Financial Questions to Consider During Divorce
While every state requires financial affidavits of parties filing for divorce to ensure full disclosure of all assets and liabilities, and income and expenses, financial concerns for each party should extend beyond this data exchange.
One important concern for each party is to determine what is most important to them in terms of assets or income. This may run the gamut from “keeping the marital home” to “securing enough support to meet basic needs.” When asking these questions, it is important to keep an open mind to clearly hear the answer that makes the most financial sense. Sometimes it is not financially viable to keep the marital home, for example.
Another part of the divorce negotiations, is asking what you are willing to give up.
There usually is a give and take and not everyone (and in many cases no one) walks away satisfied with the settlement. Preparing a list of must-haves is important, but that cannot be laundry list of indisputable demands. There should be a prioritized list of what is absolutely intractable and what can be negotiated and shaped differently with flexibility shown by both parties. Keep in mind that it is far less expensive to negotiate a workable, “satisficing,” solution than to continue fighting over a particular asset or support amount.
Introspection regarding how a party will describe their lifestyle after divorce is important and factors into many of the financial decisions that arise during the dissolution process. In order to make logical, reasonable decisions, a hard look may be required at revising a standard of living that may have become expected. After all, even with support, there are not two households generating costs of ownership if only in rent/mortgage, upkeep, groceries, insurance and the like. Often, post divorce expenses increase, and some of these examples are:
1) a change in tax filing status from married filing jointly to single or head of household 2) no multiple car discounts in auto insurance
3) the need for healthcare marketplace health insurance coverage vs. employer coverage
4) additional child care costs if a stay-at-home-parent returns to work
5) one party may not qualify for a mortgage requiring alternative arrangements
As decisions are being made, they need to consider the tax effect or implications not only during the pendency of the divorce, but afterwards. Being able to withdraw from the retirement accounts at age 59.5 without incurring a tax penalty is a positive. However, any tax-deferred assets will be taxed at the ordinary tax rate upon withdrawal. Careful planning of how to meet cash flow needs post-divorce is important in the decisions regarding how the assets will be divided. Also, if someone will be receiving a lump sum buyout and is requesting cash, a careful analysis of the impact of that decision is important to minimize overall taxes paid to preserve as much of the assets for the parties post-divorce.
Another important implication of tax considerations is which party can leverage the IRS tax credits that may be available. A high earner spouse paying child support, for example, may argue for the assignment of the tax credits, but in most cases, the tax credits phase out or are completely inapplicable due to their earnings. It may be more prudent for a tax benefit to award the tax credits and dependent claiming to the lower income spouse. This also has the possibility of reducing the amount of child support that is paid by the higher earner in many circumstances.
There may not have been a need for individual life insurance policies throughout the marriage because the employer’s group term life insurance was deemed sufficient. However, life insurance may become a more critical factor post-divorce if there is a spousal support and/or child support obligation. Each party may also need to consider their own umbrella insurance to protect assets awarded during the divorce, whereas only one umbrella policy may have been in place during the marriage.
When there has been one party primarily responsible for the financial investment decisions, divorce presents an opportunity to engage the other spouse whose risk tolerance may not be the same. This has implications for how assets are divided as many risky assets may be intolerable for one spouse despite the opportunity for greater gains in the future. An assessment of the amount of risk, liquidity needed and tax implications of being awarded certain assets and not others is critical to making good decisions regarding the division of assets. Oftentimes, a premium or discount is included for including assets in the mix that another party is not keen on receiving if negotiations to offset those assets is not reached.
In this same vain, one party may be less inclined to keep a complicated portfolio of assets post-divorce. It may make more sense to streamline the finances to make them more manageable for one party or the other. This has implications in how to structure the settlement agreement regarding the assets and should be considered in tandem with the type of assets and growth vs. stability needs of both parties.
Finally, accepting or requesting a lump sum spousal support over receiving monthly support payments may offer some advantages to both parties. Evaluating the implications of this decision in terms of the spending behavior of the recipient spouse and employment prospects of the payor spouse is critical.
It is advisable to have someone to assist with these financial decisions and considerations during the divorce process ensure that the financial foundation for post-divorce security is embedded in the settlement.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
