12 Steps For Financially Surviving Divorce

12 Steps For Financially Surviving Divorce

Surviving divorce depends on a lot of things–like having
your finances in order. This can help you stay fiscally
upright during a troubled time.

by Sandra Popescu

–After starting on the Ten Tips for Financially Surviving Divorce, I decided it was more like a 12-step program for a very sobering experience; thus the name change and two additional tips.

Financial sobriety is an awakening process requiring a plan of action and incremental steps. If you were taking a job in another country, you would probably have already established a working budget identifying the income and expenses you expect to have. Before you made the decision, you would have determined if the job could support the lifestyle you intend to have. In addition, you would have estimated the actual costs to make the move, and made arrangements to pay for it in cash or on credit.

Why wouldn’t it be the same for divorce? You need to wake up and take inventory of your situation. This is a giant step into a brand new life; alone! Anticipating this life transition requires immense preparation to be successful. Focus on your future as much as possible and leave the past behind. Why, Why, Why doesn’t really matter any more if you want to get sober!

So, what is the first step? Although I believe good legal advice is paramount for a successful divorce, some financial planning before you file or see the attorney can make that process much more focused and efficient.

#1 Collect all the pieces to your puzzle so your side has a full understanding of your financial picture to enable you to receive your fair share. That means, gathering all the data you can get your hands on including copies of bank and brokerage statements, cancelled checks, check registers, accounting software backups, pension fund plans and statements, insurance policies, credit card statements, deeds to real estate, titles to automobiles, etc.

#2 Identify all sources of income for the family including employment, business, retirement, and investment income, and all benefits. Periodic gifts and early inheritances should also be accounted for if it affects your income available for support or shows your ablity to enjoy a more comfortable lifestyle because of it.

#3 – Make sure you have access to cash. Review your bank and investment accounts to ensure you are a joint owner and signor on the accounts. If not, suggest your name be added as a safety precaution (if your spouse isn’t already suspecting a divorce). If the divorce has a potential to get “ugly,” you may want the ability to freeze joint accounts so community funds don’t disappear.

At the same time, open a separate bank account in your name only and start funding it. Remember, if the funds are transferred from a community account to your new separate account, the funds are still considered community property and will need to be disclosed. However, having funds in a separate account gives you some comfort to know that the spouse doesn’t have access to these.

#4 – Run a credit report to find out what credit cards and loans are out there. You might be surprised to find your spouse has more debt and/or credit applications than you thought. Get a copy of the credit applications and see what your purported incomes are. This might prove handy when your spouse claims he or she makes substantially less. Use the report to identify all credit cards, loans, liens, etc. and start closing all inactive accounts. You might even enlist your spouse to clean up the family credit and get your credit score in good shape so you are in position to obtain credit moving forward. It would also be prudent to obtain a couple of credit cards and a line of credit in your name to assist you in moving forward since it is often easier to qualify for credit while you are still married. Once you file, consider freezing all the joint credit accounts so unnecessary debt isn’t added to the community.

#5 Get your tax returns for at least the last five years and review everything with the tax accountant to get a good understanding of your family’s resources. Investigate the supporting documentation. Inquire if income is underreported and/or expenses overstated. What personal/discretionary expenses are included in the tax return? What assets have been depreciated? Obtain the documentation for the tax basis in your real estate properties, businesses, and any investments (generally what you paid for the asset or have contributed to the business) and review for possible taxable gains and losses upon sale. You may also want to consider hiring a new tax accountant that will represent you separately after the divorce-especially if the prior person has an allegiance to your spouse.

#6 Get court forms at http://www.courtinfo.ca.gov/cgi­bin/forms.cgi and review them; particularly FL-142 for the Schedule of Assets & Debts, and FL-150 for the Income and Expense Declaration. You will be much better prepared if you can get a head start on these forms or at least be familiar with them.

#7 Prepare your budget in accordance with #6 above. Be sure to include supporting documentation to establish your marital lifestyle. I like to have a separate budget for the children because I believe most people are willing to support their children, but they have no idea how costly it really is with the many activities they are involved in.

