The Keep - Your - Cash Divorce

Don’t risk losing your hard-earned money, your retirement account and your home. Here’s our in-depth guide to ditching your husband without forfeiting your finances.

By Jean Chatzky
Photograph: illustrated by Mark Matcho

Divorces are resolved very differently today than they were in the past, when women were treated like stereotypical 1950s housewives and were often awarded alimony and full custody of the children. In 2011 there’s a greater chance that the wife is the spouse with more money in the bank, a substantial retirement account and the bigger salary, and judges will treat her accordingly. In other words, when it comes to divorce, equality has its drawbacks. “These days there’s not a presumption that Mom gets the kids,” says Lois J. Liberman, a partner in the matrimonial department at Blank Rome, LLP (full disclosure: She represented me in my divorce). “And you may have to pay your husband alimony or maintenance.” This often comes as a surprise, perhaps because women still work harder to earn every dollar while continuing to handle a majority of the child- and home-related challenges. “Women are much more outraged when they have to pay support,” says Liberman. “We take the news worse than men do.”
Remember, a marriage is a business deal, and unwinding it to your advantage means putting aside anger and maneuvering into the best possible financial position. That strategy, never easy, has been made even more difficult by the recession. But if you follow these guidelines, you should come out on the other side with your savings—and sanity—intact.

New divorce rule: Protect Your Interests Before You File

If you’re preparing to ask your spouse for a divorce, some financial planners
recommend opening an individual account in a bank where you and your husband have never done business. Check with your lawyer first, then set aside enough money to pay your legal fees and keep yourself going for several months. Savings of this kind give many women some psychological relief, says Lili A. Vasileff, president of the Association of Divorce Financial
Planners, in Greenwich, Connecticut. It’s a risky step, however, because when you reveal the existence of your new account during the divorce process (which you are legally required to do), you may appear untrustworthy. So your attorney could tell you to return the money to the original account at this point.

Or you could instead ask your lawyer to immediately freeze all joint accounts once you file, says Michelle Smith, a divorce financial planner in New York City. After the freeze, you and your spouse would each open a new, separate account, funded with an agreed-upon amount taken from the joint account (essentially an advance on what will eventually be the distribution of assets). If the divorce is not acrimonious, skip the freeze and ask for duplicate statements or online access so you can both monitor the accounts.

New divorce rule: Once You’ve Filed, Assemble a Team

A marriage involves finances, investments, tax planning and insurance, so for your divorce, you’ll need experts who can advise you on each of these topics. In addition to a divorce lawyer, look for a fee-only financial adviser skilled in investments, taxes and the divorce process. And if you have valuable art or a small business, you may need an appraiser who has specific
experience with marital dissolution.

If you suspect that your husband has been hiding money from you, says Vasileff, you may want to hire either a forensic accountant, who is a CPA trained to locate hidden funds, or a financial planner with divorce credentials. But keep in mind that despite rampant paranoia, hidden assets are not the norm: A study by the accounting firm Grant Thornton determined that in 2007, hidden funds existed in just 20 percent of divorce cases. Plus, paying someone to look for secret funds is not cheap. Costs start at about $10,000 and can rise into the hundreds of thousands if the investigator has to dig into privately owned businesses or hunt for money sequestered abroad. “Depending on the marital estate, when you’re looking for millions, it’s worth it. For $25,000, not so much,” Vasileff says.

New divorce rule: Consider the Value of Your Assets After Taxes

When it comes to divorce, each investment has two values: the one you see on paper and the amount it’s worth after taxes. For that reason, “splitting an account right down the middle is not necessarily to your advantage,” says Gary Schatsky, a Manhattan-based lawyer who is also a fee-only financial adviser and president of ObjectiveAdvice.com. If you’re in the highest federal tax bracket, then $100,000 in a 401(k) will be worth only about $65,000 to you after federal taxes. If your spouse is retired or laid off, he is in a lower bracket, and that same $100,000 will be worth more to him. So you might ask for more outright cash instead. Note that even accounts like 401(k)s, which are in one person’s name, are subject to state law and may be considered joint property in a divorce.

Also weigh the question of future tax liability: Is it more advantageous for you to take a loss or a gain? When you sell the asset—whether it’s stock or a home—will you owe taxes? Or will you have tax losses that you can use to offset future income? This can get complicated. For example, if you have 1,000 shares of a particular stock bought over time, they are not all worth the same thing in a divorce. The ones purchased at the highest prices (often the ones you bought most recently) are most valuable, because when you sell them in the ­divorce—which you have to do on a first-in, first-out basis—you will have the smallest gain and thus have to pay the least capital gains taxes. So although all shares will sell for the same price at a given moment, the ones with the smallest gain could be better to own because they don’t pre­sent as large a tax liability; those that have lost money could be better still because you could write off the loss.

