By Barbara Shapiro, CFP, CFS, CDP
The reports, with their bleak predictions for marital success, continue to come in. Most recently, the figures state that 43 percent of first marriages and 60 percent of second marriages end in divorce. What the figures don’t tell us, however, is how expensive the divorce process can be and how financially crushing the aftermath is for many involved. But those who have been through it don’t need a newspaper to confirm the obvious.
There is good news, however, for those who have not yet, but are considering, entering into the world of the previously married. There are ways to plan for post-marriage financial stability, the most important of which is to insure that the divorce settlement itself is not only equal, but financially equitable as well. Knowing the difference can mean savings of thousands of dollars or more.
There are many issues to consider when formulating the divorce settlement including taxes, investments, property, child support, and children’s future education needs. While all of these issues are directly correlated with financial matters, many don’t seek the advice of a certified divorce planner, instead relying on their lawyers to answer complicated financial questions. As certified divorce planners cannot give sound legal advice, lawyers should not be relied upon for financial advice.
Equitable vs. Equal
Typical mistakes can be avoided when a financial expert is involved in the settlement creation. If a couple has $250,000 in cash and another $250,000 in combined additional assets, for example, the assumption might be made that if one spouse takes the cash and the other takes possession of the invested assets, the settlement is equitable. While it appears that this is an equal division of assets, it is not, in fact, equitable. Taxes, capital gains, and the rate of inflation and its effect on investment returns must be taken into consideration before signing on the dotted line.
Home Ownership
Similarly, questions about the ownership of the home must be thought of in financial terms, rather than simply in emotional terms. Often women want to gain full ownership of their home, but doing so often leads to their financial peril. From mortgage payments, to gains’ taxes, the owner of the home bears a heavy burden. Couples can consider maintaining joint ownership of the home, which often has tax benefits. If the home remains in both partners’ names, when they eventually do sell the house, they might be able to shelter $500,000 of gain from taxes, rather than the $250,000 that a single owner can shelter.
Tax Concerns
Taxes associated with capital gains must be kept in mind at all times. If a couple owns 100 shares of stock currently worth $80 each, or $8,000, allotting 50 shares to each partner may not be equitable, although it would appear to be equal. If half of the shares were purchased at $50 each, and the other half was purchased at $75 each, the partner who keeps the shares purchased at the lower rate will pay far more in built-in-gains if they sell when the stock is at $80, as they will be taxed on a greater gain than the partner who keeps the stocks purchased for $75. While it is not a lawyer’s job to watch out for this type of detail, those who have this information will make wiser decisions that will impact the future financial well-being.
Questions about filing income taxes during the final year of marriage need also be discussed with someone who understands tax laws and their financial implications. Questions about joint or single filing status, and who can claim head of household, differs according to each situation, but being aware of the financial implications associated with each filing status is imperative.
Education Planning
Saving for children’s college education expenses only becomes more difficult after divorce. Creating a 529-education plan before finalizing the divorce is a way for both parents to ensure that their children’s education expenses will be met. It is also a way for both parents to share in tax benefits, as funds invested in 529 plans are sheltered from tax. The money grows tax free, and the parents gain peace of mind in the process.
Child support and alimony can and should be discussed with legal council as well as with a certified divorce planner. While the laws regarding the duration of the support payments and the specifications for support alterations are legal issues, the financial questions are obvious and must be addressed as well. How much, if any, is necessary can be better determined by one who knows the fill scope of the financial earning power, and property, assets, and investments owned by the couple.
Two-income households are the norm, and employee compensation packages and opportunities for investments become more complex each year. Dividing assets in the event of a divorce is more involved than ever before. Certified divorce planners who are also certified financial planners work in tandem with divorce lawyers to insure their shared clients obtain financially equitable divorce settlements.
Of course financial planning is not imperative in order to get a divorce. It is, however, imperative to future financial success.
Barbara Shapiro, CFP, CDP, CFS, is Vice President of HMS Financial Group, a full-service investment and financial planning firm in Dedham, Mass. Investment securities offered through Cadaret Grant, Member NASD, SIPC. She offers phone consultations and advice and can be reached at (800) 335-2442 or by email: bshapiro@hmsfinancial.com