Financial Tips for People Going Through a Divorce
“Financial Tips for People Going Through a Divorce” by Bob Nemeth, CPA/ABV, CVA, CDFA, CFE | Principal – Business Valuation/Tax
The divorce process asks a lot of the individuals going through the separation. Not only can the emotional stress of the process weigh on a person, both parties need to ascertain the fiscal value of their combined assets, including available cash, investments, and even any privately-held businesses.
While the divorce process can feel overwhelming, it can turn from bad to worse without proper fiscal preparation and help. A bad divorce settlement can end up complicating your tax situation or leave you without enough income to meet your monthly expenses, but a little financial education and understanding can help you prepare for the divorce process. Here are some tips that you should know to protect your fiscal situation during and after a divorce.
Understand That Everything isn’t Equal
During a divorce, it’s important to take a close look at every asset to understand how it may affect you financially. When people go through a divorce, underlying assets can cause you to pay more in taxes than you would expect, or at least more than the other party in the divorce.
Certain assets have much greater tax implications than others. For example, let’s say that you and your spouse are trying to split up $100,000 of assets, which includes $50,000 cash and $50,000 worth of marketable securities. If you divide up the assets so that one person receives the cash and the other keeps the marketable securities, the person who gets the cash comes out ahead financially because an additional tax needs to be paid on any gains on the marketable securities when they are sold.
In addition to marketable securities, businesses and homes can also lead to tax issues during the divorce process. It’s important to analyze each type of asset to really understand what the tax implications are for each party so that one side doesn’t get hit too hard after all the assets have been split up for both parties.
Have Documentation Available
It’s important to have all the documents you’ll need during the divorce process. Bank statements and tax returns are pretty standard, but it can be easy to forget about other key documents, such as investment statements. You’ll want to collect all these documents now, as it can be very difficult to get statements like these from a former spouse 15 years down the road.
Investment statements are very important, as they share the cost basis for certain assets, which is very important when you eventually decide to sell an investment. You may get the current statements, but you may not have information relating to the original cost of the investment. This information is required if you ultimately sell the investment, so it pays to get your documents in order ahead of time.
Make Sure Everything is Disclosed
When you’re going through the divorce process, make sure that you disclose every asset that you own. Not only does this mean that you must personally disclose any assets you can remember, it also means that you should look at your prior tax returns to see if there are any items that don’t appear to be disclosed. There’s always a chance your former partner may forget about some type of assets. Even worse, you may uncover signs of fraud during the divorce.
Disclosure is key for a few reasons. One, it makes it easier to fairly split up all the available assets. Two, non-disclosure can lead to penalties, which depend on the just how egregious the issue is. It’s one thing to forget a $10 savings account, but an undisclosed $500,000 investment account could result in the court could awarding the asset to the wronged party.
Create a Budget
Your financial situation changes quite a bit after you’re divorced, so it’s important to create a budget during the divorce process so you can determine what you’ll need to live within your means.
When you get a divorce, you are essentially taking your source of income from when you were married and dividing it between two households. While the total income may be the same, it never goes as far with two households because there are always more expenses then you had before. A budget helps you understand what your expenses are so that you don’t stretch yourself too thin after the divorce, especially if you end up with assets that don’t create cash flow.
Don’t Go Through the Process by Yourself
While some people think they can handle their finances on their own, it’s a good idea to seek help from some professionals who can help guide you through the divorce process if your case is even remotely complicated. There are a few different people that you’ll want to turn to during a divorce, including a financial planner and a CPA.
In a relationship, it’s not uncommon for one person to handle most of the financial decisions and pay all the bills. As a result, this person usually understands all the family finances, while the second person may have little or no idea about where their finances stand. A financial planner is able to provide financial education and help a client prepare a budget so that he or she is in a solid financial state following the divorce.
A CPA is another key person who can help protect your financial future during a divorce. The older you get, the more assets you tend to collect. The more assets you have, the more complicated it becomes to split certain assets and determine the tax implications for each party, especially if someone owns a business. A CPA and business appraiser can sift through all of these assets to provide credible fair market value opinions and make sure that your tax situation is in order during and after the divorce.
Divorce isn’t easy. Between the emotional and financial complexities, there are a lot of details that you’ll need to deal with to ensure that your future is secure. If you’re a business owner, executive, or another individual with a complex financial situation, Apple Growth Partners’ domestic relations litigation team can help. Contact us today to talk to one of our experts about how we can provide some financial clarity during your divorce.