As a Certified Divorce Financial Analyst™ (CDFA), I am usually called in when a couple has decided to separate and want some help determining what marital assets should go to whom.
My training as a Certified Financial Planner™ (CFP®) practitioner also comes in very handy as these disciplines work in concert. It is not as simple as splitting up assets as each asset can have a different "value". I don't mean that a $40,000 checking account doesn't equal a $40,000 CD.
I mean that sometimes certain assets bring with them a different value as they are simply very different. What appears "equal" is not always "equitable".
Awhile back, I spoke with a woman that was in the early stages of a divorce. More recently we reconnected as they were now ready to move forward with the divorce process. She owned a house with her husband worth $950,000 and they had a joint checking account worth $90,000. They also had the following individually owned assets:
Assets in "Chiara's*" name Assets in "Ian's*" name
401K $495,000 403b $82,000
IRA $216,000 Roth IRA $40,000
Roth IRA $60,000 Savings Bonds $55,000
We aren’t at the actual division of assets stage yet, however, the point I am showing here is that not every asset is equal. For example, Chiara’s Roth IRA is pretty close in value to Ian's Savings Bonds. However, if Ian cashed in his bonds he would most likely need to pay taxes on that money. On top of that, the bonds were an inheritance from his grandfather and depending on which state they lived in, might not be considered a marital asset. Roth IRA's under certain conditions are tax-free. If Chiara's Roth IRA is at least 5 years old and she is over 59 ½ when she cashes it out, the entire balance could be tax free.
It can become even more complicated when company stock or stock options are on the table. What about if one of the spouses (or both) own a business? These circumstances definitely add a layer of complexity to the situation and need to be evaluated carefully.
Many times, one spouse wants to keep the house in a divorce, yet houses come with their own set of issues. There are property taxes to pay, insurance, upkeep, lawns to mow and possibly snow to shovel. On the positive side, the house over several years, could appreciate substantially. Then again, one cannot simply take a window out of their house and go buy groceries with it.
Sometimes one spouse has more in an IRA than their spouse does, and these assets can be pretty easily split in a divorce. Workplace retirement plans, such as a 401K or 403b can be more difficult and can require a special document known as a Qualified Domestic Relations Order or QDRO to split these up. (We can sometimes eliminate the need for a QDRO if there are other assets to divide).
One thing Chiara told me was Ian wanted to keep the house. She was fine with that but based on the amount of his assets and a couple of other things she told me, I wondered if that was feasible. This is where the CFP® hat comes in. Equal, equitable, or however you slice it, without looking at the overall big picture, the wrong division of assets could be a ticking tax and expense time bomb.
Before making decisions on asset division, it is best to speak with a professional.
If you are past the divorce process, it is also imperative that you have a plan going forward. Sometimes we can correct some issues that were agreed upon pre-divorce.
This blog article is very basic in nature and should not be misconstrued as tax or legal advice.
*Names have been changed for privacy
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Here is another article that may be of interest, Your Divorce is Final. Now What? Click HERE
In good health.
All the best.
Rick Fingerman, CFP®, CDFA®, CCPS®
*This blog article is meant to be just a simple primer. I'm happy to speak in more detail one on one.
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