Dividing Finances

It is always best to wait until you have a signed Marital Settlement Agreement before you sign anything else that changes ownership or obligations. The divorce law is much more complicated than most people realize so you need solid legal guidance to avoid major problems in the future.

Sometimes one person will push the other to sign over a house or car under the mistaken belief that it will somehow give them security or an advantage. They don’t understand that there are only two ways to ensure that financial matters are finally resolved: either by signing a Marital Settlement Agreement or having a Court issue an order.

Your Attorney-Mediator will guide you through the financial division decisions and then work with you to ensure that finances are fully divided when they can and should be. They always work toward dividing household budgets and implementing support payments as soon as practical to relieve the immediate financial pressure of joint budgets.

Everything else is usually divided within 30 days of the date the Marital Settlement Agreement is signed. Some things take longer, such as dividing some retirement plans that require a court order or dividing the proceeds of a house that is being sold.

The bottom line is that rushing into financial divisions is not good for anyone who is separating or divorcing, especially if you plan to work together through mediation. Important steps like division of assets or debts should only be taken after you have a clear understanding of the law and you have taken the time to carefully consider how divisions will impact your future.

There are two elements of dividing finances upon separation and divorce. The first is dividing the marital assets and debts. The second is determining what future financial payments are due from one person to the other.

The Divorce Code “Equitable Distribution” law gives us a list of 11 factors to be considered when deciding how to divide assets and debts. Some people assume that their financial divisions will be an equal 50/50 and are surprised to find that the law sometimes results in divisions that are 60/40 or higher.

The Attorney-Mediator will review the 11 factors with you so that you have a clear understanding of how the law applies to your particular situation. They will also help you understand what assets and debts are subject to division and what are not. Finally, they will work with you to divide everything in a way that improves the odds of a secure financial future for both of you.

After agreeing how you will divide your assets and debts, the Attorney-Mediator will guide you through decisions about support payments for your children and alimony payments if appropriate. Those decisions are very critical to the security of both of your financial futures so they must be made very carefully. Those decisions are discussed more fully in the Q&A on Child Support and Alimony.

Ultimately, the decision on how to divide your household and the amount of spousal support payments is up to you. That’s why people love mediation: you are in control. We are there to give you guidance and advice, but the final decision is between spouses.

When you get married, the law automatically gives rights to your spouse to inherit your property at the time of your death and allows them to make decisions for you if you are unable to make them for yourself. If you had an Estate Planning Attorney draw up a Will, Power of Attorney, and Declaration (Living Will), those documents further define these rights.

When people are separating or divorcing, they generally do not want their spouse to retain those important rights and powers. However, with the daily distraction of separation and divorce matters, they forget to settle their estate matters properly.

During the Alpha Center program for divorce mediation, Clients are alerted to this major concern at the appropriate time and are given direction on how to settle their estate matters. They are offered referrals to Estate Planning Attorneys near them who can write a new Will, Power of Attorney, and Declaration for them at a reasonable cost.

We often have a lot of money and emotions wrapped up in our homes when it comes time to separation or divorce. If there are children, their needs for a stable home must also be considered.

If either person wants to keep the house for the long term it must be appraised to find the value and refinanced to remove the other’s name from the mortgage, note, and deed to the home. That will require them to prove that they can afford the monthly bills and mortgage for the home. All income, including child support and alimony, is taken into consideration. It is always helpful to consult a mortgage lender who is familiar with divorce before making any final decisions.

If neither party wants to keep the house for the long term, they must decide who will live in the house until it is sold and how the expenses will be paid. It is also important to clearly define when the home will be listed for sale, how repairs will be handled, and how the sale proceeds will be divided.

Sometimes money is very tight and both people have to stay in the house until it is sold. Of course this presents additional challenges, particularly when children are involved.

The contents of our home are often referred to as personal property under law. This includes our furniture, electronics, kitchen items, and anything else that is buried in our closets, basement, and garage.

Although we may have paid a lot for a personal property item, it is valued under divorce law at the price you could sell it for at a yard sale. Even though this is “small change” in divorce divisions, angry people are inclined to spend thousands in attorney fees to argue about them. On the other hand, wise people will spend very little of their time and money on dividing personal property.

