Amy Wolff, Author at Collaborative Law Institute

June 2, 2015

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A large component of a divorce is dividing the assets that you and your spouse accumulated during your marriage. Now that the divorce decree is completed, it is essential to start retitling assets as soon as possible. Retitling of assets confers control by defining ownership and restricting access. A good way to begin this process is to create a personal net worth statement that lists all of your assets and liabilities, per the divorce decree. This statement will serve as the master checklist in your retitling process. Every asset has its own retitling requirements, but essential to the process are the following documents:

Current Identification, reflecting any name change if applicable
Certified Divorce Decree (see our blog on changing your name)
Account information for bank accounts, investments, loans and credit cards
Social Security numbers for both you and your ex-spouse

For instance, let’s say you have a joint account with your ex-spouse. The typical steps you would need to take are as follows:

Each of you open individual accounts in your own name
Complete a letter (called a “letter of instruction”) explaining that due to divorce, you would like to divide your joint account per the divorce decree, and clarify how the joint account should be divided.
Both of you sign the letter
Have the letter notarized (banks accounts, etc.) or, Signature or Medallion guaranteed (for investment accounts; it will depend upon the specific investment company as to which guarantee is required). A notary is quite common and can be found at many institutions. Both as signature and medallion guarantee can be obtained at a bank, credit union or investment company (note that this is different than being notarized).
Mail the letter along with a certified divorce decree to the company.

You will receive a letter of confirmation when your individual accounts have been opened and the assets transferred into them, from your joint account. The joint account will be closed once the transfer has been completed. Remember that with any new accounts, you will need to reestablish things such as bank account links for automatic deposits or withdrawals, as well as updating beneficiaries on retirement accounts. Retitling real estate typically requires a Summary Real Estate Disposition Judgment (SREDJ) or a quit claim deed. A SREDJ is written by your attorney and signed by a judge, authorizing the transfer of the property, and is completed once it is filed with the County Recorder. A quit claim deed is also written by an attorney, but is signed by your ex-spouse before being filed with the County Recorder. Certain properties may require a quit claim deed as well as a SREDJ or a certified divorce decree to be filed with the County Recorder to complete the title transfer. Be sure to follow up with your family law attorney for assistance with this. Don’t forget to retitle assets such as vehicles and insurance policies. You will also want to make sure your name is removed from the assets transferred to your ex-spouse, in order to limit your liability if something goes awry with their property. Retitling is a lot of work but it is essential to start as soon as the divorce is final, and to see the process through until you have checked off every item on your personal net worth statement. Once completed you can be assured that what is yours is officially yours.

May 4, 2015

Parents with children who attend college get to take part in the annual ritual of filling out the Free Application for Student Aid (FAFSA). The FAFSA can be nearly as difficult as Calculus 101, but unlike calculus this math, can have real implications to your life and financial situation. If you are divorced with a child heading off to college, below are some things that you should know about FAFSA and student financial aid. The custodial parent is responsible for filling out FAFSA and it is only their financial and household situation that are reported on the FAFSA. This can have important implications for determining eligibility for aid and for calculating the Expected Family Contribution (EFC) to the student’s college expenses. Determination of the custodial parent follows the criteria below, in descending order of importance:

The Custodial parent is considered the parent with whom the child lived the majority of the time over the 12 months prior to completion of the FAFSA (not the previous calendar year).
If custody time is equally split, the parent providing more financial support over the past 12 months.
The parent that provides more than half of support now and will continue to do so in the future.
The above are the primary criteria, but other criteria used to substantiate the above include who has legal custody, claimed the student on their tax return or has the higher income.

Legally separated parents are considered to be divorced. Never married biological parents are treated in the same manner. Many private colleges do consider the non-custodial parent as a potential source of support, and require a supplemental financial aid form from the non-custodial parent. This affects the awarding of the school’s own aid, but not federal and state aid. The federal government does not consider the income and assets of the non-custodial parent in determining a student’s financial need. However, it does consider child support and other support received by the custodial parent. If the custodial parent has remarried, the income and assets of the stepparent are to be reported as well. Any prenuptial agreement that absolves the stepparent of responsibility for college funding is ignored by the federal government. Potential Impact of the Divorce Process on Student Aid Eligibility A divorce that is still in process or recently completed can have a serious impact on student aid eligibility. The following are common divorce maneuvers that raise the reported income of a custodial parent:

Investment and property liquidations
Retirement plan divisions that include a distribution to the parent
College expense payments required by the divorce decree will be included in the student’s income.