New divorce rule: Think About When You’ll Need the Money

Liquidity is another important consideration. Money in a 401(k) or other retirement account should normally remain there until you are at least age 59½, when you can start to withdraw it without penalty. And if you are optimistic, you may want to hold on to stocks and homes that are under‑water until their value goes up again. If you’ll need funds from any of these sources sooner than that, you might be better off allowing your husband to keep the house, stocks or IRA funds in exchange for dollars. “Do you want the investment, or do you need the cash?” says Schatsky. “First figure out what is important to you, and then you can find a creative way of dealing with each asset.”

New divorce rule: View Your House as Just Another Asset

For the purposes of divorce, your house is no different from stocks or anything else you own. You must think dispassionately about whether it makes financial sense to keep it; this decision is less about whether the property has lost value and more about whether you can afford the mortgage and maintenance on your own. The house and all its associated expenses (taxes, insurance, upkeep) should represent no more than 35 percent of your take-home pay.

If you decide to try to hold on to your home, hire your own independent appraiser, as will your spouse; each will submit an evaluation, and then you’ll split the difference to come up with the agreed-upon value. Although it’s cheaper to share the cost of a single appraiser, keep in mind that you and your husband now have competing interests. You want the value of the house to be as low as possible so that you can get a greater share of the rest of the marital pie. He wants the opposite, says Rita Medaglio-­Barrera, a certified divorce financial analyst and partner at Mediation and Collaborative Action Group on Long Island, New York.

Whatever you choose, it’s often a good idea for the partner who is going to keep the home to refinance the mortgage to take sole ownership. This is important, because if your husband is keeping the house but doesn’t re­finance to take your name off the mortgage, you could still be liable if he is unable to pay, regardless of whether you sign a quit-claim deed disclaiming any interest in the property.

New divorce rule: Rethink Your Insurance Coverage

Start with your life insurance policy and remember that “the goal of life insurance is to avoid the financial destruction of the family,” says Schatsky. When you’re divorced, you have to be sure there’s enough insurance money to take care of your children or older parents in the case of your death—but you no longer have to provide for your spouse, which can save you significantly on premiums. The exception: If your spouse owes you a lot of alimony or child support, he should name you as the beneficiary of enough life insurance to cover that debt in the case of his death, and vice versa if you’re the one who owes the money. This will ensure that your kids are covered even if your estate is decimated to pay off the debt. If your spouse already owns a life insurance policy that designates you as the beneficiary, says Michelle Smith, as part of the divorce negotiation ask to remain on the policy and to be made a “third-party recipient” of any changes—which means you’ll be notified if the terms are altered or if premiums aren’t paid. (In the latter situation, coordinate with your attorney to pay the premium yourself, then have your lawyer go after your spouse to recoup those funds.)

Next, review your health insurance. If you’re covered by your spouse’s policy (and he works for a company that has more than 20 employees), you can keep it for 36 months under COBRA. You will, however, have to pay the premiums, which can be high, so be sure to first compare them with the rates for a solo policy (though these can be expensive, too).

Then think about disability coverage and long-term-care insurance: When you’re single, both of these are more important than they are when you’re married, because there’s no one to provide you with extra income or care if needed. Unfortunately, policies for single people tend to be much more expensive than those for couples. If you purchased a policy with your spouse,
do not cancel it because you’re divorcing. Instead, if you have a joint policy, consider crafting your divorce agreement to make sure the premiums are paid (which is all that matters to the insurance companies), and you’ll both be able to continue your coverage for less than you could with a solo policy.

HAS THE RECESSION PUT YOUR DIVORCE ON HOLD?

There were 20,000 fewer divorces in 2008 than in 2007, largely because people felt they couldn’t afford to separate in the bad economy. But just because couples aren’t splitting legally doesn’t mean they’re not taking action, says Lili A. Vasileff, president of the Association of Divorce
Financial Planners in Connecticut. Over the past few years, she has seen a huge uptick in the number of couples visiting her for pre­divorce counseling. “The idea is, ‘We can’t afford to get divorced right now, but in the meantime we need to figure out how we’re going to preserve what’s left of our assets,’ ” she says.

What’s involved? Among other things:

 Setting up separate bank accounts so that each spouse starts managing his or her own spending and bill paying.

 Figuring out cash flow: How much money is necessary to maintain the house and lifestyle? How much will each partner contribute to do that? 

Deciding if retirement-account contributions are affordable or should be put on hold.
 Paying down debt and/or establishing credit, if necessary, so that each partner ends up with a good credit rating.

The number-one cause of divorce is money trouble, so for predivorce financial counseling
to work, both partners have to acknowledge the roles they’ve played—then agree to put their grievances aside. “They have to accept the fact that they’re not happy, so it’s time to figure out what to do,” Vasileff says. In certain cases, she adds, once the partners address their financial
issues, they decide they want to stay together after all.

First Published Thu, 2011-02-03 18:23

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