Here is a simple method that can be used by couples to divide their personal property in a fair and timely manner:

1. One person prepares a list of all items in the household.
2. The other person reviews the list and adds any missing items.
3. Three columns are drawn on the right side of the list: two are titled for each person and the third column is titled “Swap.”
4. Each person places a check mark in their column for the items they want to keep.
5. Where there are check marks indicating both people want to keep an item, a check mark is placed in the “Swap” category.
6. The final step is to trade off items in the “Swap” column.

It is best to divide personal property equally so that neither person has to purchase more new items than necessary for their individual residences. If there is a home that is being listed for sale, it is best to leave the furnishings in place so that the home “shows” well.

Although we often think of our pets as important family members, the divorce laws group them together with our personal property. Sometimes divorcing couples divide their time with their pet and the related expenses. Other times, one person assumes full “custody” and financial responsibility for the family pet.

As in all divorce matters, both people come out ahead when they focus on resolution rather than continuing to “fight the fight” when it comes to dividing personal property and pets.

Remember that balance is an important goal in dividing your finances. Each of you should begin your new lives with enough to meet your housing needs, a sufficient “rainy day” fund for emergencies, and enough in retirement funds to assure comfort in your later years.

Cash that is invested in savings, money market, or other liquid investment funds should be divided to ensure that both of you have adequate savings set aside to handle life’s unwanted surprises. If there is an unexpected illness or job loss, you want to have a cushion to meet your needs for six months if possible.

When dividing cash investment funds, it is always wise to do so without generating additional taxes or fees that will take dollars out of your pocket. Many people are not aware of these additional costs. If they do find out, it is often afterwards and too late to do anything about it. This is where good tax planning and financial counseling are key to your financial comfort level and success as a new single household. That is why Alpha Center’s divorce mediation program includes advice from professionals who can guide you to ensure that you keep the maximum amount of cash in your pocket.

We often hear Clients suggest that “you keep the house and I will keep the retirement.” While it may seem equal, it is a plan that will leave one with a gap in housing and the other with a gap in retirement funds. If there is a limited amount of cash to divide for emergencies, the plan is highly likely to leave both of you struggling to get through the financial surprises that life often brings. It is far better to make your divisions, including retirement, more well-balanced.

If you are in your 50s or 60s you are becoming keenly aware of the upcoming retirement phase of your life. Fortunately, this baby boomer generation has moved beyond the “rocking chair” mentality of their parents. Sometimes by necessity they continue to work but often it is because they know they can reinvent themselves to be of value to others and continue to earn money if they choose to do so.

If you are in your 30s or 40s, you are so busy with establishing your careers, homes, and often taking care of children that you have very little time to think about the next phase of your life. Those years pass quickly and you will arrive at the next phase before you know it. A little bit of thought and planning now will go a long way for a better future.

The retirement funds that have been accumulated during the marriage are likely to be divided, leaving each of you with far less than you had together during the marriage.

Most retirement funds from employment are “defined contribution” funds which means you know what is being put in and receive a statement of the balance in the account. Although they are rarely offered these days, there are some “defined benefit” funds which mean that you don’t know for sure what is going into the fund and you receive a statement that tells you what your monthly payment from the fund will be when you retire. There are some employment retirement funds that are a hybrid of the two.

All retirement funds offered through employment are “tax deferred,” which means you don’t pay taxes on the money until you receive payment. These funds must comply with federal law to keep their tax deferred status. The federal law requires a Qualified Domestic Relations Order or QDRO from the court before the funds can be divided. The Attorney-Mediators at Alpha Center will guide you to a specialist in this area to ensure that all of the federal law requirements are met.

Private retirement funds are usually held in an IRA and they do not require the QDRO. The key is to ensure that, when funds are transferred from one person to the other, the person receiving the funds places them in an IRA in their individual name. If this transfer is not properly handled, there will be taxes due that could have been avoided.

