You don’t need to be a world-class attorney to make smart decisions about protecting yourself and your assets in divorce. But you do need to be mindful, have a little understanding about how investments work and most of all, put your emotions aside. Here are the top 5 steps you can take to make sure more money stays in your pocket after divorce.
1. Peace, Love and Understanding
We’ll get to the peace and love in a bit. For now, let’s acquire some understanding. And the number one thing for you to understand is the difference between taxable and non-taxable assets. In a perfect world, all your assets and your soon-to-be ex-spouse’s assets would be in tax-deferred retirement accounts. That’s because IRAs and 401ks are easily split in divorce.
In those situations, all you need is a QDRO from the courts (easy to do) to split the assets. At that point, each person takes their portion as decided by the court and just keeps the money growing in their own IRAs. The beauty of this is that nobody you incurs any tax liability as a result of this split.
Now, it’s likely that your assets aren’t all in retirement accounts. And if your ex offers you a tax deferred account in exchange for taxable account, he’s not playing fair. Let me use an example to illustrate. Say your adversarial spouse offers to give you $100,000 in his IRA if you give him the $100,000 in the bank account.
If you go for this, you husband will have full access to that $100,000. But if you want access to your money, you’d have to pull the funds out of the IRA and pay taxes and penalties on it. You might be left with $50,000 or less. So if you are negotiating your divorce, make sure to look at your after-tax values – not pre-tax.
2. Peace & Love
Your soon-to-be ex might be a first class jerk but you will be richly rewarded if you take the high road. Put yourself in his shoes and think like he’s thinking. You’re never going to convince him that he’s a doofus at this stage of the game. To late for that. It’s time for you to go the extra mile – for your own benefit.
Do everything possible to avoid confrontation. If you start down the road of war, the lawyers will be the only winners. Better to give him 10% more than to allow the attorneys to start a fight that ends up costing you most or all of what you’ve worked your entire life to acquire. Capishe?
3. Call in the Right People
I suggest that you avoid working with your financial planner (who is probably not an expert in divorce settlements) when trying to come up with a divorce settlement offer. Instead, talk to a Certified Financial Divorce Practitioner* and try to get your spouse to the table too. Divorce mediators can shrink the cost of divorce by over 50%. They are schooled and experienced in negotiating fair divorce settlements. Of course, you should consult with your attorney to make sure the agreement is equitable. Just don’t allow the lawyer to drag you into a conflict once a settlement has been reached.
4. What to do about contested assets.
You can always suggest that any contested asset be sold off and have the proceeds split evenly. If this becomes impractical, just remember to value all assets after tax. That means if you own real estate that needs to be split for example, consider what the proceeds would be after all the dust settles – including commissions and capital gains taxes are paid.
5. Think Money – Not Assets
If you’ve never seen the movie “The War of the Roses” I strongly suggest that you do so immediately. It tells the story of a couple who fight over every little bit of memorabilia they acquired during their marriage – and it ends up costing them big.
If you’ve got a portfolio of stocks for example, don’t insist on holding on to the Apple shares and sticking your spouse with the Microsoft. Remember, stocks and bonds can always be sold. If you are splitting your assets and valuing them after-tax, it doesn’t matter. If you try to be magnanimous and accept the Microsoft, you can sell them whenever you like and buy Apple shares if you like– or anything else you fancy.
Don’t let divorce devolve into a game of brinkmanship. As I said, when this happens, the lawyers are the only possible winners. Think of your assets after-tax, put yourself in your spouse’s shoes and be willing to do more than your fair share in order to keep the acrimony at bay. Use the right advisors and don’t get attached to any particular asset. This is the best way to protect yourself and your assets during divorce.
We’ll continue this discussion by considering how best to divvy up the assets during a divorce.
If you are divorced or in that process, what is your strategy? Is it working? Why or why not?