Written by: Lori Price, Wealth Manager & Partner & Hollis Hardiman, Wealth Advisor & Partner
Although very often stressful and emotional, preparing for your settlement agreement often comes down to acquiring complete and accurate information and getting organized in advance. If you are unsure about certain assets owned by you or your spouse, you could be losing out on valuable items or accounts once the divorce is finalized. You should try to do as much research in advance to ensure that you do not have to return to court at a later date. Fortunately, if you focus on some of the most important financial issues and implications of the divorce (and seek out the guidance of an attorney or attorney-mediator and a divorce financial planner), you can generally reach a divorce settlement that is fair to both spouses.
Getting all the information you need is not always easy. However, there are many ways you can work through collecting the data that you need. For example: if you and your spouse have recently refinanced, asking for a copy of the mortgage application can be just the treasure map you are looking for. Usually, a mortgage application lists all your assets and liabilities- which is just what you need to get started. If you don’t have copies, you can also reach out to your CPA for recent tax returns. A tax return will help you work your way through understanding the income your family receives. The return will also list any dividends and interest you may be receiving on investment accounts and K-1s, etc., if there are other business interests.
Below are some terms that you will want to become comfortable with as well as a list of some assets you want to make sure you are digging into throughout your process.
1. Do you or your spouse have any deferred compensation, options or restricted stock?
There are many types of compensation to be aware of when it comes to income. An employer likely has incentive plans for employees. This can include deferred compensation, stock options, RSUs, etc. There is also a likelihood that a retirement plan is offered. You want to make sure you are aware of any 401K’s and pension accounts that may have been awarded during employment. Even seemingly small assets or accounts can grow over time, adding value to your overall net worth.
2. Does the family have an HSA account?
Like IRA’s and 401K’s, a Health Savings Account (HSA) can grow over time. Since HSAs are not jointly-owned accounts, you will need to make sure you know the balances of all HSA accounts. In this case, you could open your own HSA to receive the rollover benefits from your spouse’s account. HSA’s grow tax-deferred and are not taxed at distribution if the funds are used for allowable medical purposes.
3. Do you have the cost basis for all assets?
Getting the cost basis on every asset owned, including your house, is extremely important. The value of an asset could be different from when you purchased the asset until now- (like a stock that has gained or lost value). The potential tax implications on those gains and or losses should be discussed between both parties and will affect the financial outcome of the settlement.
4. Where will funds for supporting our children come from?
Many issues pop up between divorcees with children. Your children’s education, healthcare, and financial well-being should be the number one concern. The more you discuss upfront, the easier it could be down the road. In addition to basic support, smaller expenses such as babysitting expenses, camps, tutors, sports equipment, discretionary medical, therapy, etc., should also be part of the conversation. These costs add up, so there should be a discussion on how they will be paid moving forward.
5. Is there a Trust?
Trusts can be more complex, as you may not always have the right to the money in a trust in your spouse’s name. However, an attorney should review the documents to see if you do have access and can include any income or assets held in a trust as a family asset. If your spouse does have a trust, you need to know the details and determine if it can be included in the settlement.
6. Is there life or disability insurance, or will you need to have additional policies?
Life and disability insurance are important if you plan to ask for alimony or have dependent children. If your ex dies or is disabled and cannot work, you may not be reimbursed without comprehensive life and disability insurance. Even if alimony is not a factor, life insurance still allows you to receive compensation when your ex-spouse passes. You should own the life insurance on your spouse to make sure that the premiums are paid.
7. What else counts as an asset?
Other assets, including art, antiques, wine and other collectibles, travel miles, Venmo accounts, etc, should also be valued before a divorce. These assets can be significant and need to be included in the split. After all, you can’t cut a Picasso in half!
While asking the right questions and collecting the right information should be your top priorities, reaching out to professionals is also vitally important. Moreover, you should always discuss your financial situation with an experienced divorce financial specialist. At Merit, our specialists help with the financial information on the front end and make sure that there is a financial calendar and timeline. This makes it far easier for your lawyers to conduct productive negotiations on your behalf and for you to feel confident that your settlement is fair.
If you would like to get professional help with your divorce settlement negotiations, be sure to contact Merit Financial Advisors today!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please discuss your specific situation with the appropriate professional.