How to Protect Your Personal Finances in Divorce

by Stacy Francis, CFP®, CDFA

Divorces are very complicated and can take a huge emotional toll on you. The last thing you need is for your divorce to be a financial disaster, on top of that. One of the biggest questions divorcing couples have is “how are we going to split our assets?” Unfortunately, this is not easy to answer, as it varies from case to case, depending on state laws, the judge assigned and the specifics of each situation.

State Laws

Most states use equitable distribution to divide marital property. This method takes into account each spouse’s financial situation when dictating how to divide the property. This can add flexibility to the negotiations, but it can be challenging to anticipate what the outcome will be.

There are nine community property states (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin) that consider all property acquired during the marriage to be equally owned by each spouse, and it is split 50/50 in a divorce.

Determine Net Worth

To calculate your and your husband’s net worth, add up all your assets and then subtract all of your liabilities. Make sure you know the cost of your home and also have your house appraised, since the value may have gone up significantly since you purchased it. It is best to consult with a financial expert to help you assess the value of your investment accounts determining both their current and future values. Be sure to have any businesses or collections, such as fine art, appraised, as well.

Splitting Investments

Divvying up your stocks, bonds, 401(k) plans, IRAs, pensions, and other investment accounts can be a daunting task. The bottom line is the share of marital assets you get after the taxman gets his. Say your spouse handles all the investments and offers to split them 50/50. Sound fair? Maybe and maybe not. Be sure to look at the value of your assets relative to your spouse on an after-tax basis, and then decide if you like the deal. For example, some assets are taxed at a much higher rate than others, making them, essentially, worthless.

Many people are unaware that investment accounts have hidden costs like taxes and surrender charges that you need to take into consideration before liquidating or splitting them up.  It is best to hire a financial professional to help you come up with a property division settlement; they will be able to help you see your whole financial picture while taking tax issues and future valuation of assets into consideration.

Some assets are more easily split than others. To get part of your spouse’s pension or 401(k), you’ll need a lawyer to draw up a qualified domestic relations order, or QDRO. There are several options, including a one-time payment, monthly payments at retirement, or a lump-sum payment that you would transfer directly into your own IRA, where your money would continue to grow, tax-free, until you retire. IRAs can be divided without a QDRO, as long as the division is explicitly detailed in your divorce agreement.

Long-Term Value

A key thing to keep in mind is to not give up long-term value for immediate gain. When looking at what assets you want to walk away with after this divorce, make sure you take into consideration the long-term value of these assets, not just the current value. If you give up a pension, for example, in exchange for keeping the house or up-front money, you may feel short-changed when you reach retirement age. A retirement account can be very valuable down the road.

Knowledge is Power

According to “The Divorce Revolution: The Unexpected Social and Economic Consequences for Women and Children in America,” a man’s standard of living usually increases by 10% after a divorce while a woman’s standard of living usually drops by 27%. They found that one of the factors in this is that women are more likely to be unaware of the family’s financial status.  It is incredibly important to do the research on your financial situation, and fully understand it, so you will be better prepared when it comes time to negotiate your divorce settlement.

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Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.

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