Divorce is a painful process in many ways. It’s not a topic many want to discuss or think about, but it happens. One of the major areas of focus throughout the process is the division of finances. While marriage is ideally a matter of the heart, if it ends in divorce, it quickly becomes also a matter of assets and debts.

From the date of a legal marriage through divorce, any property, income, assets, money, possessions and debts accrued are considered part of the marital property. In Iowa, that means everything may considered 50/50 equal ownership by the married couple.

How, then, is the equal division of assets and liabilities determined? It certainly would be easy if we could just take the current value of each item amassed during a marriage and divide it equally in half. For obvious reasons, that’s not always possible. Most couples have shared many years together, collecting mutually meaningful memories in the form of items as well as valuable accounts. Even when both parties want to keep the process simple, emotions run deep and can cause angst amidst the details.

Here are some of the financial complexities we often deal with in divorces:

Values that may change over time

The longer divorce proceedings are drawn out, the more it is possible that the value of certain items or accounts may change.For values that may change quickly, find an agreeable date on which you start the conversation about property’s value. This provides a mutually agreed upon starting point for both parties to gather value statements.It can be tempting to withhold or make it difficult for the other party to receive information, but in the end, that just results in more attorney fees and it definitely prolongs the divorce process. Remember, the slower everyone gets needed value information, the more time and opportunity for the value to change.

No current value

When there are assets subject to a variety of variables, such as vesting schedules, contingencies on continued employment, and future retirement income streams, there are methods for calculating the potential value using a complex list of assumptions.While some investments or accounts may be worth more in the future, valuations will only be based on today’s value. It’s important not to focus on the largest cash value available now, but instead to consider the future when child support or alimony payments cease or retirement living becomes a reality.

Division of finances in divorce is incredibly complicated. As difficult as it is to see the next hour or day, it brings to light the importance of having a trusted advisor to help guide you through the fog while keeping an eye on your future.

In the next article, I will discuss tax implications in the division of property among divorcing couples.

Until next month, be wealthy and wise!

As an independent financial planning firm, we help people in all stages of their life plan for, grow and enjoy their finances. Recently I have noticed an interesting new trend among the clients we help through tough divorce decisions — approximately 60 percent are in what is being called “grey divorces.”

Grey divorces are among couples who are nearing or at retirement age. While divorce rates in younger couples have leveled off, couples who have weathered the storms of marriage for twenty or more years are increasingly making the tough decision to live their lives apart.

There are specific things senior adults can do to avoid making big mistakes during divorce at this stage of life:

1) Fix, don’t fight. There is a very positive, mutually beneficial divorce practice called the collaborative divorce process. Collaborative divorce brings both spouses, their attorneys, a Certified Divorce Financial Analysts (CDFA) and other specialists to the same table to discuss areas of importance. CDFAs help divorcing couples explore various financial choices before final decisions are made. Seeing the short and long impacts of financial decisions helps each side better understand the implications; in some cases, we’ve even seen couples decide to stay together!
2) Pay attention to pension plans. Pensions are different because they are defined benefit plans, not defined contributions. While defined contribution plans, such as 401(k) accounts and 403(b) accounts, provide the values on their statements, pension plans, such as IPERS and FERS, are future income streams for retirement.

There are two ways to value pensions plans. A “Benson Formula,” splits monthly benefits during retirement. Present-day valuation is offset with assets. Both of these options should be assessed by an attorney and financial team.

If there is a plan to split monthly pension benefits between spouses during retirement, it is important to protect the ex-spouse of the worker (the person who has the pension plan) in case of death before retirement and after retirement benefits begin.

3) Create a life insurance strategy. Most attorneys will only value life insurance policies for the cash value in the event it exists. However, some policies allow change of ownership so one spouse is the beneficiary on the other spouse’s life insurance policy even after divorce. In this case, the death benefit can be of value to replace income (child or spousal support or pension income) or to pass assets to heirs through estate planning. And don’t forget — life insurance death benefits are not taxable under current law.
4) Don’t overlook tax filing strategies for the year of the divorce. Couples should file individual returns for the year the divorce is finalized. Be careful of items that can cause unaccounted for tax implications such as spousal support, temporary orders, sale of investments, charitable contributions, withdraws from retirement accounts and child deductions, among others. Be sure to ask your CPA to review your divorce decree or settlement prior to signing.
5) Couples married for 10 or more years may qualify for ex-spousal Social Security benefits (which does not affect the working ex-spouse’s benefits). There are two basic benefits an ex-spouse may receive: spousal benefits and survivorship spousal benefit.