If you are in the process of getting divorced and have a child in college or heading there soon, you will want to consider how your divorce will affect your child’s financial aid eligibility. A maneuver in the divorce process to financially equalize both parties may backfire if it negatively impacts financial aid eligibility.

March 31, 2015

When contemplating the pros and cons of getting divorced, I doubt anyone ever puts in the pros column “easier to claim Social Security Spousal Benefits”. Some people may not even realize that they can get Social Security spousal benefits based on their ex-spouse’s work record. Below are some of the basics of claiming spousal benefits after divorce. Social Security spousal benefits, whether married or divorced, are calculated to be 50% of the spouse’s Primary Insurance Amount (PIA) at their Full Retirement Age (FRA). That is 50% of the benefit amount the ex-spouse would receive if they applied for benefits sometime after their 66^th birthday (currently). In order to be eligible to claim spousal benefits on an ex-spouse’s work record, one has to be over age 62 and so does the ex-spouse. The marriage has to have lasted at least 10 years and one has to be divorced for 2 years. Finally, one cannot have remarried and it doesn’t matter if the ex-spouse has remarried. The advantage of being divorced and claiming spousal benefits is that the ex-spouse does not need to be receiving benefits. Married couples have to undertake some complicated paperwork machinations if one spouse wants to claim spousal benefits while the other spouse continues to work. A divorced person doesn’t even need to interact with their ex-spouse to claim benefits based on that person’s work record. One has to provide the ex-spouse’s social security number, a marriage certificate and a divorce decree to claim spousal benefits. The ramifications of claiming spousal benefits prior to your own FRA should be thoroughly understood before applying early. The same reductions in benefits that affect anyone applying for benefits before their FRA also apply to spousal benefits. For example, an ex-spouse claiming spousal benefits as early as possible – age 62, will have their benefit reduced by approximately 25%. Instead of receiving 50% of their ex-spouse’s PIA, they will receive approximately 35% of that benefit. Another important consequence of applying before one’s own FRA is that social security actually awards benefits based on one’s own work record. If the spousal benefit is greater than one’s own benefit, social security adds the difference to one’s own benefit instead of solely awarding spousal benefits. There is a misconception that one can claim spousal benefits prior to their FRA, let their own benefits continue to grow and switch to their own benefit later. Since social security is actually awarding one’s own benefit for a claim prior FRA, this strategy not possible. The good news is that one can do the switching strategy after their FRA. We have helped divorced working women who have reached full retirement age claim spousal benefits based their ex-husband’s work record. They can receive spousal benefits beginning at their FRA until age 70, while their own benefits continue to grow. By delaying claiming their own benefits until age 70, social security automatically increases their benefits 8% for each year they delay past their FRA. Continuing to work may increase their benefit even further. An additional advantage of waiting to claim benefits until after one’s FRA is that benefits will not be reduced if still working. Anyone claiming benefits prior to their FRA and earning over $15,000 in W-2 income from a job will likely see their benefits reduced. After one’s FRA, one can work without a reduction in benefit and as already mentioned may see their benefit increase. Social Security is a complex program, so whether divorced or married, it is best to meet with a financial advisor to discuss when to take social security before applying for benefits.

