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Steer Clear of Financial Advice from Friends and Family During Your Divorce

posted by admin 3:42 PM
Thursday, November 3, 2011

Imagine you are enjoying a wonderful evening at a five-star restaurant. You’d like to order a bottle of wine, but you’re not sure which one would best accompany your meal. Would you ask the bus boy or valet for their recommendation? Of course not! If you’re ordering wine at a five-star restaurant, you want the advice of the wine expert on staff. Naturally, you would turn to the sommelier.

The same logic applies to other aspects of daily life. If you have a problem with your car, you take it to a trusted mechanic. If you have a concern about your heart health, you consult a cardiologist, etc.

So, to whom should a woman turn when she has concerns about the financial aspects of her divorce?

The answer is simple: She should consult only with a professional divorce financial expert – someone who is specially trained to handle the multifaceted financial aspects of today’s complex divorce settlement agreements.

Unfortunately, that’s often easier said than done.

Why? Because when it comes to divorce, there’s no shortage of friends and family who are willing to lend their advice.

In fact, as I see it, divorcing women need to learn to make an important distinction. They need to learn: 1) where to get financial advice, and then, just as importantly, 2) where NOT to get financial advice. Quite frankly, the opinions and recommendations of friends and family can often be more detrimental than helpful. They all mean well, of course. But, this is definitely one of those instances where a little knowledge can be a dangerous thing.

To illustrate my point, here is my short list of people you should “tune out” if they start volunteering financial advice during your divorce:

1. Friends, family, or anyone who claims to have “been there” (or knows someone who has)

Lots of people have a divorce story to tell, and usually, they’re quite eager to share it.  In reality, though, no two divorces are alike. Even relatively fundamental things like differences in geography can have a profound impact. Just because a friend of a friend who lives in Silicon Valley received a settlement that included half of her husband’s tech company doesn’t mean you will get the same deal in your east coast divorce. (See my earlier post for more details about the differences between Community Property and Equitable Distribution States.)

Likewise, even though your cousin kept her marital home , that doesn’t mean you should. And, discussion about your stock portfolio can lead to a veritable minefield of misinformation, as well. Uncle Joe, who helped you get on the right track with investing as a twenty-something, just isn’t the right person to help you understand how dividing your current portfolio will impact your long-term financial well-being.

As I mentioned earlier, all of these people are well-intentioned, and there’s no doubt that they can provide support for you in other ways during your divorce. But, when it comes to advice about your finances, please learn to say, “Thanks –but, no thanks.”

2. A financial professional who doesn’t specialize in divorce

A CPA can file your taxes or give you a snapshot of your current and past financial status.  A typical financial adviser is hired to help you invest in stocks, bonds and mutual funds.  But should you rely on financial professionals like these during your divorce? No, you shouldn’t.

Instead, you need someone with a skill set specific to divorce finances.  A Certified Divorce Financial Analyst (CDFA) specializes in divorce finance and will carefully weigh each settlement proposal presented and project how it will affect your short- and long-term finances while calculating the tax implications for each scenario.

Keep this in mind: The US is home to more than 1 million accountants and some 320,000 financial advisors. But there are only about 3,500 CDFAs who are specifically trained in the financial aspects of divorce.

What’s more, many CDFAs have completed additional education and training. For example, in addition to being a CDFA, I have attended law school and have also completed dozens of advanced training courses in finance and divorce, including many of the same continuing education courses that are required for divorce and other attorneys (trust and estate, asset protection, etc.).

3. An attorney

Finding a firm that specializes in divorce/family law and dedicates at least 75 percent of its practice to divorce is a MUST.

But, these days, there are numerous critical financial tasks that are beyond the scope of even the finest divorce attorney’s expertise. For example, preparing financial affidavits and projecting the financial and tax implications of each divorce settlement option are now the purview of CDFAs.

Put another way, think of the CDFA as the financial quarterback of your divorce team. A CDFA is responsible for creating comprehensive financial analyses and projections so you and your divorce attorney can fully understand the short- and long-term financial and tax implications of each proposed divorce settlement offer. Then, your attorney can use that information to substantiate and justify his/her positions when negotiating with your husband’s attorney.

