A Message from Kimberly Clouse, Financial Expert:

I have worked in the financial services industry for nearly a decade in many capacities, most recently as a financial advisor for individuals. Over the course of my career, I have had the privilege of working with a diverse range of people, from the single mother just starting her own business to the dot.com billionaire. Based upon my experiences, I have learned that the same basic principles and lessons apply to a successful and healthy financial life, whether you're starting out or cashing out. These guiding principles include simplicity, a long-term perspective, and above all, knowing that you have control of your financial destiny, and all the information you need is well within your reach.

Divorce Do’s and Don’ts

You’ve heard the statistic: more than 50% of all marriages end in divorce. Since marriage is both an emotional and financial contract, divorce will significantly impact your balance sheet. While the psychological impact of divorce is devastating, the monetary consequences can be devastating as well. Keep in mind the following when navigating through the divorce maze:

Laws Vary By State: State law largely dictates how your assets will be divided in the event of divorce. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), marital assets are divided 50%-50% between husband and wife. Most other states employ the “equitable distribution” principle, meaning that the divorce judge can allocate the family assets as he or she considers fair. It is therefore crucial that you know what state law applies to your situation.
Mediation Can Save You Thousands: With the average cost of divorce running towards $15,000 (largely due to legal fees), more and more couples are turning to professional mediation. If your situation is relatively straightforward, a mediator may be able to help you and your spouse reach a compromise that is fair to both parties. An attorney would then draft and file the appropriate documents reflecting the agreed upon plan. (The Academy of Family Mediators and the Mediation Information & Resource Center are good sources of information on mediation.) Keep in mind that mediation works best in situations in which both spouses are willing to cooperate and are confident that neither one is hiding assets.
Don’t Define Your Assets Too Narrowly: In the Internet economy, many firms compensate their employees with stock options. Do not make the mistake of overlooking the value of options--and restricted stock-- when calculating the amount of your divorce settlement. Moreover, do not assume that unvested options have little or no worth: the ability to buy stock in the future at a pre-determined price can be extremely valuable, and thus options “earned” during marriage should be included in the household assets. Another often-overlooked--but valuable--asset is frequent flier miles.
Know the Tax Implications: In general, divvying up ownership of your assets should not trigger any tax liability, but taxes are still an important issue to consider if eventually you’re planning to sell the assets. If, for instance, you agree to take $250,000 in stock while your spouse receives $250,000 in cash, yours is the inferior deal. Say that you need to convert your stock to cash to purchase a home, for example, you would incur capital gains taxes. The net assets that you will own post-sale will be considerably less than $250,000. Also, be aware of the tax treatment of any retirement benefits you receive as part of your settlement.
Protect Your Credit: Deciding what happens to the family house is typically a very difficult divorce decision, and one that can affect your credit. The simplest--and tax-friendliest--way to resolve ownership of the house is to sell the property and split the proceeds. The 1997 tax act allows couples to exclude up to $500,000 of capital gains when they sell their primary residence, even after they have divorced. If selling is not an option, and one spouse is going to keep the house, the house-less spouse should ensure that his or her name is removed from the mortgage. Creditors will look to all parties listed on the mortgage documents, so if your ex is late on a house payment, your credit report could be negatively impacted if you are still named on the paperwork.

Divorce is among the most traumatic of experiences, but for your financial well being, you should try to approach the process like any other major financial transaction. This means doing your homework and not taking any action until and unless you are completely comfortable. Since arrangements to which both parties have agreed are difficult to amend, it is to your advantage to act both cautiously and wisely.

This column is designed to provide accurate and authoritative information on the subject of personal finances. It is provided with the understanding that the Author is not engaged in rendering legal, accounting, or other professional services by publishing this column. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been evaluated carefully and appropriately. The Author specifically disclaims any liability, loss or risk which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this work.