before their settlement was finalized, he could have demanded more property in exchange for paying Penny’s debts or insisted that they sell some jointly held property to pay off their creditors.
Moral of the story:
Getting something “in writing” from the court
doesn’t always mean you’ll get it for real.
During their 15-year marriage, Sharon and Bill were committed to building up a good portfolio of stocks and mutual funds for their retirement.
Because Sharon avidly followed the market, she wanted to keep a batch of stocks she had recently purchased and asked Bill to take stocks of equal value, which they had purchased early in their marriage. After negotiating over a few other assets, Bill and Sharon reached an agreement in which each of them would receive the exact same dollar amount in cash or assets at the end of the divorce. The court accepted the terms of their settlement, and the books on their marriage were quickly closed.
Sharon paid attention to basic financial facts that Bill ignored: costs and taxes that decrease the value of an asset.
Sharon wisely picked the stocks most recently purchased. Because these stocks had not increased substantially in value, the taxable capital gains were low. Bill, however, blithely accepted the older stocks, which had gone up a lot in value since the time of purchase. Even at a capital gains rate of 20%, he owed substantial taxes when he sold the stocks. Had he taken the time to calculate his potential tax burden before agreeing to the settlement, he could have suggested splitting the stocks so that each spouse took half of the older stocks and half of the newer stocks.
Moral of the story: A 50-50 settlement isn’t always equal.
Lessons in Legal Reality
Ending a marriage with no assets or huge debts is the hard way to learn about divorce. Your lessons do not have to be so costly. You would never try to play basketball with football rules or to cook Chinese food using classic French recipes, would you? Similarly, you must learn to follow the correct “rules” for playing in the legal league versus the financial field.
The following five guidelines explain the legal basics of divorce:
Most divorces are settled out of court.
Generally, divorce law is local.
Don’t expect the legal system (or a lawyer) to take care of you.
Your future is in your hands—not the court’s.
It’s easier to write laws than to enforce them.
Most Divorces Are Settled Out of Court
You may imagine that you’ll have a divorce trial like those on an old Perry Mason or L.A. Law episode—everything settled in an hour with the “good guys” winning. Perhaps you’re waiting for your day in court when you can explain to a wise and kindly judge the exact wrongs your spouse has visited upon you.
Don’t count on it.
An estimated 90% of divorce cases are settled without a court trial. Most of your settling will be done through meetings between you and your spouse or between your lawyers, often on the courthouse steps. As the trial date nears, you will quite likely be rushed into conferences in the courtroom hall or coffee shop. In these frantic meetings, your spouse and/or the attorneys may confront you, demanding instant decisions on issues that will affect the rest of your life.
Most divorce courts today are primarily concerned with money, not morals. The main job of the legal system is to resolve property disputes and to ensure the welfare of children. Spousal misconduct, of course, could affect custody, and economic mischief (such as hiding assets) can change the outcome of the final settlement. But by and large, you will not get a chance to vent feelings about your mate in the courtroom.
The impersonal atmosphere of the legal world may baffle you. But, in fact, it is often to your advantage to stay out of the courtroom. As long as you and your spouse work toward a settlement without involving the court, you can trade property, negotiate terms, and still maintain some measure of control over your destiny. If you cannot reach a settlement and must have a trial, however, you put your fate into the hands of a judge—a stranger who knows nothing about your children or property. You’ll have to live with whatever that judge decides.
Divorce Law Is Local
Divorce laws not only differ from state to state, but interpretations of divorce law can vary from judge to judge. Whether you ultimately hire an attorney and whether or not you have a court trial, you should ask a local lawyer to assess the most likely outcome of a divorce like yours. Ask about the types of settlements local judges tend to approve. Find out how the local courts and individual judges view mediation. Also ask about judges’ attitudes and the prevailing mood regarding, for example, joint custody, moving away with the children, or alimony.
Divorce courts are unlike other courts. They are called “courts of equity,” which means that the judge has wide discretion in making decisions. While a lawyer can educate you on the law, a lawyer cannot ethically or realistically promise what the judge will do in your case.
You may not like what you hear when you see a lawyer, who may tell you that the things you want in your divorce are impossible to get. Another attorney may promise you everything, but ultimately deliver nothing. Interviewing several people for a cross section of opinion can give you a more accurate picture of your situation. (See Chapter 7 for information on hiring an attorney.)
If you know how individual judges normally rule in your locale, your expectations will be more realistic. Even if you don’t have a trial (remember, 90% of cases are resolved before a trial), divorce lawyers tend to give advice that is consistent with local court rulings. Granted, it’s hard to ignore sensational newspaper stories about big-dollar divorces in other parts of the country. But those cases are irrelevant. You must concentrate on what happens in your backyard, because that is where your divorce and your financial future will be decided.