February 24, 2015

At first glance, you might think that beginning social security benefits at age 62 versus waiting until your full retirement age (FRA – currently age 66) sounds like a pretty good deal. You receive four more years of benefits and won’t have to withdraw as much from your savings as you would if you waited until your FRA. By not taking money out of your savings, the money can grow more than it would if it were relied upon to cover all living expenses. Those arguments have some merit, but probably not as much as most might think. It may indeed make sense in some situations to begin benefits at 62, particularly for someone with serious health issues. However, for anyone expecting to live past their mid-70’s, the numbers tell a different story. As an example, consider two 62-year olds (Ms. Early & Ms. Normal) who will both receive a primary insurance amount (PIA) of $2,200 per month at their FRA. Ms. Early opts to receive benefits at age 62 and accepts that she will only receive 75% of her PIA, or $1,650 per month. Ms. Normal decides to wait until her FRA (age 66) to receive her PIA of $2,200. Ms. Early is happy with her decision to start at 62 because she will have received $79,200 in cumulative benefits even before Ms. Normal receives her first benefit payment. When Ms. Normal begins receiving benefits, she receives $550 per month more than Ms. Early, thus Ms. Normal’s cumulative benefit grow faster than Ms. Early’s. At age 77, Ms. Normal’s cumulative benefits will overtake Ms. Early’s. If Ms. Early and Ms. Normal both pass away at age 87, Ms. Normal’s cumulative benefits will have exceeded Ms. Early’s benefit by $66,000. Over 20 years, $66,000 ($3,300/year) may or may not seem like a lot, but one important detail was left out of the above example for simplicity. Social Security benefits are subject to an annual cost-of-living adjustment (COLA – a percentage increase to a benefit) to keep pace with inflation. The reality is that Ms. Early and Ms. Normal will both receive the same COLA percentage, but they will receive different dollar amounts due to their different benefit amounts. Since Ms. Normal’s benefit is greater than Ms. Early’s benefit, her COLA increase will be greater, causing the difference in their benefits to increase over time as well. If one assumes a 2% annual COLA, the monthly benefit difference grows from $550/month ($1,650 at 62 vs. $2,200 at 66) to $907/month at age 87 ($2,707 for Ms. Early vs. $3,909 for Ms. Normal). Using the 2% annual growth scenario, Ms. Normal’s cumulative benefits overtake Ms. Early’s a year earlier (age 76) and her cumulative benefit will exceed Ms. Early’s by $113,417 at age 87! As with all annuity cash flow streams, the optimal time to start receiving benefits depends on the length of the time the benefit will be received. In other words, if you knew when you were going to die, it would really help determine when you should start taking benefits! As the examples above illustrates, Ms. Early would have been better off starting at age 62 if she knew she was going to die in her mid-70’s. But, the mathematics of longevity side with Ms. Normal because if Ms. Normal is alive at 65, Social Security’s own studies show that she has a 71% chance of living to age 80, a 53% chance of living to 85 and a 30% chance that she will live to 90. It is unfortunate that the likelihood of living longer than one expects, and the cost of starting social security early, is not fully appreciated by most people who start their benefit at age 62. If they realized that they had a good chance of living to 90, and that by receiving benefits at 62 they were short-changing themselves of $147,219 in benefits, they might have continued to work a bit longer.

January 22, 2015

There are few things that distinguish a new phase in life more than changing one’s name. However, one has to do a thorough job of informing the “world” of this change – such as identity providers, business relationships, friends and family. Identity providers – they make it official. An obvious place to start, they include the following:

Driver’s license: go to your local Department of Motor Vehicles office, fill out the appropriate form and submit it with the required documents
Passport: go to travel.state.gov, fill out Form DS-5504 if your passport is less than one year old or DS-82 if older than one year, and submit it with the required documents
Social Security Card: go to socialsecurity.gov, fill out form SS-5 and submit it with the required documents
Voters Registration: re-register at www.sos.state.mn.us
Veteran’s Affairs: call the DMDC Support Office at 800-538-9552 to update your DEERS information

Certified Divorce Decree Essential to changing your name on the identity documents listed above, is providing a “certified” divorce decree or other legal name change document. To obtain a certified divorce decree, request one by letter or in person, from the records center at the court where your divorce was filed. You will need:

Names listed in the decree
File number
Courthouse location
County of the court
Fee per Copy (typically about $16)