Spousal benefits apply when the spouse with social security is still living and their ex-spouse is retirement age and/or disabled. The maximum available spousal benefit is 50 percent of the primary insurance amount.

If the spouse with social security is deceased, an ex-spouse of retirement age and/or who is disabled may be eligible for up to 100 percent of the survivor benefit, even when receiving social security benefits of their own.

Overall, it’s important to address your own intentions and expectations of divorce. Will you have the resources and means to maintain the lifestyle you want? Too often I see individuals who believe their lives will be much improved with divorce — emotionally, physically, financially and mentally. However, sometimes the financial realities don’t match expectations when there has been very little — or no — earning income years.

As with any major life transition, your finances need to be part of the plan. Find a professional you trust, and don’t be afraid to ask questions. In cases of divorce, a Certified Divorce Financial Analyst (CDFA) can be a major source of support and comfort throughout the planning process.

Tips for setting up children for financial success

It’s the time of year when many parents are sending kids off to college to start newly independent lives full of exciting opportunities – new classes, new friends and many new opportunities. It may also be one of the first times some parents realize their children will face real-world decisions that may affect their future financial standings.
The truth is, parents should be preparing their children for financial success long before college. The time to teach kids about financial responsibility and decision making should start when they are young and be cultivated all the way through their childhood.

Here are four important tips for raising children to be financially successful:

1. Help your child connect with trusted resources to learn from professionals. Rather than telling your child what they should do, help them learn important financial skills from the experts. Find a trusted banker, lender or financial advisor and introduce them. Encourage your child to ask questions or, if they’re young, ask questions for them. When your child enters high school, student loan advisors are an excellent resource for learning about options for financial aid.
2. The internet can be helpful for research, but make sure any online research is done through trusted sources. Financial professionals can help you find good resources. Online calculators are helpful to show how student loans, or any loans, are not “free.” Understanding the total interest paid over the term of the loan can empower your student to make more informed decisions. We recommend www.finaid.org for resources on student financial aid.
3. Be an example of what financial health looks like. Our thoughts and attitude toward finances are often reflected in our personal financial health. How we manage our money depends on how we prioritize it. The number one indication of financial health that leads to financial wealth is the ability to spend less than what is earned. Talk to your child about the choices he/she makes and how those decisions affect spending and saving. Show them your own budget or help them create a spending plan as they start their first job as a teenager. Take them with you to your own financial planning session and allow them to ask questions of your trusted advisor.
4. Practice makes perfect – and this includes the practice of finance! If you have a credit card, talk with your child about how it is used and paid off each month. Discuss also when it’s appropriate to use debit cards as opposed to credit cards. When they reach the age of 21, they are authorized to apply for credit cards. Instead, let your child be an authorized user on one of your credit cards – consider using it as a “practice” or emergency card. If they charge anything, they are expected to pay it off within the next billing period.
5. Discuss the power of choices with your child. Tap into what they want for their future and what drives them. Talk about how life circumstances can change, and how planning and choices made now can affect how they weather certain life storms. Help them to ask themselves about the “what ifs” of life and be financially armored to stop changes from becoming crises. My youngest daughter (how old?) loves to have fun. If it isn’t fun or leading to fun, it isn’t worth her effort. So, I like to talk to her about spending her money for fun – but also how NOT fun it can be when bad choices lead to negative consequences.

When my first child was born, one of my clients wisely told me, “You are raising an adult not a child.” Most of us dream that our children will always come to us for our wisdom and sage advice. The reality is, they may not. We have limited years to emulate our knowledge, set them up with mentors, and introduce them to professionals who will foster their independence and responsibility. Start now. Set your child up to be healthy with financial abundance to contribute to a better world.