GETTING PERSONAL: Preparing Financially for Divorce

By Colleen DeBaise
20 December 2005
(Copyright (c) 2005, Dow Jones & Company, Inc.)

 

NEW YORK (Dow Jones)--It's the opposite of a fairy-tale ending: a marriage is headed toward a breakdown, with financial pitfalls that seem impossible to avoid. A spouse who is contemplating divorce and wants to avoid a monetary wreck can take steps to prepare for the splitting of bank accounts, retirement savings and assets such as the family home, cars and collectibles.

With the divorce rate high, many couples choose to enter into a pre-nuptial agreement before wedding bells toll, and experts say that's still the best way to safeguard family wealth or personal fortune amassed before the marriage. "Once you've already tied the knot, the spouse has rights," says Jenifer Kelley, a private wealth advisor with Merrill Lynch & Co. (MER) in Greenwich, Conn.

A sticking point in many divorces is the division of property, covered by laws that differ by state. In general there are two categories of property: separate, which isn't divided in the event of divorce, and marital, which can be. Separate property includes assets brought into the marriage, or inherited or received as a gift during the marriage. Marital property is anything acquired during the marriage, and anything separate that has been commingled, such as in a joint account.

A growing number of couples concerned about the possibility of divorce are turning to post-nuptial agreements to outline the division of assets, Kelley says. Some couples didn't foresee needing a pre-nup, but after marriage circumstances changed: Perhaps one spouse created a business, or another spouse gave up a lucrative career to care for children. While post-nuptial agreements are similar to pre-nups, there's a big difference. "You have to give the other spouse due consideration," Kelley says. "It just makes the negotiating a little bit tougher."

The divorce rate varies widely based on factors that include income, education and age at marriage, but has been about 50% in recent years - and spikes higher when it comes to subsequent marriages, according to government data and other research. With that in mind here are some steps for spouses to consider, as the long road to divorce stretches in front of them:

--Take inventory. Know where all the assets are, and make copies of bank, brokerage and retirement-account statements, and tax returns. Understand your cash-flow needs. "Before things go amuck, understand what your situation is, so when you're in that crisis mode, you don't have to learn anything," says Stephanie Sherman, an independent financial planner with Prudential Financial (PRU) in East Hanover, N.J. "Even in the best of circumstances, there is going to be some level of acrimony."

--Don't hide assets. Especially in a big-money break-up, a divorce attorney will likely hire a forensic accountant to trace any funds siphoned to a separate or off-shore account. The spouse who tries to sock away assets, in many cases, has to return half of them. "Don't do it if you're not entitled to it," says Sherman. "It will just make things worse."

--Don't commingle. If the relationship is on the rocks, a spouse who receives an inheritance or gift shouldn't deposit the sum into the couple's joint account. Once that happens, the assets become exposed to distribution in the event of divorce. To further protect assets, a spouse may want to talk to parents or grandparents about transferring wealth into a trust on his or her behalf. A trust isn't foolproof - a judge may look at it when deciding to award alimony, for instance - but can serve as a valuable tool.

--Hire an advisor separate from the family advisor. This is especially important for the "non-dominant" spouse who doesn't typically manage finances, says David Emery, senior financial advisor in Univest Corp.'s wealth management group in Souderton, Pa. That spouse may need an advisor, such as a certified divorce planner, who has experience negotiating a settlement. A financially unsophisticated spouse might neglect to add health insurance costs into cash-flow needs, or fail to plan ahead for the death of the ex-spouse whose income supports the family. "The non-dominant spouse might not think they are being taken advantage of, but often after the divorce is settled they realize they could have done a better job," he says.

--Resolve debts. The same rules regarding separate or marital property apply to debt. In general, any debt that a couple has incurred during the marriage, such as credit-card balances, car loans and mortgages, is considered a joint responsibility no matter who spent the money. A couple may want to use liquid assets to pay off debts, or sell big-ticket items such as extra cars or vacation homes to clear the bill before the divorce. If the debt hasn't been resolved, a couple should make clear in the separation who will pay the outstanding loan.

--Seek professional guidance from a divorce attorney - and the earlier, the better. "It will prepare you for the worst-case scenario," Sherman says. "Hopefully it will go better, but at least you're ready."

(Colleen DeBaise is one of four Getting Personal columnists who write about personal-finance issues ranging from new tax proposals to education-funding strategies to estate planning.)

-Colleen DeBaise, Dow Jones Newswires, 201-938-4381, colleen.debaise@dowjones.com [ 12-20-05 1453ET ]
70708
Document DJ00000020051220e1ck000fl
Copyright 2009 Factiva, Inc. All rights reserved.