Divorce is never easy, but taking steps to protect your financial future during these trying economic times may be especially challenging. With falling real estate prices, a volatile stock market, and lenders tightening requirements for mortgages and other personal loans, making strategic financial decisions is even more important these days.
If you think a divorce may be in your future the time to prepare is now. Whether you are the petitioner (the party seeking the divorce), or the respondent, it is important to be fully informed about the marital finances long before a court date is set. Although we think of marriage in the romantic sense it is also an economic partnership and, when faced with divorce, requires an exit strategy just as one would use when ending a business partnership.
First, if you have not already done so, you should get a copy of your credit report and establish credit in your own name. Your credit report should be reviewed for errors but also to see what debt is associated with your name especially with accounts jointly titled with your spouse. Many spouses have been shocked to learn that huge credit card debt had been amassed on a joint credit card with statements going to a post office box rather than the marital residence.
The next step in preparing for the financial settlement is to review and make copies of all the financial statements of the household including bank statements, retirement plan and investment accounts, mortgage and other debts, insurance policies and tax returns. As a general rule, property acquired during the marriage is considered marital property, and are included in the settlement, unless it was received as a gift or inheritance and maintained in individual name. For example, if you received a sum of money from Aunt Martha and deposited it into an account in your name the funds will generally be considered non-marital. If, however, you deposit that check into your jointly titled account with your spouse you may have made a presumptive gift to the marriage and it may be shared in your settlement.
Note that all property, whether marital or non-marital, must be reported on the financial affidavit used by the Court even though non-marital property will not be considered for division. Each state uses a standard form, sometimes called a Financial Affidavit or Case Information Statement, which details income, assets and liabilities, and living expenses for each party. The document provides a fairly comprehensive overview of the marital finances and can be a useful tool in determining an equitable distribution of property though a complete analysis which reflects the after tax value of the property should be performed. For example, if an investment account holds securities which will create a taxable gain or loss when sold this should be factored in to the property division.
A tax return can be a valuable tool and provide a wealth of information when determining an equitable distribution of assets during divorce. If you have blindly signed your joint tax returns in the past don’t beat yourself up over it but it is important to take time now to understand the documents. One transaction, easily overlooked, is the withdrawal of assets from a retirement plan which would be indicated on the first page of the tax return. If there was a premature distribution from a marital account those funds should be accounted for in the settlement. Also potentially informative is the Schedule B Interest and Ordinary Dividend Form which shows interest, capital gains or losses, and dividends earned on investments. If, for example, interest was earned on an investment in one year, but not the next, you should determine the disposition of the asset for which there may be a perfectly reasonable answer such as the savings were used to pay a child’s tuition.
At times you may feel like a detective searching for documents and statements to prepare financially for your divorce settlement. It is important to get as organized as possible, early in the process, and to seek professional advice from an attorney and a financial advisor. Your attorney will guide you through the legal process, file necessary documents and represent your interests in the courtroom. A Certified Divorce Financial Analyst™ specializes in divorce financial issues and can be a valuable part of your divorce team to help plan your path to financial independence.