If your divorce was filed in Minnesota, you can find information on where to request a certified divorce decree at www.mncourts.gov. It is recommended that you order several. Most identity providers will require a certified copy, and often don’t return them. Keep in mind that removing the staple voids your certified copy! Business Relationships Business relationships are also essential. Think about every business, medical or financial professional and financial institution with whom you interact and start making a list. Then, add on utilities, shopping websites, magazines and other publications, as well as charitable organizations. The sooner you start, the more likely your lights will stay on, your checks will be honored and your will get the packages you ordered. IRS The IRS verifies the names and social security numbers on every tax return with the Social Security database. If you file your tax return before changing your name with the Social Security Administration, use your former name. Any mismatch will result in your return either being rejected immediately or the IRS sending a letter requesting clarification, which will delay any refund you may be due until you reply. Friends and Family Your friends and family are the easiest to inform in the internet age; just send out a mass email. Remember to change your social media profiles too. Better yet find a way to celebrate this change! Make an event of it and all your friends and acquaintances are more likely to remember that you have moved on to a new phase in your life.

December 22, 2014

The holiday season is upon us with all of its beauty, tradition and unreal expectations. It can be a stressful time for even the most grounded person. For someone newly divorced and still sorting out their new life, the challenges that the holiday season imposes can add a whole new level of stress if one doesn’t meet those challenges head on. It’s the financial impact of the holidays that we want to address today. Buying presents, decorating and entertaining can put a big hole in your budget if you are not careful. It can turn out to be a holiday hangover that lasts until summer. Meet the holiday spending challenge head on by getting a grasp on how much you can reasonably spend above and beyond your normal day-to-day spending. Follow that up with a holiday spending worksheet listing all the added expenses, including presents, cards, decorations, groceries, clothing, charitable donations, travel and dining out. Divide up your holiday spending dollars amongst the items on your list. Now, prioritize your spending by putting the most important holiday items at the top of your spending list. Focus on purchasing the high priority items first. If high priority items, like presents or travel expenses, end up costing more than you budgeted, you will need to cut back on the low priority items. When it comes to presents, the holidays call for cooperation rather than competition. Trying to outdo your ex-spouse, particularly with the presents, is only going to add to the holiday stress. Share with your ex-spouse what you intend to buy and the things you know your child wants. Since it is likely that your child is going to celebrate Christmas twice, each spouse might want to agree to buy smaller items. If your child just has to have a really expensive item, considers splitting the cost. This is your opportunity to make new traditions. Look for ways to celebrate the holidays that focus on togetherness rather spending. Making cookies and homemade decorations, or helping out a charity, can all be done for minimal cost while instilling what the spirit of the season is really about. Avoid the holiday blues by approaching them with the right attitude. Look on the bright side, now is your chance to get rid of those awful holiday traditions of your ex-spouse. Here is your chance to start new traditions that truly reflect what you value and what you want your family to remember for years to come.

December 11, 2014

Over the next couple months, I will discuss the various dimensions of Social Security. So many people look at the Social Security program as the simple process of going in to the Social Security Office to claim benefits sometime after age 62, when they decide to stop working. This is putting the cart before the horse in that they have not factored Social Security’s impact on their retirement cash flow into their decision of when to retire. The Social Security program has a complex set of rules that if understood, can influence the when-to-retire decision and a person’s retirement lifestyle. First the basics, let’s say someone owes you money and they have agreed to pay you a certain amount at a defined time in the future. For your benefit, you and this person also agreed on some leeway in these terms – a sliding scale for getting your money earlier or later than the agreed upon date. If you called as soon as the agreement allowed and said that you wanted your money, they only have to pay you 75% of the agreed upon amount. If you tell them you want them to pay you at the very latest date then they will pay you 32% more than agreed. When you get your money back really depends on when you need it. If you find yourself in a financial bind you will likely ask for it early and accept the discounted amount. If you don’t need it at all, you may be happy to wait until the very latest to get the surplus. Social Security works in a similar manner. The agreed upon amount is your “Primary Insurance Amount” (or PIA). The date upon which you will receive 100% of your PIA is what Social Security calls your “Full Retirement Age” (or FRA). Everybody retiring now has a FRA is between ages 66 and 67. Anyone born after 1960 has a FRA of 67. As long as a person works and pays Social Security taxes for 40 quarters (10 years) they are eligible for the standard PIA based on how much they paid in over the years (survivor benefits and disability benefits are a whole other discussion). Social Security has a sliding scale like our loan example, if you want your benefits before your FRA, then you may get as little as 75% of your PIA. If you wait until age 70, you are entitled to get 132% of your PIA. Whether in a financial bind or not, the most popular age for starting to receive social security benefits is 62 – the earliest age possible for most people. Approximately 32% of men and 38% of women begin receiving benefits soon after they reach 62. The average age of when people apply for benefits is 64 so the majority apply for benefits before their full retirement age and accept some degree of reduced benefits. Only 2% of applicants wait until age 70 to get the greatest benefit possible. Some might have a legitimate financial need to apply early, but many are probably just tired of working and want to start retirement as soon as possible. For whatever reason, it would be safe to say that there are a lot of people out there not putting much thought into when they begin to receive benefits. This is unfortunate because unlike the loan example where only one payment was made, Social Security pays month after month. The decision to start receiving benefits early or late is therefore reinforced every month. Many people depend on Social Security for a significant part of their retirement income and as such, the level of their benefit greatly influences their retirement lifestyle. In my next blog entry we take a look at the impact of claiming benefits before one’s FRA.