Without a doubt, if you’re going through a divorce, you’re going to get advice –whether you asked for it or not. The trick is to know which advice to heed and which advice to ignore. Get the specialized help you need by hiring a CDFA. They’re the professionals that can evaluate your financial circumstances before, during and after a divorce, while helping you plan for a secure financial future.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

 

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Should I Keep the House?

posted by admin 1:35 PM
Monday, September 26, 2011

Many women start divorce proceedings unprepared for the emotional rollercoaster surrounding the marital home.

Often, it starts as an internal struggle.  After all, most women fully expect to keep their house. To them, it represents a place of comfort that will provide solace during, and after, a time of great uncertainty.

But at times, the marital house can be just the opposite. It can serve as a painful reminder of all that went wrong with the marriage.

Mix in the feelings (and opinions) of a husband and children (not to mention the fact that the marital residence is typically a couple’s largest asset), and it’s easy to understand how a single piece of real estate can ignite a contentious tug-of-war.

Despite all these emotions, however, every woman must answer the question “Should I keep the house?” based on practical financial reasons. Part of our job at Bedrock Divorce Advisors is to complete the financial analyses and projections needed to help a woman understand if she can afford to do so, and if so, for how long.

Are you trying to decide whether or not you should keep your marital residence? If so, here are four key questions you need to consider:

1. Is your marital home a good fit for the new “single” you? Perhaps the house you’re living in now was purchased with the needs of others in mind. Did you choose the location because it was convenient for your husband’s business and travel?  Or did you seek out certain accoutrements largely because they were conducive to entertaining his business associates? If you did, maybe those accessories now seem frivolous and unnecessary.  Are the children you raised in the home grown and living on their own? This could be the right time to downsize and find a place that better suits your life now. It’s important to sort through and separate what you needed from a home in the past vs. what you need now and in the future.

2. What is the current value of the house? Because the marital home is often one of a couple’s largest assets, an unbiased third party real estate appraiser can be an integral member of your divorce team.  An appraiser will calculate the market value of the house by comparing it to homes recently sold and those that are currently on the market.  Ideally, these comparable houses are in close proximity to your home and have similar square footage, acreage and amenities.  Using this information, the appraiser will present an accurate selling price in the current competitive market.  The appraiser’s report could feature prominently in divorce negotiations whether or not you decide to keep the house.

3. What is the cost of keeping the house? Along with mortgage payments, you’ll also have to pay for taxes, utilities, seasonal maintenance, monthly service contracts and perhaps even additional staff to manage the property. Costs like these can add up to become a significant addition to your monthly expenses.   You’ll also have to consider looming repairs and renovations.   While projects like these may add value to the home, they could also prove to be a further financial drain on your resources.

4. What will you have to give up in order to keep the house? Often keeping the marital residence is a tradeoff, rather than an exchange of cash.  In other words, your spouse will keep something that is presented to be of equal value in exchange for the house. If you are concerned about hidden income/assets/liabilities, the possible dissipation of marital assets and/or the value of any item that’s under negotiation, you may need to add a forensic accountant and/or a valuation expert to your divorce team. They can determine the true worth of a business, professional practice or other asset with a keen eye for any misrepresentations that could skew that figure.  The valuation expert can also establish the value of stock options (and/or restricted stock, etc.) and intangibles such as  an advanced degree or training to help ensure that you do not unwittingly give up something of inequitable current or future value in exchange for the house.

Choosing whether or not to keep your marital residence may be one of the most difficult decisions you have to make during your divorce. Give yourself the time to think it through carefully, and remember: Think Financially, Not Emotionally®. You need to strategically manage your assets and develop a sound, comprehensive plan for financial stability and security in the future.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

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How To Start Preparing Your Personal Finances for Divorce

posted by admin 3:04 PM
Monday, August 29, 2011

“A journey of a thousand miles begins with a single step.”

When the Chinese philosopher Lao-tzu said that nearly 3,000 years ago, he certainly wasn’t talking specifically about divorce – and yet, his words of wisdom do apply.

Divorce is a journey, of sorts. And, even though the mere thought of divorcing your husband may seem completely overwhelming at first, you do have to engage in the process. You have to take the initiative. You have to begin with that all-important first step.

