Breaking up is hard to do: Protecting assets in divorce

Getting divorced has a significant impact on your finances — and some missteps can make it even more costly.

Divorce is an issue plenty of Americans will find themselves navigating. In 2014, divorces and annulments occurred at a rate of 3.2 per 1,000 people, according to provisional data from the Centers for Disease Control. At least anecdotally, lawyers say, the number of filings and proceedings initiated tends to pick up in January — leading to the nickname Divorce Month.

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"We definitely see an uptick," said Joslin Davis, president of the American Academy of Matrimonial Lawyers. "People just really don't want to do anything during the holidays — for emotional reasons, primarily." The new year seems like the ideal time for a fresh start, she said.

As much as you might want to get the process over with as soon as possible, moving quickly through a divorce can be a mistake. Take time to consult with a financial advisor and accountant, as well as your attorney.

"There are a lot of financial 'gotcha' nuances that people aren't aware of, because they aren't your day-to-day," said certified public accountant Tracy Stewart, a member of the American Institute of Certified Public Accountants' personal financial planning executive committee.

"Everything matters in a divorce," she said. "Pay attention."

Moves made without due consideration could mean you give up more than you need to or don't get your fair share. Worse, some aren't fixable, or they initiate a domino effect of problems — like an acquaintance of Stewart's who (without asking for professional advice first) dipped into his IRA early to pay off joint debt during his divorce. Not only did that affect his retirement prospects, but it also more immediately triggered penalties and a taxable-income increase that phased him out of valuable deductions.

"I'm sure it seemed like a very good idea at the time," Stewart said.

Experts say the following six common missteps should be avoided in order to limit the financial pain of a divorce.

Mistake #1: Missing money

"Take the time to look at all the assets that exist," said Zaneilia Harris, a certified financial planner and the president of Harris and Harris Wealth Management. What you don't know about can't be factored in when negotiating for a fair settlement.

Make a thorough accounting not just of current accounts and non-cash assets but future interests, like pensions, business interests or start-up stock options. Don't forget income earned before the divorce filing (usually the cutoff date for asset valuation) but received after, like bonuses and the most recent paycheck's retirement contributions, said Davis, who is also a principal of Allman Spry Davis Leggett & Crumpler, P.A., in Winston-Salem, North Carolina.

It helps if you're actively involved in managing the household finances and have a good reckoning, Harris said. Hiring an investigator can help fill in the gaps — and unearth any hidden assets. In a 2014 National Endowment for Financial Education survey, 15 percent of consumers copped to hiding a bank account from their partner, and 14 percent lied about how much they earn.

Dig into the details of each asset. For example, inherited money and goods may be considered marital property or separate property, depending on state law, Davis explained.

"Each state has its own tweaks on some of these concepts," she said.

Terms of pensions and investments may also dictate how they are divided — if they can be at all, said Stewart.

Mistake #2: Ignoring tax basis

Want a fair settlement? Taxes matter.

"People should at least give consideration to comparing taxable assets with nontaxable assets," said Stewart. Whether pretax or post-tax dollars are involved, it makes for a significant difference in an asset's value.

The spouse getting the $500,000 house, for example, faces a different set of tax circumstances when selling the house for profit than the spouse receiving distributions down the line from a $500,000 individual retirement account.

"Because of the tax on that traditional IRA, it's not worth what it is on the statement," she said.

Mistake #3: Staying connected

Joint accounts and beneficiary designations linking you together can be a serious liability once you've decided to divorce, Harris said. One client's spouse cleared their joint bank account of cash; another's husband stopped making payments on their mortgage to force her into giving up her interest in the property.

Early steps to divide finances should include opening a new individual bank account to keep future income separate and pulling a credit report to unlink joint debts.

"If there's a spouse who's a spendthrift, you want to make sure that spouse does not have access to your credit cards," Davis said.

Call your credit card issuers to see about removing authorized users or closing joint accounts. (You may need to pay any outstanding balances first.) Alert your health insurance provider that you're divorced. In some states, you could still be held liable for an ex's medical bills if providers aren't notified of the coverage change, she said.

As you split, be sure to update deeds and titles to reflect which spouse got what. Change beneficiaries for assets, including annuity contracts, life insurance policies and retirement accounts. Such designations can trump even what's in a will, meaning your ex gets the 401(k) balance and car even if you'd intended they go to someone else.

One tie to maintain, experts say, is any life insurance policies you have on your spouse. There's little reason to let that connection lapse, since you'll (eventually) be the one benefiting, said Harris.

Mistake #4: Raiding retirement

"I always discourage taking distributions from retirement unless it's for retirement purposes," said Stewart. Don't tap accounts to fund divorce bills or pay off joint debts, and keep any assets received from retirement accounts as part of the settlement reserved for retirement.

The reasoning is simple: As it stands, only about half of households have adequate savings to be "retirement ready," according to the Center for Retirement Research at Boston College, and divorce isn't going to improve your prospects.

Divorced baby boomers saw their wealth drop 77 percent compared to when they were married, according to a 2005 study published in the Journal of Sociology. New research from Bowling Green State University also found that among recently divorced individuals age 62 and older, 27 percent of women and 11 percent of men are in poverty. In comparison, researchers wrote, poverty levels for married couples of that age are just 1 percent to 3 percent.

Mistake #5: Getting emotional

"People overvalue their assets," Davis said. "They're important to them, and they often have an inflated idea of how much they're worth."

That can make settlements lopsided, sometimes with dangerous repercussions — for example, getting the house won't matter if you don't have enough liquid assets to keep up with the mortgage, Stewart explained.

Get professional appraisals for property, such as real estate, collectibles and family businesses. That helps you negotiate based on their fair market value rather than sentimental attachment.

Spouses who feel guilty or who hope to reconcile may also make the mistake of making large support payments while separated to compensate for those feelings, said Davis. "What it does is set up a status quo that many times is difficult to undo," she said. "You're demonstrating to everyone, including a judge, that you can afford that amount of money."

Mistake #6: Underestimating jurisdiction

Where you live matters greatly when it comes to issues such as alimony and what assets are considered marital property, said Davis. "People need to have an understanding about what the law in their jurisdiction is" — ideally, before they file, she said.

"In some states, like Texas, alimony is almost nonexistent," she said. "You certainly don't want to move to Texas if you're a dependent spouse."

Which laws are in play isn't always easy to suss out. It can get particularly complex if a couple has moved around and owns property in several states, or if they live in different states now that they are separated. In the latter case, which state presides can depend on which spouse files first or who gets served first, said Davis.

Davis noted a recent case where her client filed first in North Carolina, but his soon-to-be ex, living in South Carolina, served him with papers first. If the two lawyers hadn't hammered out an agreement, she said, it would have meant judges in both states would have had to determine where the proceedings would take place — making for a lengthier and more expensive divorce.