Sometimes people who are going through separation or divorce are struggling financially and have no choice but to cash in retirement funds to be able to establish two separate households. This step should be avoided if possible, but if it cannot be avoided it should be handled very carefully. The tax burden should be clearly identified by the accountant in Step 4 of the Alpha Center program for divorce mediation. This step will ensure that the tax is as low as possible and the tax debt is divided fairly.

Social Security payments will hopefully be available to supplement whatever retirement savings we have accumulated. This payment is controlled entirely by the government so is not divided in divorce. It is good to know what you will be entitled to receive in Social Security so you can plan for it. A good source of that information is: www.ssa.gov/estimator/

Whatever stage of life you are in when you separate or divorce, there is no doubt that good planning is the key to your comfort in retirement.

Business ownership brings its own unique challenges during separation or divorce. It is often the main source of income for both people and must be handled in a way that keeps that much-needed income flowing.

When couples have been deeply involved in the business together, they may plan to remain business partners. Ending a marriage but preserving a business partnership, although not impossible, is very challenging indeed. In those cases where people believe they can do it, it is important to clearly define the terms of the continuing business relationship. It is also wise to have a legal “off ramp” in place for when one of them decides to leave the business.

Most often couples decide that one of them will keep the business and the other will leave when they decide to separate or divorce. Once that decision is made, the next challenge is to decide what value the business has.

This can be done by using an “informal business valuator” who decides the value based on a brief review of key business financial documents. A more in depth analysis can be provided by a trained “business valuation expert”, which is much more costly.

Many factors go into valuing a business including a business’s “good will.” Some businesses have no value under law whatsoever, so it is always good to seek the advice of the Attorney-Mediator who can offer the right guidance.

If there will be child support or alimony payments coming from the business earnings, there is an additional challenge to be addressed. Business earnings must be analyzed to “add back” certain deductions that are legal under IRS law but not legal under divorce law. Those matters are more fully addressed by an accountant who specializes in divorce.

Owning a business does present additional challenges when you separate or divorce and it is always best to deal with those challenges with the help of neutral experts.

The saying that “the devil is in the details” very much applies to debt acquired during a marriage.

Most debt is from a company who holds the person who signed up for the debt responsible. Sometimes that is both spouses and other times only one. The divorce law usually (but not always) holds both people responsible for the debt acquired during the marriage.

A crucial step before making decisions is to do a credit check to see what debt is shown as joint and what is shown as individual. We can’t always rely on our memory, and sometimes your spouse may have created a joint debt of which you were unaware. It is best to secure reports from all three reporting agencies.

Sometimes debt is owed to a family member or friend who lent you money during the marriage. When you separate or divorce, this debt must be addressed very carefully. Like the credit card companies, your family member or friend is not bound by the terms of your Marital Settlement Agreement, so a separate written agreement must be signed between the person who lent the money and the person who is responsible for repayment.

Once the debts are clearly defined and understood, they must be divided in a way that is fair and reasonable. The next step is to make sure all joint debt is eliminated and that each individual is held responsible for only their debt.

Sometimes people want to rush to pay off credit cards so they can “start fresh.” While it is good to eliminate credit card debt, it is best to have a clear understanding of your financial needs after divorce before you take any steps. Sometimes you will need the cash for housing or emergencies so it may be better to pay off debt more slowly. In Step 6 of the Alpha Center program for divorce mediation, your Financial Counselor will offer you the best guidance to make the right decisions about reducing debt.

Child support payments are due when there is a child under 18, or older, in some circumstances. The payment is made from one parent to the other and is intended to cover food, shelter, and clothing expenses for the child.

Other expenses such as health care and extracurricular activities considered separate from child support are usually shared by the parents in their percentage of total combined income. For example, if the parents’ income adds up to $100,000, where one person earns $60,000 and the other earns $40,000, these additional expenses will be shared 60/40.

Sometimes the person paying the child support will object to payment because they are not sure that the funds paid are actually going to the child. However, this objection has not been recognized or acted upon by the courts or lawmakers.

They key point about the child support calculation is what numbers are used to determine gross income. Sometimes income is “imputed” to a parent who is not earning up to their full potential. At other times, it is necessary to “dig a little deeper” into tax returns to ensure that all of the relevant income is being reported. Finally, if there is a business or a salary with a bonus or commission component, it is necessary to do a more in depth earnings analysis.

