Divorce + Emotions + Money Innocence
Financial assets can refer to many different types of accounts, investments, cash, cars, collectibles, real estate, and much more. During a divorce, the individuals involved will often only discuss splitting everything 50-50. However, some of these assets may be more important to one spouse over the other considering the liquidity or illiquidity of an asset or taxable consequences to one spouse or the other.
It’s easy to divide cash. During divorce it is often used as a bargaining tool to offset splitting other assets. You have a retirement account, for example, with $100,000 in pre-tax savings (taxes are owed at withdrawal) and you want to keep it entirely on your side of the balance sheet. To offset you are giving your spouse more cash from your regular savings to equal the $100,000 in the retirement savings. Looks and sounds fine, however when the spouse starts to withdraw the funds, they will need to pay taxes (let’s assume a 30% tax rate). This means over time that the value drops from $100,000 to $70,000. I’ve gone through divorce, and I know how this feels when you realize the taxable events could eat into your portion of a settlement.
Your house, or home, becomes a very emotional asset and there are a lot of details to work out. If one spouse stays, how is the mortgage paid? Who takes care of the upkeep and maintenance? How do you account for your share of equity if the house is not sold right away? If the property is going to be sold, consider the sale at a time when you can capture the joint federal tax allowance used to offset capital gains. How will proceeds and debts (if a house sells for less than owed on mortgage) be assigned?
My point is that you are so emotionally attached to certain assets, while going through a stressful time, that you tend to dismiss some very important details. If you are contemplating a divorce, now is the time to take inventory of your assets, liabilities, income and understand the changes to your lifestyle going forward. Divorce can have a huge financial impact on your life, as well as an emotional impact. You probably will be making decisions about things you never considered before. A CFP® is trained in financial matters dealing with families and divorce and should be part of your team along with a good divorce attorney.
