Do I need a financial advisor as well as a lawyer for my divorce? Won’t I be paying twice the money for two professionals to be doing the same work?
Working with a financial advisor may help ensure you are making fully informed financial decisions and may also save you money and time during the divorce process. You should think of your divorce as a financial transaction in which everything you own jointly and everything you owe jointly are to be divided between you and your spouse. It is the unwinding of both an emotional and financial partnership.
Financial advisors can help:
- Create a realistic budget as you move through the divorce process and beyond.
- Educate you on the financial characteristics of your assets such as tax implications.
- Determine a long term financial plan for your life as a single adult.
- Divorce lawyers can help:
- Educate you on the legal process of divorce.
- File legal documents with the court such as summons and complaints.
- Represent you in the divorce proceedings and in a court of law.
I’m worried that my spouse will try to hide assets from me. How can I be sure I get a fair share of the business and other assets?
A key first step for finding the location of any possible hidden assets is to thoroughly understand the company. Knowing the company makes it easier to spot changes in business patterns — changes that might indicate whether income has been depressed and assets have been shifted out of the business.
Whether a business has a gross profit margin (that is, sales less the direct cost of goods sold) of 40% or 50% makes a huge difference. For example, inventory and supplies worth hundreds of thousands of dollars may have been purchased right at year-end and not recorded as inventory because they were not yet logged into the warehouse inventory system.
Some additional questions a forensic accountant may inquire about the company include:
- Who are its customers?
- Has the level of business from these customers remained steady?
- What types of products or services does the company provide?
- How do trends in other industries affect the company’s income?
- Have key clients been leaving the company for a single competitor or a new company?
- Have there been changes from year-to-year in key areas of its balance sheet or income statements?
The answers to these questions may point to any number of explanations. For example, a review of the customer activity logs may show a sudden decrease in revenues from a major client. Further investigation may show that several customers have switched their business to a new competitor in the market. It may turn out that one spouse is a partner in the competing business, which was set up for the express purpose of siphoning-off key accounts from the existing business to reduce its value in the divorce settlement.
Trends within the industry as a whole, as well as with competitors, in particular, can also affect the business. Questions a forensic accountant may ask include:
- Is the industry in a growth phase?
- What are common earnings for other companies in the industry?
- What are common expense levels?
- What other industry trends affect the company?
- What is happening with the competition?
- Is the company using a higher level of supplies to produce the same amount of goods as other businesses in the industry?
- Has the company experienced an income decrease while similar companies are experiencing growth?
If a forensic accountant suspects that a business owner is siphoning-off assets from the company by “cooking the books,” the forensic accountant can research statistics from similar companies. As a rule, two companies with similar levels of business will likely have similar levels of expenditures, but if one is spending twice what the other spends for supplies, there might be something hidden below the surface.
Unearthing hidden assets can be a painstaking process because the spouse involved in the business may have taken steps to cover his or her tracks in anticipation of the increased level of scrutiny. Careful investigation of the company’s financial documents and industry research (as well as consideration of other factors, such as the individuals involved) by an experienced forensic accountant can often reveal the trends that will show them how and where assets have been moved.
Are alimony and child support taxable? If so, is there any way of structuring support payments to my ex to lower my taxes?
For federal income tax purposes, child support is tax-free to the recipient but not tax-deductible by the person who pays it (the payor). In contrast, alimony payments are taxable to the recipient and tax-deductible by the payor.
In a negotiated written settlement, you will need to meet all of the following requirements for deductible alimony treatment:
- All payments must be made in cash or its equivalent;
- Your agreement should have no provisions that state that you and your ex are opting out of alimony treatment for income tax purposes;
- You and your ex must not reside in the same household after the settlement;
- Alimony must terminate on the death of your ex.
The IRS is aware that many taxpayers attempt to convert property settlements incident to divorce or child support obligations into tax-deductible alimony. The Tax Reform Acts of 1984 and 1986 enacted rules designed to prevent excess front loading of property settlements into alimony payments. The rules come into effect to the extent that annual alimony payments decrease in excess of $15,000 during the first three calendar years. If you fail the test and do not meet certain allowable exceptions, a portion of your alimony payments will be viewed as non-deductible.
