DIVORCE FOR THE REST OF US: A FINANCIAL HOW-TO
For top executives and their spouses who have millions to divvy up in a divorce, spending hundreds of thousands of dollars on lawyers fees and court proceedings may be worthwhile. But for most people, the name of the game is to cut your losses and get out of a failed marriage as quickly and cleanly as possible.
No matter how acrimonious the split-up is, you should work toward an uncontested divorce. More than 90% of divorces are settled out of court, which requires both spouses, often with the help of lawyers and mediators, to agree on how to divide assets and debts, and to resolve child custody and support issues. Once you've arrived at a settlement, you basically just ask the court to approve it and grant you the divorce. In some states, people with very clear-cut cases may be able to handle the entire process without a lawyer.
If your marriage is dissolving, your first step should be to become informed both financially and legally, says Violet Woodhouse, an attorney and financial planner in Newport Beach, Calif., and author of Divorce and Money (Nolo Press, $26.95). "No one wins in divorce," she says, "but the one who is the most informed comes out ahead." Your legal rights vary state by state, but generally each spouse is entitled to half of the marital property.
PAPER CHASE. If you haven't been handling your family finances, you'll need to take a crash course in everything having to do with your household bills, debts, income, and assets. Gather all related documents for you and your spouse, including pay stubs, employee benefit statements, tax returns, bank statements, checking account records, credi- card bills, loan agreements, brokerage accounts, and insurance policies. Also gather documents for any separate assets that you brought to the marriage so you can prove they shouldn't be counted as marital property. Woodhouse recommends making copies of all the documents and storing them someplace other than your home. When divorce proceedings are initiated, you may no longer have access to the desk drawer where the files are stored.
"Information is everything," says Woodhouse. "It goes to the heart of all the decisions you'll have to make." Quite often, a spouse may have the wrong idea about how much money there really is. "All they know is they can spend a lot," she says. "But very often they are spending everything, and they may not have a lot in assets." Those financial documents will help you figure out what your income will be after the divorce, including how much support you may be required to pay, or be entitled to.
That information also is the basis for eventually dividing up the marital estate. Use it to make an inventory of assets and liabilities. For assets, list the original cost basis and estimated fair-market value. Take tax issues into account. Spouses can transfer property without paying taxes, but the original cost basis goes with the property. If part of your share of the marital estate includes assets that you plan to sell, remember that you'll have to pay the taxes. You'll also need to figure out how returns will be filed during the divorce period and if support payments will be deductible.
TAX-CODE SECRET. Take a close look at retirement plans, including pension plans, 401(k) plans, and profit sharing. In all states, those assets are considered marital property, even though they are only in one person's name, says Carol Ann Wilson, a Boulder (Colo.) financial planner and founder of the Institute for Certified Divorce Planners. A little known part of the tax code allows a spouse, as part of a divorce decree, to withdraw a lump sum from the other spouse's qualified plan without paying the usual 10% penalty for tapping the money before age 59 1/2. A forensic accountant -- yes, that's what they're called -- can put a value on any stock options. You may also want an independent appraiser to put a fair value on a family business or professional practice.
Divorces frequently end up in court when financial information is withheld. Paula Pace, a family mediator in New York City, says she recently had to halt mediation for a couple because the husband wouldn't agree to have his business appraised. "One of the biggest problems people get into is when they won't share information with each other," says Wilson. "That causes their divorces to cost them so much more money." Ultimately, both sides are going to get all the information anyway, she says, but they may have to do it through an lengthy "discovery" process in court or by hiring a forensic accountant who can decipher complicated financial records.
Mediators, who are often lawyers themselves, can help you and your spouse work out the entire settlement, or at least resolve the thorniest issues. Lawyers, left to negotiate, can sometimes be such zealous advocates for their clients that divorce can take longer, be more grueling, and be much more expensive.
Mediation can also provide time for a shell-shocked spouse to absorb what is happening. "Usually one person has initiated the divorce, which puts the other person at a disadvantage," says Pace. She says she'll meet with a couple for one or two hours every couple of weeks, and the settlement will be drawn up after four to eight sessions have been held. Once you've arrived at a settlement, a lawyer can review it to make sure it matches up with your legal rights and create a document in legalese. Mediators may not charge less per hour than lawyers, but you'll be paying only one person between you (your last act as a couple?), and the process should take less time. Sooner or later, most people who are going through a divorce will be happy to do whatever they can to reduce the cost and the duration of the unhappy event.
By Amey Stone, associate editor, Business Week Online
Updated July 23, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.