By the Financial Planning Association
Divorce is a painful emotional process, but it can also lead to huge financial losses for your clients if cautious steps aren’t taken.
In these economic times, many marriages slide into trouble over money. But
when a marriage dissolves, any hint of financial difficulty before the divorce
has the potential to plunge the split parties into disaster.
Even when money is tight and parties are distracted by the pain of a breakup,
financial and tax planning need to be front and center in divorce planning. You
can help your clients by assessing debt and other financial obstacles. Here are
critical steps that need to be taken by divorcing clients:
- Get a budget in place. No matter how sophisticated clients
think they are about their finances, don’t pass up the opportunity to do a basic
financial budget with them for their new lifestyle. Ask the basic questions that
will help them understand what life will be like when they are living with a
single-job income stream or a temporary income stream provided by an ex-spouse.
It’s always an eye-opener. - Find an experienced divorce attorney. If you’re not familiar
with the complexities of divorce legal procedures, you should help your client
find a good divorce attorney. A good divorce attorney isn’t necessarily a shark.
The choice of attorneys—for men as well as women—should fit the challenges being
faced on both sides. Good divorce attorneys definitely cost money, but they pay
for themselves by handling such major issues as division of marital property,
exclusion of non-marital property, and various ways to structure ongoing
financial contributions from one party to another. Everyone in the process
should understand qualified domestic relations orders—known as QDROs (pronounced
“quad-rows”)—to assure that pension assets will be shared fairly. Most of the
legal cost in a divorce is based on the presumption that assets are being
hidden. If divorcing couples draft a financial statement agreeable to both
parties, legal fees can be dramatically reduced. - Know the tax ramifications of alimony. It is possible to
deduct some alimony payments. There are seven requirements that need to be
met:- The payment must be made as part of a legally binding written agreement.
- That agreement cannot state that the payment is not alimony.
- Payment must be made to or on behalf of the ex-spouse unless there are
payments diverted to others directed in writing by the ex. - After the client is legally separated or divorced, either spouse cannot live
in the same residence or file joint tax returns. - Payments must be made in cash or cash equivalents.
- Alimony cannot be treated as child support.
- The client’s obligation to pay ceases if the ex-spouse dies.
- Value the assets before clients agree to take them. Say your
client is getting the house. Does it have a 20-year-old furnace and a roof
that’s about to cave in? A thorough inspection by a licensed inspector could
help. If someone’s getting the family car, is it past warranty with a funny
sound coming from under the hood? If one spouse runs a lucrative business that
the other has worked for or invested in, how do they both know they’re getting
the right share? Hiring a valuation expert may be necessary. Divorcing spouses
need to make sure they have enough money to finance repairs and replacement of
assets that they’ll be paying for as a single person. - Think of the kids. In many states, college-age children have
the right to demand financial support or college funding at the state level so
their education isn’t interrupted. While both parents should advocate in their
kids’ best interest, this isn’t always the case. Be aware of the state’s divorce
laws with respect to secondary child support. - File taxes wisely. There are always special situations in a
divorce that will determine whether a couple will need to file jointly or
separately during the last year that the marriage exists. It’s best for both
sides to get some assistance filing their taxes during their divorce year and
the year afterward. - Help documenting child support. Child support guidelines
vary from state to state. If the state has a special program that allows a
spouse to pay into a special account so child support is recorded every month,
consider it. It provides a paper trail and enforcement system for assuring that
kids get the money they need. Federal law requires all child support payments to
be made by wage assignment and health insurance by health insurance orders. A
majority of child support orders go unpaid. Make sure your client knows the laws
to force compliance. - Once the divorce is over. Watch the spending. Budgeting
early in the process may cut down on the risk of overspending, which is often a
temptation after a painful event. Both necessary and unnecessary spending after
a divorce is a key reason the newly single tip into bankruptcy. Make sure your
client is aware of the danger of overspending.
