As a Financial Planner and CPA I am often asked about issues relating to finance as one goes through divorce. The following is a list of 19 rules that generally apply to finances and divorce. Because every situation is different this list is not all inclusive. You should consult the members of your team, primarily your attorney, but these are general things to watch out for. As you go down the list, ask yourself if you need to consider each point as it applies to your own situation.
1) If you have the ability to postpone taking income from bonuses or commissions until the following year, do so. This may help reduce the amount on which your divorce support obligations are calculated.
2) Obtain an attorney experienced in the nuances of divorce and its complexities not someone who just handles them occasionally. Make sure that your “team” is aware and kept abreast of the changes. Your team is your attorney, your tax professional, insurance person, your investment counselor, and any other financial adviser you might have.
3) If you have a business of your own that you went into the marriage with, make sure that your attorney is aware of that. Hopefully, your spouse was never a director or corporate officer.
4) Make a list of credit cards and cancel those that have zero balances with both your names on them. See what can be done about those cards that have balances on them.
5) Perhaps your spouse has already been setting the ground work for the divorce and has already been channeling some of your hard earned money into hidden assets. If you suspect as such, forensic accounting may be in order.
6) When you are certain as to what assets you will have after the divorce, gather them together to change beneficiaries where needed. This includes 401K’s, IRA’s Life insurance policies. If the children are under 18 consult an attorney about setting up a trust.
7) Before taking money out retirement money, make sure that a QDRO qualified domestic relations order has been initiated to circumvent being penalized and tax on retirement distributions that will be split with your ex spouse. Have the QDRO in place before the divorce is final.
8) Don’t let your emotions be your guide in this difficult time. Lean on your team. Most of us understand the team approach through sports and such. This is no different.
9) What are your assets worth? It may pay to obtain a qualified appraiser for your home, business, and other belongings.
10) Try to structure payments as alimony instead of child support you’re your ex-spouse is the “marrying kind”, alimony may very well stop before the child support obligation does and its tax deductible.
11) Have the divorce decree spell out who is to get the dependency deductions. Have your ex-spouse sign Form 8332 to ensure no problems down the road. This form can be signed for future years.
12) Get a life insurance policy on your ex spouse if children or a business is involved in the event something happens to them.
13) If stock options are a part of the settlement, look into having a separate statement issued to the ex spouse to eliminate any unnecessary tax burden.
14) If the ex spouse is entitled to receiving part of your retirement when you collect it, try to tie them into a set amount now. The benefit is that the payout in the future should be more than what is present value.
15) No matter what the emotional attachment, if you won’t be able to get your name off of assets like the home, sell them.
16) College aged kids. Work out the dependency deductions before hand to ensure that you get your share of educational deductions or credits that are only available to those who claim the deduction.
17) When figuring the divorce settlement be sure to factor in any tax issues that will come as a result. Example one spouse gets a $1,000,000.00 in cash and the other gets a $1,000,000.00 in stock options. The cash settlement won’t have a tax consequence but the sale of the stock options will. Determine the basis in assets that are being divided. There may not be a tax bill upon splitting up the assets but there very may be one when selling the asset later. Another example is a second home never used as a primary residence.
18) What if your soon to be ex spouse is self employed and not paying taxes, they appear susceptible to an audit, or you suspect that there may be improprieties in their business, think twice before filing any more joint returns. You may wind up being stuck with the tax bill down the road after the divorce is final.
19) Understand that child support is not tax deductible but alimony is.