Divorce can be one of the most traumatic experiences one can go through.  As you go through the process, you will need to make financial decisions that will likely have long-lasting implications on many aspects of your life.  You may feel that you want to get through the process as quickly as possible in order to move on with your life, but it’s very important to take your time and consider the following recommendations rather than making quick, emotional, decisions for the sake of expediting the process.

#1 Assemble your own professional divorce team

At Team Hewins, we believe clients are best served when you work with a fee-only financial advisor who is also a CERTIFIED FINANCAL PLANNER™.[1]  They should also have experience with the divorce process so that they can properly guide you through what can be a very complex process. “Fee-only” is very important as these advisors will not try to sell you products and will also be held to a fiduciary standard[i].  We also believe it’s also very important that they are a CFP® professional, as this designation signifies that they have the proper training and expertise to properly advise you with the very important financial decisions that you are about to make.  The financial advisor should be able to help you coordinate with the other professionals that you will need to work with such as a family law attorney who has expertise with the divorce laws of your state and a certified public accountant (CPA), or a forensic CPA.  Coordinating with your team may seem to be a daunting task, but no matter how amicable or adversarial your situation, you will want to engage different professionals than your spouse uses to assist you in making informed decisions. You need advisors to represent your interests and provide advice.

This point cannot be stressed enough, as there can be many complex aspects to consider with regards to a divorce –this is not something you want to try to figure out on your own.  You might be tempted to use the same professionals as your spouse to save money; in the long run this could end up costing you a lot more!

#2 Get organized!

Gather the most recent statements and documents available for all financial-related items so that you can start to form a clear picture of your current financial situation.  Statements for bank, brokerage, and retirement accounts, tax returns, insurance policies and pay stubs (year-end especially) are good places to start.  Review your expenses as a couple and start to look at your anticipated expenses post-divorce so you know how much income you will need.  It’s also a good idea to obtain a credit report so that you are fully aware of all your debt and credit score so that the debt can be divided and you know if your credit score has been adversely impacted. The bottom line here is that you need to know your entire financial situation.  Your financial planner can best assist you knowing all of the details.

#3 Understand the True Value of Your Assets

You may think that any $100k asset is equal to any another $100k asset, but factors such as income tax treatment upon selling an asset can result in one being worth much less than another as illustrated in the chart below.

After Tax Chart

*Cost basis = $100k **Cost basis = $70k Federal tax rates assumptions – 37% ordinary income, 20% capital gains[2]

In a case where business assets are involved, it can be even more difficult to determine a true value as there can be various types of assets within the business.  Depending on the nature of the business, there may be physical assets such as buildings and equipment, non-physical assets such as intellectual property, copyrights, royalties and possibly accumulated profits that you have already paid taxes on but that have not yet been distributed.  In many cases, a formal valuation will need to be completed in order to properly value the business.

If real estate is involved, you should start by speaking with a trusted Realtor® to determine the approximate market value.  If you are unable to agree on the value, a formal appraisal will be necessary.  If the property is being rented out on a regular basis, net cash flows should be taken into consideration as well as any existing debt.  Again, income taxes need to be factored in as there could be taxes owed should the property be sold in the future.  Your team of professionals will be key to helping you with all of this.

Other Factors to Consider

In addition to the assets and financial benefits that you know about, there could be others that exist but that you have never seen a statement for or would likely not know to ask about.  The financial advisor and family law attorney you are working with should be able to help you identify if any of the following pertain to your situation.

  • Employer benefits/accounts
    • Pension or deferred compensation program
    • Accrued vacation pay
    • Stock options/Restricted stock units
    • Retirement accounts with old employers
    • Health Savings Account
  • Capital loss or net operating loss carryover
    • These could be used to offset future income; if these were created when you were married, they should be split up as well.
  • Travel rewards/Customer loyalty programs
  • Prepaid expenses
    • Cemetery, burial plots
    • Club memberships (Golf, gym, professional dues/memberships)
    • IRS refund applied to the following year’s tax liability
    • Gift cards
  • Hard to find assets
    • Cryptocurrency
    • Foreign bank accounts

Conclusion

Going through a divorce is unchartered territory for most people and can be downright emotional and frightening.  But a team of professional advisors will be able to help you manage the process and complexity in order to get you headed in the right direction on the path of your new life.

By Karl Schwarz, CFP®, CPA, Principal and Senior Financial Advisor. To contact or learn more about Karl, visit his page here.

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. For detailed information about our services and fees, please read our Form ADV Part 2A, which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (650) 620-3040. The views and opinions expressed in this article are solely my own.

[1] “About CFP Board.” CFP Certification The Standard of Excellence, www.cfp.net/about-cfp-board/cfp-certification-the-standard-of-excellence.

[2] El-Sibaie, Amir. “2019 Federal Income Tax Brackets | 2019 Tax Brackets & Rates.” Tax Foundation, 16 Apr. 2019, taxfoundation.org/2019-tax-brackets/.

[i] Kagan, Julia. “Fiduciary.” Investopedia, Investopedia, 25 May 2019, www.investopedia.com/terms/f/fiduciary.asp.

 

 

Team Hewins » Divorce Financial Planning » Three Things People Going Through a Divorce Should Consider in their Financial Planning
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