Financial Aspects of Divorce You Should Know Before Getting Married
Divorce isn’t fun to talk about, but the reality is that it is a financial event just as much as getting a new job or getting an inheritance. This month we interviewed Carla F. Stern, an Atlanta divorce attorney and a partner at Stern Edlin Family Law, PC. Information is the biggest ally. Whether you’re happily married, about to divorce, or not even married yet, here are some financial tidbits to know about.
Get the Records Straight
Anyone who works in the divorce industry will tell you that the most important thing is to get all your financial records straight — and get them documented.
According to Carla Stern, “Normally what we find is that within any couple, one person usually handles all the bills, investing money, etc. The one who is not often is left in the dark about the landscape of marriage, expenses, income, and assets.”
Without this information, there is no way to obtain clarity about the management of the household and value of the assets. And that is usually pretty heavily relied upon in court to determine how the divorce is settled.
The last thing you would want is to be strapped with a heavy alimony or “maintenance” payment for the rest of your life because the court concluded that your lower earning spouse was accustomed to a higher lifestyle than what was the reality.
How could that possibly happen?
Let’s say that you make twice as much as him or her, but you’re frugal. In the absence of proof, the court may conclude that all you earned was being spent rather than saved. The result? Your ex-spouse is earning more money divorced than when you were married for the rest of the foreseeable future.
Takeaway for the reader:
As a matter of general practice, it is a good idea for both partners – the one handling the finances as well as the one who isn’t – to have documents in order. This provides total transparency so that if your marriage ever does come to an end, the attorneys and other parties involved can see what the true situation is.
Both partners in any marriage should ask themselves the following questions, and document the responses.
- Where is the money going currently?
- Where has it gone in the past?
- How have we invested?
- What are our monthly expenses? (this is a BIGGIE)
You should also keep a dossier of financial information for you and your spouse such as:
- Tax returns for the last 3 years
- Bank statements
- Investment account statements (retirement and non-retirement accounts)
- 401k statements
- Employee benefit handbooks
- Insurance policies
- Mortgage documents
- Credit card statements
- Will and testament, power of attorney, healthcare proxy documents
- Title and deed documents (cars, boats, houses)
- Checking and savings account statements
- Credit report with credit score
- Student loan statements
- 529 plans and custodian accounts
#2: Clarify Any Unknown Values
According to Stern, one of the biggest things couples overlook is how certain types of assets are valued. Some assets are easy to value, such as a residence (just get it appraised) or your IRA account (just look at the last monthly statement).
Where the plot thickens, however, is when someone owns a business. With so many people self-employed in today’s “Gig Economy”, the value that the household derives from a business is not always clear.
Some business owners may not be taking any income from their business and may elect to reinvest the cash flow in growth opportunities to drive revenue for their enterprise instead. Or they may simply be accumulating equity in their business which would create a high value asset.
Another scenario that can be problematic is unvested stock options. If options are vested, the trading value is evident by looking at the market price. However if the options aren’t yet vested then how do you know what they are worth?
Takeaways for the reader:
- Accountants and forensic experts should be called in to conduct an analysis and derive the value of such difficult-to-price assets. It’s complicated but necessary in the case that property becomes divided in a divorce settlement. When asset values are not clear, the divorce becomes more expensive.
- Be sure to appraise valuable furniture, artwork, jewelry, appliances, and automobiles.
- It’s a good idea to keep a record of the non-economic value that you may be offering to your household as well. For example, stay at home caregivers who care for children are probably saving the family at least $60k in annual expenses, if you take into account all that goes into it.
Example: I provided 40 hours of daycare a week in the year 2016. The going rate for a nanny for two kids was $30/hour on Care.com. This equates to X amount of annual expenditures if my family would have paid someone to do what I did for free.
#3 Don’t Forget the Almighty Prenup!
First of all, a word or two about the law. The law is not customized for the individual. It is a general guideline that may or may not result in equitable and fair treatment. It’s up to you to protect yourself against getting slighted by one-size-fits-all laws.
Nobody likes talking about prenuptial agreements. It’s kind of like making arrangements for your own funeral…
But they are very important to individuals who are on their second or third marriage, have accumulated a large wealth position, or when there is a large difference in assets or income between the two partners.
Prenuptials are one way to avoid an unfair circumstance that your state’s laws may create.
- A husband and wife decide to divorce. She’s making $300k and he’s making $100k. She’s a busy engineer who works long hours, but her livelihood is compromised by her ex-husband constantly dragging her into court to contest alimony payments. This all could have been avoided if she had signed a pre-nuptial.
- An unmarried dentist accumulates a $1MM portfolio over 15 years of work. To do so, he relentlessly sacrificed his personal life in his 20s and 30s, paid down debt, and lived frugally. Upon getting married, he should be entitled to protect his “separate estate.”
- A wealthy business owner has two children and then unfortunately suffers the passing of his wife. He wishes his two children to inherit his $5MM portfolio upon his passing, and sets up a trust with them as beneficiaries. He subsequently meets the woman of his dreams and strikes up a love interest. She’s 20 years younger than him. When they marry, he needs to ensure that his wealth goes to his children not his second spouse and her children as his new wife is likely to outlive him.
Takeaways for the reader:
- It can never hurt to consult with a family law attorney and/or financial advisor prior to marriage, regardless of your financial status.
- Individuals with significant income, assets, or potential to gain future assets, or those who are getting married for the second or third time should definitely consult with a financial advisor and family law attorney and consider the merits of a prenuptial agreement prior to marriage.
According to Carla Stern, “Prior to marriage, every financial advisor should be asking their clients if they are inheriting money or being gifted money, and ask where you want this money to go. It’s important to have the conversation and figure this out before the fact.”
There may be other ways to ensure separation of assets (e.g., leaving assets in your name only, refraining from commingling accounts, not putting your spouse’s name on certain accounts.) But as Stern says, when in doubt, consult with a professional.
Summing It Up on What You Need to Know About Finances Before Getting Married
Money is one of the biggest things that couples fight about. Getting financially naked can be a trying exercise for even the strongest of couples. Information is the answer. Going about it with full awareness of all financial factors, and then taking legal measures to address them, is the best way to set yourself up for a happy marriage.
Securities offered through Arkadios Capital Member FINRA/SIPC. Advisory Services offered through ACG Wealth, Inc. ACG Wealth and Arkadios Capital/Arkadios Wealth are affiliated through common ownership. Certain individuals associated with or employed by ACG Wealth may also be registered representatives of Arkadios Capital. This information has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.