The splitting of assets during the emotionally charged time of divorce is never easy. But there are some simple things a divorcing couple can do to ensure their assets are better protected as they resume their individual lives. For the purpose of this how-to, we'll assume that the couple has no prenuptial agreement. For more on that topic, see Marriage, Divorce and the Dotted Line.
Assessing Assets and Liabilities
Both individuals should create a net-worth statement to identify marital assets and individual assets, as well as any debt held by both or either party. If necessary, a financial adviser can act as a go-between. Debt can include a credit card balance, a mortgage or lines of credit. A person can obtain their credit report from any of the major credit reporting agencies.
The couple would also be wise to freeze any home equity line of credit, as it may result in a lien being put on the couple’s home. The same can be said for brokerage accounts.
When assessing their wealth, the splitting couple should also look at their anticipated income from dividend-paying stocks or any business or income from a rental property they may own. They should also assess the asset’s tax basis to determine its liability. For more on this topic, see Get Through Divorce With Your Finances Intact.
Figuring Monthly Expenses
It’s also important for each individual in the divorcing couple to come up with a record of what their anticipated monthly expenses will be once they are living separately. This will help in assessing the amount of income necessary to cover those expenses. It’s also a good idea create an emergency fund that can be used as means of saving and investing for the future.
Both spouses will need to value their retirement plans and look at the tax characteristic of the assets when taken out of the plan. The penalties and hurdles, via surrender charges, liquidation or transfer restrictions, and lack of marketability, can be big. Market value can also hit by timing, such as date of separation and declaration of intent to divorce. A cost basis review should be done to help allocate capital gains, and qualified assets should be compared to nonqualified assets.
Factoring In Retirement Needs
When dividing up assets, each individual in the couple should be cognizant of both the short- and long-term effects of their settlement. They can do so by projecting the impact of the settlement on their retirement, education and cash flow needs. One more thing, divorcing spouses should be sure to revise who is the beneficiary of their retirement savings plans, insurance policies, as well as any other asset.
Tax Implications of a Settlement
The couple should also take into consideration the tax implications of the sale of any homes or property, as well as the tax implications of the payment and receipt of any alimony and child support. A key bit of information to remember is that no gain or loss in income is recognized when assets are transferred between couples within one year after the date of divorce. That said, the transfer can occur within six years after the divorce if a separation or divorce agreement instructs the parties to make the transfer.
Neither spouse should transfer or liquidate marital assets without the go-ahead from an attorney until the divorce is finalized. Until that happens, an attorney may suggest splitting up the couple’s cash assets to handle for immediate costs. For other accounts, access restrictions or dual statements could reassure both parties.
Financial advisers can be especially helpful here by explaining to the divorcing couple that why they should be equitable, not every settlement represents an exact even split. For example, a spouse can be compensated with cash for the lack of liquidity of an asset. For more on this topic, see Understand The Rules of Dividing Plan Assets.
Consider Changing Insurance Needs
If the couple has a child it may also be a good idea for each parent to take out a life insurance policy. That would protect the child in the event of an unexpected death of one of the parents, which may impact alimony and child support payments. This can be made a condition of the divorce settlement.
The Bottom Line
Dividing assets and liabilities in a divorce can be a sad, complicated task. But with some planning, patience and the help of a financial adviser, splitting couples can avoid some obvious and not-so-obvious pitfalls while they tend to their changing financial needs.
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