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

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

First Published March 8, 2011

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Comments

Nancy Liebman05.17.2011

Part of having a successful divorce is understanding what you will need to live on going forward. Establishing a realistic budget will help you determine what assets are most important to keep. You need to be realistic about the future but you should have a financial plan that will guide your discussions with your attorney, mediator etc.
My website http://www.getyourfairshare.us provides numerous resources including a budget excel spreadsheet for you to complete.

Jeffrey Landers03.26.2011

When going through a divorce (or thinking about it) you should immediately start gathering all of your financial records. Having all the information together and organized will save you time and money. My company, Bedrock Divorce Advisors, created a Divorce Financial Checklist (you can download it for free at http://www.facebook.com/BedrockDivorce) that will walk you through the key documents that you'll need. Please bear in mind that not everyone will need every document listed. Do not keep these records in your home! Bring copies to your parents, a trusted friend and/or keep them in a safe deposit box that your spouse doesn't know about or have access to.

Phoenix Rector03.23.2011

Marriage is more than a 'business deal'. There is the emotional bank account to take into the equation & attempting to ignore it can be more dangerous than the loss of any finances.
Yes, protect your financial interests, honestly! Don't be a jerk just because the marriage is ending!

Missy 03.19.2011

This article states that, in dividing up stock for divorce purposes, "the ones with the smallest gain would be better to own...those that have lost money could be better still because you could write off the loss." This may be true only if the taxpayor is in a tax bracket that is higher than 50%. For example, assume a taxpayor is in the 25% bracket. If that taxpayor has $1 of capital gain she will pay 25% in tax and keep 75 cents. If the same taxpayor has $1 of loss the deduction would give her only 25 cents ($1 deducted by someone in the 25% bracket saves them 25 cents of tax). Am I missing something?

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