As income changes, so does the child support payment amount and additional expense percentages. This variable aspect of child support makes it even more valuable to work with an Attorney-Mediator and an Accountant-Mediator who can assist with future recalculations as needed.

College expenses always loom large on family’s financial horizons. As tuitions rise every year, the burdens become even greater. When parents are making the financial adjustment to two separate houses, it makes an already financially challenging time even more so.

The good news is that there are strategies that you can and should use to reduce the amount of money needed for your child’s college. The more you cooperate and the earlier you begin planning, the lower your expenses will be. There are college planning professionals who now specialize in advising parents and students on how to choose the right school and how to pay for it.

There is one very important fact that must be considered before you commit to paying college expenses for your child. Students can borrow money for college and have a long time to repay it (often at low interest rates). You cannot borrow money for retirement and may not have a long time to fund it. You don’t want to end up spending your money on their education, then end up on your child’s doorstep looking for financial assistance in your retirement years.

If a married couple has established college savings accounts for their children, those funds will be helpful in defraying expenses but they may also get in the way of financial aid. It is always best to consult a college planning specialist to develop the best approach. Any funds that were saved during the marriage must be included in the Marital Settlement Agreement along with specific language about how the money will be controlled and spent.

Like other matters in divorce: good advice makes for good planning, and good cooperation makes for a good outcome.

This topic is one of the most heated issues that arises in separation and divorce. It is crucial that both spouses understand the law and make decisions that consider the financial well-being of both people.

Spousal support is available under Pennsylvania Law in some cases. It is based on a formula that is 30% of the difference between incomes if there are child support payments, and 40% of the difference if there are not. Spousal support only continues until a divorce decree is issued by the court.

Alimony is available under Pennsylvania Law in some cases. It is based on a list of 17 factors which must be considered to determine if alimony will be paid and, if so, for how long. The Attorney-Mediator works with both people to make sure they understand the law and make an agreement that is fair and reasonable.

Spousal Support is not tax deductible but Alimony can be in most situations. Sometimes there is a clear tax advantage to alimony for both people, so it is always important to have the Accountant-Mediator identify the best tax treatment of alimony in Step 4 Save Taxes.

The Alpha Center program for Divorce Mediation places strong emphasis on carefully analyzing the financial needs of both people and their children before deciding on any future payments. No one enjoys doing budgets, but after they are complete most people feel much more at ease knowing exactly how their financial lives will look in the future.

Along with everything else in your life, your insurance policies have to change when you Separate or Divorce. The Attorney-Mediator will guide you to specific agreements but here are some general considerations.

Life insurance policies have a death benefit amount that is usually designated for the other spouse to receive upon your death. If there is an alimony payment, there may be a need to keep some of that coverage in place, but the balance of the death benefits (or all, if there is no alimony) are usually left to the children.

Health insurance coverage for children is usually the responsibility of the person who has the best coverage through work. The parents share the responsibility for out-of-pocket premiums due.

As for the spouse who has been covered under the other’s work policy, they can continue to remain covered when there is a Separation. If a divorce decree is issued by the court, then they are no longer eligible to remain on that policy. They can continue coverage with the same company under COBRA law, but the premiums are usually extremely high. Generally they find health insurance coverage with their own employer or look for private insurance coverage. Private insurance has become easier to find with the Affordable Care Act.

Auto insurance needs special attention right away when one spouse leaves the household. Since this type of insurance is based on where you reside, you must let your insurance company know the minute you no longer reside there. If there ever is an accident that results in an expensive claim, they can and do deny you coverage if they find you no longer reside at the same address.

Disability insurance can be very hard to get but very important to have if you are too ill or disabled to work. If you have it through your employer, that gives you added security. If you do not, it is certainly worth checking into purchasing a private policy if you can afford to do so.

Insurance is a safety net that becomes even more important when you no longer have the financial safety net of your spouse and their family. Your Attorney-Mediator and Financial Counselor will work with you both to ensure that you are adequately protected.