Throughout this book, we may tell you to “check with an attorney” on various questions. We say this because the individual circumstances of your divorce may require legal information beyond the scope of this book.
But who is going to pay for this costly legal advice?
Attending a brief consultation with a lawyer should not bankrupt you. Organize your thoughts and questions before you seek legal advice so you can save time when the attorney’s meter is running. At an initial visit, spend an hour—not a day. Then go home and think about how much more you may have to spend on an attorney.
In some cases, your spouse may be required to pay all or some of your lawyer’s fee. The lawyer should be able to advise you about this at the initial consultation.
If you have very little money and feel you truly need advice from an attorney, consider borrowing money, holding a garage sale, or taking a short-term second job to get some money to pay legal fees. As an inexpensive alternative, see whether a local law school or bar association has a divorce clinic where law students can assist you.
For more information on finding—and working with—lawyers, see Chapter 7.
No matter what other decisions you make, here’s an important rule: Do not let your spouse’s attorney or anyone else chosen by your spouse be the one to represent you. If your spouse is represented by an attorney, you should be also. Except in very limited circumstances, one attorney cannot represent both parties in a divorce action.
Don’t Expect the Legal System to Take Care of You
One of the most costly illusions in divorce is the idea that the judicial system will protect your rights and meet your needs. You cannot afford to make that assumption. You are the one who must make the decisions in your divorce, because you are the one who will have to live with them.
Attorneys and other professionals can help you understand your rights during divorce, but they should not determine what your financial needs will be once the marriage ends. Just because you are “entitled” to a certain asset (say, the house), that does not mean you can afford to keep it. Even though you may want to remain a freelancer, you may have to get a steady job so you can support your family after a divorce. Only you can make these decisions.
Instead of passively going through the motions of your divorce, you might do better by adopting the active attitude of an entrepreneur. Businesspeople starting a new company go to lawyers to have them formalize agreements and assess legal risks. The entrepreneur sits down with accountants and financial professionals to crunch the numbers and determine whether a business will turn a profit. Only then, after examining the financial aspects of a venture, do they consult attorneys about potential legal problems.
Likewise, you must be the one to call the shots in your divorce. Don’t expect the legal system to make the decisions that are best for you.
Don’t Be Afraid to Ask Questions
Don’t be intimidated or afraid to ask questions if something is unclear. One divorcing woman admitted that some of her troubles resulted from her own unwillingness to appear ignorant. In an interview with sociologist Terry Arendell in the book Mothers and Divorce, the woman recalled her divorce and commented, “Part of the problem was my own fault. I gave the appearance of being knowledgeable. I knew more about buying property and bank accounts than my lawyer did, but I didn’t understand all the tax things. And so I was reluctant to ask some of the things I should have asked.”
Your Future Is in Your Hands—Not the Court’s
The legal system is not designed to help you with your finances once the divorce is granted. For example, you may legally and fairly split the benefits of a pension plan in a divorce settlement, but when the time comes to retire, you may have less income than you need to live on. The court cannot anticipate or resolve that problem for you.
Further, the implications of future taxes on property are not taken into account in settlement agreements in most states. Generally, only existing—or impending—taxes can be factored into a division of assets. Anything beyond these taxes is considered speculation—and speculation is not normally welcome in the courtroom. For example, if, as part of the divorce settlement, you and your spouse will sell $40,000 of stock at a profit, the taxes owed on the profit will be factored into the settlement and could be split between you. If you keep the stocks and your spouse gets another asset of the same value, the court will not grant you more at the time of the settlement to cover whatever amount of taxes you may owe in the future.
In short, you cannot leave complex, multifaceted money questions about your future to the one-dimensional perspective of divorce law.
Definition: Settlement Agreement
Throughout this book, we refer to marital settlement agreements, property settlement agreements, settlement agreements, or simply agreements. They all mean the same thing. A settlement agreement is a written contract between you and your spouse outlining how you will divide your property and debts, the amount of alimony and child support, who will pay it and who will receive it, who will have custody of or visitation with the children, and other major issues. If you and your spouse are unable to reach an agreement on these issues (on your own or with the help of a mediator), you will have to go to court to have a judge resolve them. Once these issues are finalized, they are incorporated into the final divorce decree.
It’s Easier to Write Laws Than to Enforce Them
Laws concerning child support payments are among the most stringent on the books. Yet every year, millions of parents don’t receive the money to which they are legally entitled. Nonenforcement of court orders is one aspect of legal reality for which you must prepare yourself. As you go through each step of your negotiations, ask, “How will I handle this if my ex refuses to abide by the agreement or the judge’s orders? What options do I have to enforce this agreement?” And most important, “How much will enforcement cost me?”
