Claudia E. Mott, Financial Expert
Divorce and family law matters inevitably involve financial issues. Here is my interview with Claudia E. Mott, CFP, CDFA, of Epona Financial Solutions, who will tell us more about the financial issues of divorce.
Can you review the types of financial information needed in divorce?
When preparing for divorce, the couple needs to create a complete picture of their financial life both jointly and what will be anticipated for each party’s life separately. A balance sheet which lists all of their assets as well as the liabilities and a detailed living expense summary are the starting points.Assets include the value of the home or apartment, bank, investment and retirement accounts, personal property such as automobiles, art or other collectibles and the cash value of life insurance. On the liability side, outstanding balances on mortgages, credit cards, and all forms of loans; student, auto, personal, must be listed. By creating this inventory listing, it becomes easier to know what documents and statement are needed.The living expense summary should be created to reflect a year’s lifestyle for the family. Used to complete the Case Information Statement (CIS) or Statement of Net Worth, it includes a breakdown of costs for housing, transportation, medical and personal expenses at a very detailed level.
What are common financial mistakes made during divorce?
During the divorce process it is important to think about both the near-term and long-term impact of the financial decisions that are being made. In particular, when assets are being divided, it is essential to weigh the long-term effect of keeping a home versus retaining a retirement asset of similar value on an individual’s net worth. All too often one spouse opts to remain in a home that is too expensive for them to maintain and as a result they find themselves with little to no savings as retirement approaches.Taxes are also often overlooked when valuing assets and understanding the true amount of alimony being received by the payee. Retirement accounts such as IRAs should be tax-adjusted to reflect the value the recipient is more likely to receive when the payment is considered income. Creating a schedule of estimated tax payments is extremely important for a spouse who has never paid taxes individually but will be receiving substantial alimony payments.Understating a family’s real living expenses can end up with a settlement that does not adequately provide for the family post-divorce. Gathering the information is not a difficult process, but it is tedious and items such as out-of-pocket cash are often overlooked.
What are the most difficult financial challenges that must be dealt with during the divorce process?
All too often, getting a true and complete picture of the family’s financial picture because of a lack of cooperation by one party creates one of the most costly difficulties. All documents and statements related to accounts need to be provided to create an accurate balance sheet and CIS and financial disclosure form, but when information is held back or excluded the divorce process may not move forward without possible court intervention.The issue of hidden assets can also present a significant challenge when it comes to creating the essential financial statements for divorce. This situation often arises when cash based businesses are the main source of income for the family. Upon review of the family’s living expenses and tax returns it may appear that things don’t add up and a forensic accounting or business valuation must be completed to provide a more accurate picture.Whether it is the difficult financial times we have experienced since 2008 or a family’s unwillingness to live within their means, many divorcing couples are now saddled with debt. During the divorce process it is best to try to eliminate as much debt as possible so that the spouses can move on without these lingering obligations but in many cases this isn’t possible. Difficult decisions need to be made about keeping a house if there is equity that can be used to pay-down debt, or accepting the possible tax and penalties of dipping into retirement accounts to generate the cash to eliminate the joint obligations. .