Finances and Marriage: What Everyone Should Know in Case of a Divorce
By Tanya Aure
One of life’s most difficult decisions is whether to end your marriage. There are usually a handful of reasons that people get divorced – infidelity, financial problems, different parenting styles, personality changes, or maybe you and your partner have grown apart. Whatever the cause, there are two things that ultimately end up an issue during the divorce – children, if you have them, and money. As a certified divorce financial analyst, I work with the money. A common situation I run into is that one spouse was in charge of the finances or was at least more familiar with them and the other spouse feels like they are at a disadvantage going into the divorce. For those spouses out there that do not know where to start when it comes to their finances, here are some tips as to how to get familiar with your financial situation and how to handle the information as you move forward with your divorce.
Gather Your Documents
If you are the spouse that is more on the unfamiliar side of your finances, the first (and free) step is to start gathering your documents so you can have a better understanding of your financial situation. Here are a few of the common statements that most people have:
- Checking and savings accounts
- Mortgage statements
- Brokerage accounts
- Retirement accounts
What if these accounts are not readily available or there are no longer paper statements coming to the house? I tell my clients to do the best they can. Even identifying that these accounts exist is a good starting point. Consider this research – the more you know about your financial picture, the better you will be able to talk to your spouse about what you want to leave the marriage with.
Create a Timeline
A great tool to get you started is to create a timeline of your marriage. Date of marriage, your birthdays, your kids’ birthdays, date of separation (if you have one), and other major events. Other major events consist of job moves, location moves and anything else you can think of that may have impacted your finances during the marriage. Note that job moves are very important because more often than not, a 401K was established at one job and then either rolled into a new job’s 401K or an IRA. It helps whoever is working on your finances to follow the money throughout your marriage. Every retirement account has its own unique features and knowing when they were created will help sort out your finances during the divorce.
Financial Disclosure Forms
When you file for divorce, you are required to disclose your income, assets, and debts to your soon-to-be-ex-spouse. There are documents that must be filed with the court and exchanged with your soon-to-be-ex-spouse. In California, the financial forms that will be filed and exchanged are called the Income and Expense Declaration (FL150) and the Schedule of Assets and Debts (FL142). The purpose of these disclosure forms is to put ALL assets on the table, community property, and separate property. I find that couples assume that the only assets that need to be disclosed are community property. Each asset will be marked community property or separate property on the forms, but you need to list all the assets. If a marital asset is not disclosed and it is found by the other party, the court has the authority to award the entire omitted asset to the party it was hidden from (see California Family Code Section § 2556). Once the financial disclosure forms are completed with their corresponding attachments, they are exchanged between the parties. From there, it is a matter of negotiation and understanding what items are community property, how they should be split, and determining support.
Understand Your Assets and Debts
If you are the spouse in the marriage that does not deal with them on a daily basis, it is IMPERATIVE that you understand the assets and debts of your marriage. You need to understand how each asset should be split because assets are not all the same. For example, if you have a 401k with $500K and your house is worth $500K, are these assets worth the same amount? The short answer is no. The house can be sold for $500K and depending on the cost basis of the house, there may be no capital gains. But the 401K is not as simple. The 401K may have a value of $500K, but that money cannot be touched prior to 59 ½ without incurring a penalty AND all of the money will be taxed as income. So, that $500K, is really worth $300K, if I am being generous. This is only one example of how assets may differ. On the debt side, any debt accrued during the marriage is community debt. Where things start to get gray is money spent after the date of separation or arguments can be made certain expenses were not for the benefit of the community. These need to be evaluated on a case-by-case basis. The division of assets and debts is FINAL. There is no going back for assets or debts once the Marital Settlement Agreement is signed unless there are extenuating circumstances.
Consider working with a CDFA
Once you have most of your documents gathered or you have frankly hit a wall, consider hiring a certified divorce financial analyst (CDFA). CDFAs provide their clients and attorneys/mediators the financial effect of their settlement. They clarify the short-term and long-term effects of dividing property, analyze pensions and retirement plans, determine if you can keep the marital home, and point out the tax consequences of different settlement proposals. If you are the spouse that did not have as much to do with the finances, a CDFA can support you in understanding all of the numbers. Now, if you and your spouse used a financial advisor during your marriage and that person says that they can guide you through the divorce, be weary. More often than not, a typical financial advisor does NOT do asset and debt division on the daily. There are many intricacies involved with splitting the finances during divorce and using someone who is in it ALL day, every day, will give you some perspective and creative ideas that your financial advisor cannot give you. Use someone that you are comfortable asking questions and that knows how divorce works.
As you can see, there are several considerations when sorting out the finances in divorce. If you are a spouse that is not as familiar with the finances, it is best to start becoming familiar as soon as you can. Divorce is so overwhelming – you are always in flight or fight mode. However, the financial decisions that you make now will affect the rest of your life and possibly your children’s lives. There is NO SHAME in asking for help during the divorce, especially when it comes to the finances.
Tanya is a Financial Advisor, Certified Divorce Financial Analyst (CDFA), and founder of Comprehensive College Planning LLC. She started working in the financial services industry soon after she went through her own divorce and initially focused on college planning for her children. Tanya expanded her practice to include all financial issues related to divorce for clients at all stages. She offers comprehensive divorce financial planning services by examining asset division options, cash flow analysis, and the future implications of financial decisions (such as paying for college) made during divorce. Tanya’s purpose is to help families not only survive the divorce process but show them that they will be okay on the other side.
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