A certified divorce financial analyst helps determine the short-term and long-term financial impact of a proposed divorce settlement to ensure that it works now and in the future. Here are some areas to consider in a divorce.
• Realize all assets are not created equal
When couples are going through a divorce in Texas, the financial focus often is fixed upon equal distribution of assets. This is due to Texas being a community property state. Assets with an equal value in the short term, however, may have an unequal value in the long term. A Roth IRA, due to its unique tax status, may have a greater long-term value than a traditional IRA because the Roth grows tax-free and does not have mandatory distributions. Moreover, in the short term a $100,000 savings account may have a much greater value than a brokerage account with the same value. If the stock has a low cost basis, or original purchase price, the spouse receiving it will face a tax bill when the stock is sold.
• Understand the tax differences between child support and alimony
Alimony, or spousal support, is tax-deductible to the spouse paying it while it is taxable to the spouse receiving it. Child support, on the other hand, is not tax-deductible to the spouse paying it nor is it counted as taxable income to the spouse receiving it. Additional alimony paid through other means, outside of the divorce decree, is not tax-deductible.
• Protect your divorce settlement with life insurance
Take out a life insurance policy on the paying spouse to protect your alimony payments. Make sure to put yourself as the owner and beneficiary of this policy in case the paying spouse decides to stop paying the insurance premiums. Moreover, make sure to update all your beneficiary designations on your IRAs, investment accounts and insurance policies.
• Learn about dividing retirement plans
Any portion of a 401(k) plan or company pension earned during a marriage is considered community property in Texas. The non-employee spouse can receive his or her portion of the future benefit or the benefit can be future valued and offset. Consider your cash-flow needs to determine whether you need the benefit now or in the future.
The Qualified Domestic Relations Order (QDRO) is the instrument used to divide 401(k) plans and company pension plans. The QDRO should be completed before your finalized divorce and written by either your attorney or financial adviser. If your spouse pays you additionally through a property settlement note, make sure to have him or her use the QDRO as collateral. This reduces the number of paying spouses who quit paying child support or alimony.
• Know the difference between community property and separate property
Separate property is property you acquired before your marriage, property you received as a gift during your marriage, personal injury damages for a physical injury sustained, or property you received as part of an inheritance. Marital, or community property, is everything else. It is important to remember that income from separate property, such as dividends on stocks in a brokerage account, is marital property as well.
• Construct a good team
The team you assemble when you divorce is critical. You need an excellent attorney and a certified divorce financial analyst to start. Having this team in place will reduce your litigation costs and protect you from making serious financial mistakes. Divorce challenges the most emotionally tough among us. Don’t try to handle this by yourself. Enlist the help of professionals.
Fred Gartrell is a financial adviser and a certified divorce financial analyst with Robert W. Baird & Co. fgartrell@rwbaird.com