To further complicate the planning, care must be taken to not have the agreement provide that alimony reductions will occur based on a contingency relating to a child (i.e. the child attaining a specified age or income level, dying, marrying, leaving school, leaving your ex’s household, or gaining employment) or at a time that can be clearly associated with a contingency relating to a child (i.e. a reduction occurring within six months of the child attaining the age of 18, 21 or the local age of majority). Carelessness in the drafting of these provisions can result in alimony deductions being disallowed from the inception of the agreement through to the time of the reduction.
My spouse and I own a business together. How will a judge split it?
With co-ownership, both spouses continue to own the business after the divorce. If spouses remain amicable, it may be possible to work together after a break-up. But this is not for the weak of heart; it will require a solid working relationship or high level of trust in the other’s management skills. If there is a great deal of rancor, continued co-ownership is a recipe for disaster and not really a viable solution.
Sell the business and divide the profits . The pros of this option are that both spouses may profit from a sale of the business and can use the proceeds to invest in their own business ventures. Plus, spouses can avoid additional financial ties to their ex-spouse. The downside is that this could take some time; many businesses can’t be sold easily and it may be months before a buyer is found.
In a buyout, one spouse keeps the business and buys (pays for) the other spouse’s interest. A buyout may be the best option assuming there are sufficient assets to complete the transaction. This can be accomplished if the buying spouse has enough cash or liquid assets available to pay off the selling spouse. Alternatively, the spouses could offset the selling spouse’s portion of the business with other assets, for example:
- The equity in a home.
- IRAs or 401(k) plan assets – however, these should be calculated at their estimated after-tax value in order to compensate for the eventual tax on withdrawals.
- Securities outside of qualified plans may be the most desirable in offsetting the value of a business because there is little to no tax liability associated with these accounts.
If the business comprises most of the couple’s net worth, the spouses may have to enter into a “property settlement note” or “structured settlement,” which will be paid out over time to the selling spouse. A property settlement note is similar to a note at a bank it should have a reasonable rate of interest, a definite term, and a principal amount.
What are the most commons errors to look out for when dividing pensions during a divorce?
- Not preparing the client for the pension maze during and after the divorce;
- Waiting too long to involve the pension consultant;
- Not obtaining necessary information about all retirement plans;
- Waiting until late in the process to address the retirement division issues;
- Entering into negotiations on dividing the retirement without fully understanding all features and limitations of the plan, division options, and plan administrative practices;
- Being too quick to use a valuation and buy-out;
- Agreeing to trade off interests in retirements (i.e., he keeps his and she keeps hers) without knowing the value of all retirements;
- Using a model format from the plan or a format from another case without understanding the significance of each provision and who benefits from the chosen methodology.
- Using language in a separation agreement that is incomplete and/or vague.
Who is responsible for debts my spouse incurred after we filed for divorce?
Whether you and your spouse are liable for each other’s debts depends mostly on where you live. In the handful of states with “community property” rules, most debts incurred by one spouse during the marriage are owed by both spouses. But in states that follow “common law” property rules, debts incurred by one spouse are usually that spouse’s debts alone, unless the debt was for a family necessity, such as food or shelter for the family or tuition for the kids. (These are general rules; some states have subtle variations in how they treat joint and separate debts.)
These rules also apply to same-sex marriages in the states that allow them and to same-sex domestic partnerships and civil unions in states where those relationships are the equivalent of marriage, but not in states where the relationship does not confer all the rights of marriage.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (In Alaska, spouses can sign an agreement making their assets community property, but few people choose to do this.)
In community property states, most debts incurred by either spouse during the marriage are owed by the “community” (the couple), even if only one spouse signed the paperwork for a debt. The key here is during the marriage. So if you incur a debt, such as a student loan, while you’re single, and then get married, it won’t automatically become a joint debt. (An exception is where a spouse signs on to an account as a joint account holder after getting married.) Some states, like Texas, have a more nuanced way of analyzing who owes what debts by evaluating who incurred the debt, for what purpose, and when.