#8 Now is the time to take care of all the things you have been putting off over the years like the $2K out of pocket dental work that needs to be done or the knee surgery that requires you to be out of commission for six weeks. If it is done during the marriage (before separation), you will be using community funds to pay for if which means you are only really paying half yourself! You might even consider some cosmetic surgery that may not be medically necessary, but could give you a whole new outlook on life! Or, how about a “hair transplant.” A full head of hair would definitely boost one’s morale and make you a little more marketable!

#9-Be realistic with the community residence. Does it really make sense to keep it? How would you buy your spouse out? Can you qualify to refinance the home? Unless the sale of the home is imminent, the courts generally don’t allow the consideration of selling costs, commissions or capital gains tax in the estimate of value. However, you should absolutely consider all of these in your decision. Plus, if you buy your spouse out of the equity, you do not get a stepped-up basis in the home. The basis for calculating gains is still the original purchase price (with adjustments) not the additional amount you paid spouse. If you sell home when you are single, you have a $250K exemption from capital gains tax whereas if you are married, you have a $500K exemption. There are creative ways to retain your spouse’s $250K exemption if there is cooperation between the two of you.

#10-Don’t overlook the property tax basis transfer benefit if you are 55 or older. Under certain circumstances, you can transfer the property tax basis in your residence to another property of equal or lower value in the same county (You can also go outside with some reciprocating counties.) The catch is that only one of the parties gets the benefit, which is the first person to apply! If you have a year or two to go before reaching 55, you should consider this aspect before selling the home prematurely.

#11-Community Business-Do some pre-planning here. The business will be valued either at the date of separation or the date closest to trial depending on certain factors. San Diego County uses “marital value” as the standard of value in a divorce, which means the value derived from sustainable earnings are based mostly on historical results. Just as in #8 above, the business might be able to accelerate some business expenses like a vehicle lease requiring a cash outlay and more debt on the company’s books. Or the business may implement a new marketing campaign with the expense reducing the current earnings and the anticipated increase in revenues targeted for after the date the business is valued.

On the other hand, to maximize the value of the business, you will want to make sure all non-business and/or discretionary and non-recurring expenses and assets are identified and the books adjusted accordingly for the five years up to the date of valuation. All non-business assets schooler should be identified and removed from the company’s books as well as any personal expenses. These adjustments may also benefit the recipient of any support as it will increase the “income available for support.”

#12 Separate personal from community funds. Many of us have separate property coming into the marriage. Sometimes we even received inheritances during the marriage or used community funds to pay for debts incurred before marriage. Somehow these funds all seem to get commingled over the years. Even when funds are traceable, the reimbursement isn’t necessarily what many people are expecting. For example, if you loaned the community $100K from a separate asset during the marriage and even had a promissory note agreement, you would really only receive $50K back in your pocket. This is because in essence you loaned husband and wife $50K each for $100K. When the community pays it back, $50K comes from your spouse and $50K comes from you! Your net increase is only $50K! Community/separate property issues can be complicated and there are many factors to consider. Collect as much data as you can to defend your position and seek advice from a knowledgeable financial expert. Sometimes we are able to indirectly identify the property without a direct tracing.

Pretty sobering ordeal isn’t it? Having a clear head and the supporting documents will enable you to make informed decisions in dividing up your community property. Select a good Divorce Financial Analyst to assist you with the more complicated issues including support, which will increase your chances for financial recovery after divorce.

Sandra Popescu is a CPA, a Certified Valuation Analyst and a Certified Divorce Financial Analyst in North County. She specializes in business valuations, economic loss analyses, forensic accounting, and marital dissolutions. She is currently the Treasurer for Collaborative Family Law Group of San Diego. Her goal is to assist clients in understanding their economic situation and in achieving equitable conclusions.

Sandra can be reached at (858) 509-3947 or sandy@prodatafs.com.

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