Divorces are usually difficult and emotional, but you can reduce that stress by being prepared and organized.
Structure will keep you focused on the goal of getting a fair settlement with an equitable distribution of assets and liabilities. In order to accomplish this, both spouses need to take an inventory: What do each of you own? What do each of you owe? What are your sources of income? What are your living expenses?
A certified divorce financial analyst (CDFA) accredited by the Institute for Divorce Financial Analysts can help you gather, organize and translate the appropriate information into a financial affidavit, to be used by a mediator and/or attorney in dividing your financial lives. The steps below can assist you in the process of outlining your financial affairs.
Assets: Assets often get lost during a divorce proceeding. As soon as possible, start a list of the assets you think you own. Typical assets include cash, bank accounts, money market accounts, retirement accounts, non-retirement investment accounts, real estate, employee benefits, collectibles, personal property and the like.
Prior-year tax returns often provide valuable information about assets; however, certain items, such as annuities or cash value in life insurance policies, may not show up on a tax return. In order to get a full picture of your individual and joint assets, take an inventory of your recent statements. Make sure to note any assets that are not accounted for in your prior-year return.
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Some statements are provided on an annual basis, so you may need to contact a provider to get current valuations. For more complicated assets, such as a business, it might be efficacious to have them professionally valued. Once you have a clear picture of what you own, you can move on to addressing what you owe.
Liabilities: Liabilities, as opposed to assets, often appear when a divorce is in process. Typical debts include mortgages on real estate, auto loans, student loans and credit card bills. You will need to review your current statements to determine the exact amount of what is owed, in both debts and outstanding loans.
Generally, the spouse to whom a certain property is distributed takes on, or inherits, the debt associated with that item. For example, if one spouse will take possession of the family car, then the car loan would be attributed to that spouse. After your assets and liabilities have been accounted for, you will both need to assess your means of income.
Income: "All sources of income" encompasses earnings from a job or self-employment activity, as well as income from investments. Income plays a crucial role in calculating alimony and child support payments. Again, a place to look for income sources is your tax return. Be sure to look for differences in income by comparing prior-year returns.
Be mindful of family business income that may suddenly drop around divorce time. In lieu of this change of income, it is best to then evaluate your current and ongoing expenses.
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Expenses: It is essential that you determine your expenses at current levels and to anticipate future expenses post-divorce. Reviewing bank statements, ATM withdrawals and credit card statements will assist you in figuring out your spending patterns. When reviewing your statements, make sure to note items that are paid annually, as these are generally expenses that you might overlook or forget to capture.
Prepare a list of budget items that you "need" as opposed to items that you "want." By preparing a detailed list of your expenses, you will be ready if and when you need to address situations where compromises will need to be made. Make sure your post-divorce spending plan is realistic, and recognize that you may have a lower standard of living in the future.
Expertise: Once you have a clear picture of your financial situation, it is time to put your professional team together. Potential team members are mediators, attorneys, therapists and financial professionals. Having the right team and being properly advised is crucial. With this guidance, you can remain level-headed, rational and less emotional when determining what is most important to receive in your settlement.
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Be sure to have projections prepared that show the short- and long-term consequences of a potential settlement. You will need to know the implications of a plan with respect to your future cash flow and net worth. Remember when dividing property that not all assets are treated alike for tax purposes. For example, a traditional IRA will be subject to income tax upon withdrawal, whereas withdrawals from a Roth IRA will be tax-free at retirement.
It is best to recognize ahead of time that you may not get everything you're hoping for as assets are distributed—so be prepared to compromise. Divorce is stressful. By doing your financial homework, you will be better equipped to navigate the negotiations in an objective fashion and obtain an equitable division of financial resources.
—By Valerie Adelman, Special to CNBC.com. A certified financial planner, Valerie Adelman is a principal and wealth manager at Financial Asset Management Corp. and a founding principal of Chestnut Financial.