November 10, 2014

Once you have created a budget and projected your expenses into the next 12 months, there are additional steps you can take on a daily and monthly basis to improve your cash flow. Remember your goal is positive cash flow that allows you to save money for short and long term goals such as remodeling your kitchen, taking an exotic vacation, helping your child with college and saving for retirement. Add these ideas to your list of budgeting for a new life: Pay yourself first. Too many people make the mistake of saving if they have money left over at the end of the month. By setting up a pre-determined amount of savings that is automatically transferred from your checking account each month, the money will be out of sight and you will enjoy the results of savings growth. If you receive your payroll electronically, your employer may agree to deposit a pre-determined portion of your payroll right into your savings account, too. Give yourself a cash allowance. Oddly enough, if you have a set amount of cash to spend on lunches or small purchases for each week, it’s harder to spend it. Try it! Use shopping lists. Avoid spending money on things you don’t need by planning your shopping trip with a list. Shopping will be faster and you’ll spend less if you stick to the list. Make sure that the items on your list are also part of your budget! Distinguish between wants and needs. Paying down debt and saving money are needs. Buying cool leather boots or a new tool set might be wants. To be sure, wait a day or two before buying them and see if it’s keeping you awake at night. If it isn’t, it’s a want you can do without — at least for now. Pay down high-interest credit cards. Finance charges on credit cards can quickly devour any savings you’ve managed to achieve elsewhere in your budget. Pay more than the monthly minimum or negotiate a debt payment plan to pay down high-interest cards. And, once you pay them off, follow these tips so that you charge only what you can pay off each month. You’ll have more money to save or spend on wants as well as needs! With these tips and others (like enlisting the help of a Certified Financial Planner® professional), you will keep track of your budget, be accountable and anticipate a financially secure future! You could even model a thing or two to your kids and friends!

October 9, 2014

If you have created an estimated monthly budget for your new household after a divorce, know that it will likely change down the road. You may discover after a few months that your spending estimates were unrealistic in some areas while other areas of spending were surprising or unexpected. Here are some tips for projecting your expenses realistically into the future. Plan for car purchases. Even if you don’t have a car payment now, you’ll need to replace your car at some point. Consider including a figure in your projected expenses for “car savings.” If you usually keep a car for eight to 10 years and think you’ll spend about $25,000 on a new vehicle, save $260 a month to buy a newer car for cash when the time comes. This means no new car payment, but you’ll have a new vehicle! If you purchase cars more often, factor in the sale or trade-in of your existing car when determining how much to save. Keep up with car maintenance. The older the car you have, the more money you should set aside for unexpected repairs as well as maintenance. Maintenance could include oil changes, replacing tires, fixing brakes, tune-ups and other recommended inspections. Regular maintenance will help your car last longer too. Escrow for home repairs. A good rule of thumb for home maintenance costs is to escrow 1 to 2 percent of the value of your home each year. A home valued at $300,000, for example, could have annual maintenance costs of $3,000 to $6,000. Costs will be on the higher end for older homes or maintenance you will hire out. Maintenance could include:

Replacing the roof, siding or windows
Caring for lawn and garden, landscaping, drainage
Fixing and replacing appliances
Repairs to plumbing or electrical
Cleaning and replacing carpets
Painting
Pool maintenance
Small maintenance for light bulbs, furnace filters, etc.