As a Divorce Financial Strategist(TM), my advice is that you start this “journey” by getting a handle on your personal finances.  With just a few relatively simple steps, you can be on your way to establishing a firm financial foundation, one that will serve you well as you proceed through the divorce and long into the future, too.

For example, in order to start preparing your personal finances for divorce you need to:

1. Take inventory of all financial documents and records. Gather all your financial records, including bank account information, mortgage statements, credit card bills, wills, trusts, etc. (See more details in our Divorce Financial Checklist.) Once you have collected them, don’t keep these records in your home. Make copies, and take them to a trusted friend/family member, or use a safe deposit box that your husband can’t access.

2. Begin securing funds for legal and other professional fees. You’ll need resources to hire a qualified divorce team.   If your husband controls all access to the family funds, he can make this difficult (if not impossible). Choking off the money supply is a common tactic, but there’s no reason you have to fall victim to this kind of financial squeeze. Be proactive instead. Make sure you have funds that are secure and available only to you.

3. Open new accounts in your name. Your divorce attorney may instruct you to withdraw up to half of your joint funds and deposit them in new accounts.  (State laws will dictate what you can and cannot do.) Don’t use the bank where you have your joint accounts. Go to a different bank, and open a new checking and savings account in your name. Moving forward as a single woman will require that you establish good credit, so open a new credit card account in your name, as well. Keep in mind, though, that new federal regulations are making it harder than ever for women with little or no income to establish credit on their own. You’ll have to proceed with caution . . . just make sure you do proceed.

4. Get a copy of your credit report. While gathering your financial records (Step 1), be sure to get a copy of your credit report, too.   Monitor it so you can keep tabs on your credit score. (See my post, How To Protect Your Credit Score During Your Divorce, for more tips.) Plus, if you keep a watchful eye on your credit report, you’ll also be the first to know of any unusual activity. Is your husband charging gifts for his girlfriend on your joint credit cards? Or is he dissipating marital assets in some other way?

5. Open a post office box. You need your mail delivered to a secure, locked box that only you can access. Make sure you use this address to receive correspondence from your divorce team, your new accounts, etc.

6. Change your will, medical directives/living will, etc. Most states won’ t allow you to completely disinherit your husband until after the divorce is final. But, you can take steps to prevent him from making medical decisions on your behalf or inheriting all of your assets should you die before the divorce settlement agreement is signed. Remember, you’ll also want to change beneficiaries on life insurance policies, IRAs, etc.

Once you have completed these initial steps, you will be on your way towards a new and secure financial future. Take it step by step, and you’ll start feeling less overwhelmed, more knowledgeable and better equipped to continue on your journey to a single life.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

 

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How is Debt Divided in Divorce?

posted by admin 12:08 PM
Wednesday, July 20, 2011

Everyone seems to understand that divorce involves the division of marital property and assets.

However, over the years, I have found that many people fail to fully appreciate that divorce involves the division of debt, as well.

Ironically, debt is typically cited as one of the top reasons couples split up. But, getting divorced doesn’t make those troublesome debt problems “magically” disappear. In fact, it’s exactly the opposite. Just as debt can often play a major role in the failure of a marriage, it can also play a major role in adding stress and contention to divorce proceedings.

What can you do minimize nasty debt headaches during your divorce? My best advice is to be prepared. Educate yourself about debt, in a broad sense. Then, gather all the relevant data about your specific case.  You’ll want to collect credit card bills, information from your mortgage/home equity/auto loan accounts, etc. and learn all you can about what you and your spouse owe.

In addition, here are a few tips to help you better understand how to handle dividing debt in your divorce:

1. Where you live impacts how debt will be divided. Divorce laws differ from state to state, and how your debt will be divided depends largely on where you live and whether you live in a Community Property State or an Equitable Distribution State.

There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples living in Alaska can “opt in” for community property, and Puerto Rico is a community property jurisdiction.

The remaining 41 states are known as Equitable Distribution States (or Common Law States).

(An earlier post discusses the differences between Community Property States and Equitable Distribution States in more detail.)

In general terms, if you live in an Equitable Distribution State, debt that’s incurred during a marriage is the joint responsibility of both parties, provided both parties are co-signers on the account (mortgage, credit card, etc.). In other words, if your husband opened a credit card account in his name only, then only he is responsible for that debt.

