The Financial Layers of Divorce: What You Probably Don’t Know

In a marriage, there is usually one person who handles the finances and one who doesn’t. That generally works fine until one party decides that the marriage is no longer working for them. If it is the "monied spouse," they generally have a good handle on what is involved financially. If it is the non-monied spouse, the situation will be very complicated. Even educated professionals whom I have worked with often are surprised when together we start to go through financial paperwork and various assets, including the marital house, and discover what is really involved in determining an equitable arrangement.

When it comes to divorce, the financial information is what forms the basis for negotiations between the attorneys.  Very often, not only are there forgotten expenses, there can be income that is forgotten as well. For example, what if your spouse has a cash business? You probably have no idea of what the actual income is. Without that information, it will be difficult to determine an equitable arrangement for the divorce.

One comment I hear often from individual clients is, “I want to keep the house.”  That may sound like a fair or appropriate settlement, but does the spouse making this assertion know the costs involved to maintain the house on a monthly basis? Or what large expenses might be coming up such as the need for a new roof? What about landscaping costs? How much are the taxes?

Generally, maintenance being paid from one spouse to the other is tax deductible to the payer and income to the person receiving it. How do you determine what amount of divorce maintenance will be enough to cover not only the costs associated with running the home but other expenses as well such as groceries, clothes, your child’s dance class, and other expenses?  What about retirement? Often, one spouse is completely relying on the retirement plan of the other. Going through the life scenarios that make up the expenses of a marriage is what makes divorce so emotional; we are reliving the life we created, which is now falling apart, and we have to break it down to dollars and cents. And those who never had to think about the costs suddenly find it all overwhelming. It is in determining the costs and financial arrangements of a divorce that the services of a Certified Divorce Financial Analyst become important.

In some cases, I have clients who have drafted, with or without an attorney, a financial settlement proposal, and they want a forensic divorce accountant to look at it and determine whether it is equitable. In many cases, what might look good today might not look as good 5 years from now when the maintenance stops, and they haven't even considered how will it look 10 years from now. If there are children involved in the divorce, the finances are going to change drastically as their needs change, including aging out of certain activities, involvement with others and, most importantly, planning for college. What about the tax ramifications of investments and how that plays out in a settlement arrangement?

It is important to remember that divorce is the death of a union – a highly emotional situation.  During divorce proceedings, it's up to you to prepare a Statement of Net Worth for the court. This essential document forms the basis for discussions between the you, your attorney, and the parties on the other side. It's a tool for representing your financial picture of the marriage. In my years of preparing Statements of Net Worth, I have yet to see one prepared by the divorcing party that is accurate.

A Statement of Net Worth or financial plan must address everything. I like to say that the layers of the onion have to be peeled back so a full understanding is revealed.  Once that is done, you will be able to fully understand the big picture that includes the details of your finances so that you and your attorney can negotiate intelligently with the other side. The same information can then be utilized by you and your financial advisor to plan intelligently for your future.

Keep these steps in mind if you find yourself facing a divorce:

Step 1 – Hire a competent attorney for the obvious reasons.

Step 2 – Collect all financial information: Where are the assets? What debt is outstanding? What are your monthly expenses, including things such as clothing for you and your children, lunches, etc.? How much are you actually worth? 

Step 3 – Determine who is going to guide you through all of the financial decisions to be made: Do you have an accountant? Do you need a Certified Divorce Financial Analyst or a forensic CPA?

Without someone who is aware of the minutia involved in the financial aspects of a divorce, there is no way to accurately determine whether you are being treated fairly and whether you will have what you need moving forward into your new life. It is not only a matter of determining what is there, both on the plus and the minus side, but of figuring out how the split will affect your lifestyle going forward. Make sure you ask the right questions, and your first one should probably be: Can you help me determine what I don’t know?