You might not need the full annual budget for maintenance every year, but you may need more than the budget in other years. Start a holiday savings account. December gift giving, let alone birthday and anniversary gifting, are often missed when budgeting. Consider the gifts you give, the decorating costs and entertaining you host as part of a holiday savings account. This is one area that, once budgeted, people often decide to scale down in future years. However, if it’s a priority for you, you’ll have cash to enjoy it instead of worries about the bills later! Vacations should be planned with cash. If you routinely take one family vacation a year or take trips to visit friends and family, add these expenses to your monthly budget and put away cash to cover costs that include airfare, car rentals, lodging, meals, touring and shopping. Don’t forget to budget for “big box” spending. People often create a projected budget for groceries or school shopping expenses, but an easier way to budget is to create a “big box” category to cover shopping at stores like Wal-Mart, Target, Costco or other department/membership stores. If you find yourself shopping at these stores at least twice a month, budget for the trips and bring cash. These are just a few of the ways you can project your future expenses and plan ahead. Other categories to consider include: health care, debt payments, charitable giving, and entertainment. Adjust your amounts as you start to see a pattern month to month, and you’ll have a clearer picture of your cash flow forecast!

August 20, 2014

Cash flow refers to how your money moves in your household, from the time it is received to when it is spent. When your cash flow is “positive,” it means you have more money coming in than going out; you are spending less than you take in each month. You want positive cash flow in order to pay for expenses and also save and invest money for goals. After a divorce, however, you may find your cash flow is tight or even negative. That is, you are spending your cash almost to zero each month or spending even more than you take into the household. To improve your cash flow, here are several steps to take: 1. List all your sources of income. Your income could include any of the following:

Spousal maintenance/alimony
Child support
Part-time and full-time wages, bonuses and commissions
Self-employed income
Rental income
Royalties
Investment income
Pensions or draws from retirement accounts

Different sources of income are taxed differently, so you need to know your true after-tax income. Consult a CPA or financial advisor to learn more about this. You’ll also need to know how often you receive each source of income and if it’s fixed/guaranteed (paychecks) or variable (self-employment income). 2. Determine your historical monthly spending. Look back 6-12 months to get an accurate picture of expenses. This could include everything from car or home maintenance to vacations, kids’ sports activities or insurance premiums. Look up spending summaries on your Quicken account or request statements from your bank or credit card companies. Don’t make yourself crazy trying to document every expense to the penny. Just come up with a monthly average per expenditure (e.g. $1,000 on holiday gifts averages out to about $83 a month). Reviewing your spending habits can be a valuable exercise. You’ll likely see areas where you could realistically cut spending in order to improve your cash flow. 3. Decide if positive cash flow requires more income or less spending – or both! There are only two ways to improve cash flow: increase your income or reduce spending. You can increase income by finding a job, increasing the hours you work or finding a different job with a better salary. You could also consider returning to school to train for a better-paying job. Temporary jobs, such as retail during the holiday season, can also provide a cash cushion to meet immediate or pressing needs. If you are already working as much as you can, then look for ways to cut spending. Divide your expenses into fixed expenses (like rent or mortgage), escrow expenses (such as insurance or taxes), and living expenses (groceries, haircuts, school expenses). It is often in the living expenses category that you can find areas to cut — at least short term — in order to create a more workable budget and money habits. Keep going back to this list and making cuts until your budget is less than your income. If you are in the habit of using credit cards as your cash overflow account and aren’t paying off the balance each month, this is another sign that you may not have positive cash flow. Stop using credit for any living expenses and give yourself a cash allowance instead. You will quickly assess needs and wants by looking at the remaining cash in your wallet as the weeks go by. Be gentle with yourself. A new cash flow system takes 30 to 90 days to start showing positive results. Staying in a budget takes practice, but can become fun as you have more money to save for vacation or that retirement dream.