Financial Clarity Helps When Considering Divorce

It is emotionally traumatic to envision yourself getting divorced, due in part to the uncertainty regarding your finances in the future. Like many things in life, fear of the unknown can be more stressful than the reality.

When you understand your financial reality, you can develop a plan to improve your situation.

The same goes for facing the financial impacts of divorce. Creating a picture of your family’s financial profile, can help reduce stress.

KNOW WHAT YOU HAVE

As soon as the possibility of divorce begins to percolate, build a list of assets, liabilities, and sources of income, and find the last five years of tax returns. If you can locate a copy of the last mortgage closing document which you completed to qualify for your mortgage, it might give you a jump start.

Some assets your spouse and you may have are:

  • Cash: Is there a stash in your spouse’s sock drawer or in the safety deposit box? While you’re in the safety deposit box, make a list of the contents.
  • Checking and Savings Accounts: All personal, joint, business and trust accounts should be included. Don’t forget special savings accounts such as holiday, club or vacation fund.
  • Retirement Accounts: IRAs, 401ks, 403bs, defined contribution plans, and pensions (there are still a few around). Often, there are 401ks from previous employers which need to be located.
  • Non-Retirement Accounts: Brokerage accounts, Annuities, Certificates of Deposit, Cash Value in Life Insurance and stock and bonds in certificate form.
  • Real Estate: Record the ownership and fair market value of your home, vacation property and rental properties.
  • Other: Employer incentive plans such as stock options, banked vacation and sick days, country club initiation fees. Deferred compensation plans, while non-qualified, should be included in the list.

While you’re identifying accounts, make sure to get a copy of recent statements.

Liabilities reduce the value of some of your assets. The most obvious example is the mortgage, for which you will want to know the balance, monthly payments, rate and terms. Car loans, credit card balances, business loans, student loans are other debts to understand. Be alert to credit limits and any sudden withdrawals from HELOCS or credit cards.

KNOW WHAT YOUR FINANCIAL NEEDS ARE

Understanding your expenses and learning to budget is always a challenge. As the divorce process begins, it can be particularly complicated since you may be straddling your life in the marital home and anticipating the next step, perhaps living in smaller quarters. It can be helpful to have a list of expenses pre-divorce, and a second list with estimated post-divorce expenses.

To complete the FINANCIAL AFFIDAVIT, which is a document that your lawyer or mediator will file with the court to begin the divorce process, you and your spouse will each develop a list of income and expenses, assets and liabilities. The financial affidavit should reflect current expenses, and will be updated as you are finalizing the divorce to better reflect the situation at resolution. The judge uses this to determine financial need and assist in setting alimony, child support and the splitting of assets.

UNDERSTAND INCOME

Paystubs are a good way to determine gross income and understand what is being withheld in the way of taxes, insurance and retirement savings. Tax returns corroborate these figures. Full time, part time, and self-employment income along with investment income are all taken into consideration. Sources of income are evaluated to determine child and spousal support.

FINANCIAL REALITY

Doing your financial homework, even as you contemplate divorce can help to give you a sense of control over a difficult situation.

Whether the divorce is amicable or adversarial in nature, both parties will benefit by working towards a financially fair divorce. And if you end up deciding not to divorce, your time has been well-spent, organizing and understanding your finances.

Jennifer Nicasio, CFP®
Jennifer joined HTG in 2005. As an advisor, she helps clients make thoughtful and informed decisions on all aspects of their finances. Jennifer is a CERTIFIED FINANCIAL PLANNER™ practitioner and Certified Divorce Financial Analyst®. As a CDFA™ professional, she helps clients understand the short and long-term implications of decisions they are making during the divorce process. Jennifer has a BA from Middlebury College.