After a legal separation or divorce, a debt is generally owed only by the spouse who incurred the debt, unless the debt was incurred for family necessities, to maintain jointly owned assets (for example, to fix a leaking roof), or if the spouses keep a joint account.
In community property states, a couple’s income is shared as well. All income earned by either spouse during marriage, as well as property bought with that income, is community property, owned equally by husband and wife. Gifts and inheritances received by one spouse, as well as separate property owned before marriage that’s kept separate, are the separate property of one spouse. All income or property acquired before or after a divorce or permanent separation is also separate.
What property can be taken to pay debts? In a community property state, creditors of one spouse can go after the assets and income of the married couple to make good on joint debts (and remember, in a community property state, most debts incurred during marriage are considered joint debts).
If my spouse files for bankruptcy, how will this affect his or her obligation to pay a property settlement note?
Bankruptcy law reforms make non-support obligations from a divorce non-dischargeable in a Chapter 7 case. As the spouse who’s owed, you have to show that the discharge of the obligation would harm you more than it would harm your ex-spouse. Non-dischargeable means your ex-spouse is still responsible for it.
You should file a complaint in bankruptcy court to get your property settlement debt excepted from discharge. If you don’t file a claim with the bankruptcy court, the debt may be wiped out, and you won’t be able to collect it later.
How do bankruptcy courts decide what’s a support obligation and what’s a property settlement? It varies greatly by state, but courts have based their decisions on such questions as:
- Do payments end or decrease if a certain event happens, like remarriage or a child turning 18?
- Are you paid in installments or a lump sum?
- Are there minor children?
- What’s the relative health and education of the parties?
- Was there a need for support at the time of the divorce?
I’m concerned that my credit is going to be affected as I go through my divorce. What can I do to protect myself?
Divorce proceedings don’t affect your credit report or credit scores directly. Rather, the financial issues that are embroiled in the divorce process often involve joint credit accounts, and those very much affect your credit history and credit scores.
Accounts are reported for each individual associated with that account, so if you are listed as a joint owner, cosigner, or authorized user, you must deal with that account prior to the divorce. That means closing the account completely or ensuring that one name is totally removed from the account.
Many divorcing couples are confused by the role of the divorce decree. A divorce decree may specify who is responsible for accounts opened during the marriage, but it doesn’t break the contracts with the lenders. If the spouse responsible under the divorce decree is unable or unwilling to pay and the contract has not been changed by the lender, the late payments still will appear on both credit reports and will have a negative impact on credit scores for both individuals. The missed payments can occur years after the divorce and still will be reported for all individuals associated with the account. That certainly can be an unpleasant surprise if you haven’t dealt with the account appropriately.
In some cases, vindictive behavior during the divorce by one or both spouses can have a very direct, very negative impact. Sadly, an angry spouse may try to hurt their soon-to-be former wife or husband by making large credit purchases on joint accounts with the intent of punishing the other person with huge debts or wrecking their credit history. What they usually do not understand is that by doing so they also likely will destroy their own credit history at the same time.
If at all possible, maintain a civil relationship during the divorce process so that you can avoid the pitfalls of a vindictive split. Working together to pay off and close existing joint accounts is the best possible approach. If that is not possible, try to convert the account to an individual account when possible. Contact each creditor and explore the options available with that lender. Doing so will help you make a clean separation without financial burdens that could haunt you even after the divorce is final.
Contact a Family Law Attorney in Missouri, Illinois, Kansas and Oklahoma Today
If you are going through a family law matter and are having troubles with your finances, Stange Law Firm, PC can help. We have offices throughout Missouri, Illinois, Kansas and Oklahoma that you can call or you can contact us online. We have locations in St. Louis, Kansas City, Columbia, Springfield, Wichita, Tulsa and beyond in the Midwest.