Three states (Arizona, Arkansas, and Louisiana) provide marrying couples with the option of entering into a “covenant” marriage. A covenant marriage makes it more difficult to get a divorce and is an alternative to a traditional marriage permitting divorce without restrictions. In addition to undergoing premarital counseling prior to their wedding, a couple wanting to end a covenant marriage must wait a full two years before proceeding, and may divorce only for reasons such as adultery or alcoholism. Parties in states offering covenant marriage are free to enter into a traditional marriage if they prefer. Opponents claim covenant marriages will force some women to stay in an abusive relationship.
Although most states that have considered covenant marriage laws have rejected them, Arkansas adopted covenant marriage as recently as 2001, and such laws are still pending in several other states.
When you recognize these risks ahead of time, you can take steps to minimize them.
To enforce your divorce agreement, you will probably have to go to court. The process is expensive, time-consuming, and emotionally draining. If at all possible, keep animosity to a minimum after the divorce so that both parents’ custodial or visitation time with the children goes smoothly. In turn, that may make it more likely that your ex will make alimony and child support payments on time.
Your Best Strategy: Think Financially—Act Legally
Make your financial concerns the centerpiece of your divorce, and work within the framework of the law. That is the most powerful position you can take. If you think financially and act legally, you will be able to anticipate risks and assess your needs, before a financial disaster hits.
No one wants to negotiate for an asset in a divorce and then be unable to sell it because they’d owe too much in taxes. Why should you go through the nightmare of settlement negotiations only to end up losing everything you fought for six months after the divorce is over?
Remember: The legal process of divorce is something you will live through—but the financial reality is what you will have to live with for the rest of your life.
In a divorce, it’s not what you get that counts—it’s what you keep.
Legal vs. Financial Stages of Divorce
Use the following table to help understand the relationship between the legal and financial stages of divorce. These stages will be explored in more detail throughout the book. Keep in mind that few divorces will follow the steps in this exact order.
Nolo’s website, www.nolo.com, contains legal information and resources that will help you through your divorce. In addition, several sites specialize in divorce information. Typically, these sites include forums, message centers, and chat rooms on topics such as custody, mediation, parenting, child support, debt, grandparent issues, and divorce in the military. Many contain articles and books on divorce-related subjects and state-by-state explanations of the law. Some can help you find professionals—lawyers, therapists, mediators, or financial advisers—to assist you in your divorce. Some require small membership fees for full participation.
Consult an attorney or do some research at a law library to learn about your legal rights and responsibilities. In particular, investigate how your state’s laws regarding separation affect custody, alimony, child support, debts incurred after separation, and changes in the value of marital assets after separation.
Gather together your financial papers and make copies of all documents. Investigate the financial impact of separation. Close or freeze access to joint accounts. (See Chapter 6.) Open accounts in your own name before filing for divorce.
Physically separate. For some couples, this means moving apart. For others, it’s living in different parts of the house and no longer sleeping together. Additionally, your state law may use its own criteria to define the date of marital separation. Consult with an attorney to determine the rules in your state.
Keep track of debts incurred before and after separation, joint bills paid, and improvements made to property during separation. Keep receipts for moving and other expenses. Update insurance as necessary. Think about whether you will file taxes jointly or separately.
One spouse files a complaint or petition requesting a divorce. This begins the formal divorce proceedings. The other spouse must file an answer or response.
One spouse files a request for temporary orders regarding custody, visitation, alimony, or child support. The request may also ask that the other spouse pay both partners’ attorney fees.
Document all temporary alimony payments made, and write down your agreements about alimony. These payments may be tax deductible as long as there is an agreement in writing or a court order concerning the payments.
Conduct legal discovery (the procedures used to obtain information during a lawsuit) or win spouse’s cooperation to share documents. Determine the amount of alimony, child support, and attorney fees you will pay or receive, if applicable.
Conduct financial fact finding. Complete the net worth and cash flow statements in Chapter 12. Hire a forensic accountant if necessary to search for hidden assets. Analyze your assets and debts—use appraisers, accountants, tax advisers, actuaries, and others to help you assess values, tax consequences, and other risks of keeping or giving up property.
Begin settlement negotiations, using one of these possible scenarios:
Use mediation to negotiate the settlement.
Negotiate between yourselves.
Negotiate through your attorneys.
If you are unable to settle certain issues, bring those issues to a judge.
Before settlement negotiations, make a list of all items you want the agreement to cover. Be sure to carefully analyze the tax ramifications and other financial pitfalls of each offer and counteroffer. Reduce attorneys’ fees by doing much of the legwork on your own, settling without an attorney, keeping anger out of your negotiations, and avoiding a trial. Remember that a trial can be very expensive. You’ll have to pay lawyers’ fees as well as the fees of the experts (accountants, actuaries, and the like) whom you bring in to testify.
Draft your marital settlement agreement to incorporate terms of the settlement or the court order. The agreement is incorporated into the final judgment of divorce.
If you settle by agreement, carefully check it against your wish list.