In Community Property States, both spouses are responsible, even if only one incurred the debt.

Of course, once you and your husband have separated, the rules change. Any debt incurred after you separate is the sole responsibility of the person who made the charges. The wrinkle here is that “the moment of separation” varies from state to state. In some states, you need to legally declare a separation. In others, a legal separation is not required; you’re separated once you start living apart.

2. It’s often best to eliminate shared debt. Our firm usually advises women to eliminate shared debt before the divorce is final. Naturally, that may mean you need to use marital assets to jointly pay off what you owe –but, usually that’s a worthwhile step, if it means you can begin your single life with a fresh start. Alternatively, some couples decide to divide and transfer their debts, so that each person is individually responsible only for his or her portion.

Either way, the goal is to separate your finances (and any remaining debt) from your husband’s finances (and any of his remaining debt).  As a result, you’ll remove your liability for what he owes.

If possible, you’ll also want to close joint credit cards and eliminate your husband as an authorized used on any credit cards in your name. Remember: Credit card companies and other third party agents are not bound by divorce agreements.  It may sound harsh, but if your names are both on a credit card account, the credit card company can hold you responsible if your ex rings up a balance and then decides not to pay.

One word of caution here:  New federal regulations are making it harder than ever for women with little or no income to establish credit on their own. You’ll need to proceed with caution as you set out to establish credit in your own name . . . Which brings up my third point . . .

3. Protect your credit. Once you have: a) established control of your own debt and b) separated your liability from your husband’s debt, it’s time to turn the page and begin a new chapter. You’ll need to establish credit in your own name –and then, once that credit is established, you’ll need to work hard to protect it. Start slowly and proceed with caution, keeping a careful watch on credit card balances, debit and ATM cards, etc.

A good first step should be to create a budget that will allow you to maintain your lifestyle, pay off any remaining debt and increase your savings. A divorce financial planner can help you determine how to manage your assets and which adjustments are necessary for continued financial stability.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

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How Are Appreciated Assets Divided in a Divorce?

posted by admin 5:21 PM
Tuesday, June 28, 2011

In an earlier blog post, I explained the difference between separate and marital property.

Now, it’s time to delve a bit deeper and discuss some of the financial nuances you may encounter as the division of separate and marital property proceeds during your divorce. For example, it’s likely your case will involve assets that have appreciated in value during the course of your marriage. Here’s the issue:

In many states, if your separately owned property increases in value during the marriage, that increase in value may be considered marital property. What’s more, the division of this particular subset of marital property can be further complicated by the differentiation between active and passive appreciation of the assets.

Let’s take this step-by-step.

First, understand that an asset can increase in value in one of two ways.  An asset can either

  • Actively  appreciate –as a result of actions by the owner of the asset  . . . or it can
  • Passively appreciate –as a result of changes in the market.

While there are many complex rules that govern division of property and asset appreciation, here are a few fundamentals, in very general terms:

In community property states, where both spouses are typically considered equal owners of all marital property, the division of appreciated assets is often computed based on a series of formulas. The calculations can prove enormously complex, but here’s a short summary of the most salient points by David M. Wildstein, Esq. in his brief, Allocating Active and Passive Appreciation of a Separate Business Asset for Equitable Distribution:

“If the increase in a separate asset is passive, it is not a part of the community estate as long as no community resources were used for the asset. If the asset increases due to the effort of either party, it is part of the community. The time, toil and talent of each spouse is perceived to be a community asset. To reach a fair result, community property law created the doctrine of reimbursement: ‘The fundamental purpose of the doctrine is to bring back into the community estate value which was created by community contributions, but which took the form of appreciation in the value of a separate asset.’”

In equitable distribution states, it’s not as “straightforward” because none of the equitable distribution states use a formulaic approach as described above for community property states. In equitable distribution states, passive appreciation on separate property remains separate property.  But, active appreciation on separate property can be considered marital property.

What can qualify as active appreciation on separate property? That’s a very good question, and courts often struggle to make this determination. Typically, the judge will use a three-pronged test to evaluate active appreciation in separate property.  The judge must find that:

1.     The separate property did, indeed, appreciate during the marriage.

2.     The parties directly or indirectly contributed to the appreciation.

3.      The appreciation was caused, at least in part, by the contributions.

Of course, as with other aspects of divorce proceedings, the rules governing the determination of asset appreciation can vary from state to state.  In some states the burden of proof is on the spouse who claims the appreciation is passive. In other states, it’s the reverse –the burden of proof rests on the spouse who claims the appreciation is active.

Clearly, asset appreciation is a complicated topic that demands thorough and thoughtful consideration.  It’s essential that you seek guidance from a qualified divorce team concerning the particular circumstances of your individual case.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

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Divorce laws differ from state to state, and so the simple truth is this:

Where you live impacts how assets and debts will be divided in your divorce case.

So, in addition to recognizing the difference between separate and marital property, you also must understand the laws that govern your place of residence.

The first step is to determine whether you live in a Community Property State or an Equitable Distribution State.

There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples living in Alaska can “opt in” for community property, and Puerto Rico is a community property jurisdiction.

(You may be interested to know that the Community Property system is derived from Spanish law, and that’s why it’s found predominantly in the southwestern states.)

The remaining 41 states are known as Equitable Distribution States (or Common Law States).

What’s the difference between a Community Property State and an Equitable Distribution State?

In a Community Property State, both spouses are typically considered equal owners of all marital property. In other words, if you live in a Community Property State, whatever you earn or acquire during the marriage is co-owned by both parties, regardless of who earned it or whose name is on the title. That means whatever you earn or acquire during the marriage is spilt 50-50 during a divorce.

If you live in an Equitable Distribution State, the law “sees” assets somewhat differently.  In an Equitable Distribution State, if your name appears on an asset (the deed to a house or the title to a car, e.g.), you are considered the owner. However, in an Equitable Distribution State, your spouse has the legal right to claim a fair and equitable portion of those assets in a divorce.

The equitable distribution of assets may result in a 50-50 split of marital property, or it may not. The goal in an Equitable Distribution State is not a 50-50 split. The goal is a fair (equitable) distribution of family property.

A variety of different factors are considered when dividing family property in an Equitable Distribution State. For example, equitable distribution may be based on:

  • the length of the  marriage
  • the age and health of the parties
  • the income and future earning capacity of parties
  • the standard of living established during the marriage
  • the value of homemaking and childcare provided during the marriage
  • the value of the investment one party made to help with the education, training of the other party
  • other factors

Please keep in mind that the entire discussion above involve marital property. Separate property is a different matter.

Whether you live in a Community Property State or an Equitable Distribution state,  assets that you bring into the marriage or receive individually (an inheritance or your grandmother’s diamond ring, e.g.) remain yours. This separate property is exactly that –separate –unless you co-mingle it with marital property. For instance, if you deposited the inheritance from your parents into a joint bank account, it’s likely that those funds would no longer be considered separate property. Instead, once co-mingled, these funds would be considered marital property and subject to division as required  by your state’s laws.

In a nutshell, here’s the difference between a Community Property State and an Equitable Distribution State:

In a Community Property State, marital property is divided 50-50.

In an Equitable Distribution State, marital property is divided equitably, based on a variety of factors.

Assets aren’t necessarily the only thing acquired during marriage. Debt is often acquired, too. And just as assets are divided in divorce, debt is divided, as well. Generally speaking, the division of debt follows the same principles as the division of assets. For example, in most Community Property States, both spouses are equally responsible for the repayment of debt acquired during the marriage, even if only one spouse enjoyed the benefit. (I’ll discuss the division of debt in more detail in a future blog post.)

Okay. Are you now feeling comfortable with the distinction between Community Property and Equitable Distribution States? You are? Great! Then, I won’t feel too badly about offering this one last wrinkle:

A few states have laws with both Community Property and Equitable Distribution characteristics.

(As I’ve said before, the division of assets can get complicated quickly!)

Please, consult with your divorce attorney to learn which laws are specific to your state, and remember, when it comes to divorce, geography is critically important. Regardless of where you live, it’s essential that you seek guidance from a qualified divorce team concerning the particular circumstances of your individual case.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

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