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200150399-001As another tax season comes to a close, there are people all over the country digging through shoe boxes and file cabinets trying to meet their tax accountants’ request for cost basis information on an investment they sold last year. Hundreds of thousands of tax returns are moments away from being filed if only the taxpayer could find that elusive cost basis information. So what is cost basis, why is it so important, and why can’t anyone ever find it? At its simplest, cost basis is the purchase price you paid for an investment or piece of property. More than that, it also includes the expenses that went directly into the purchase including commissions, trade fees, appraisal and legal expenses. Cost basis can also grow over time due to reinvested dividends on mutual funds or if you made significant improvements to your property. When you sell an investment or property, cost basis is vital for figuring out if you made or lost money on the sale. The IRS wants to know your gain on the sale and expects you to pay taxes on it. If you lost money on an investment, it is important to report that as well. The loss will almost always be subtracted from your gains on other investment sales thereby lowering your tax bill. The IRS puts the responsibility for keeping track of cost basis on the owner of the investment or property. Maintaining good records on investments in particular seems to be impossible for all but the most organized. With the blizzard of paperwork that the investment company sends aren’t they keeping track of this? Yes and no. Prior to 2011, the investment companies kept track of your cost basis but they were under no obligation to transfer that information if you transferred your assets to a new investment company. Statements at your new investment company would only reflect the cost basis of investments purchased through them. As of 2011, all investment companies are required to transfer the cost basis information when transferring assets. Unfortunately, if an account has been moved a couple times prior to 2011, the cost basis of some assets is only known if the owner still has the records of the original purchase. Anyone one with a brokerage account (not an IRA which gets taxed differently) or investment properties needs to keep good records of their purchases and related expenses. While investment companies are finally doing their part, it will be years before all the investments purchased before 2011 with missing cost basis information are sold and people can throw out those shoeboxes of old statements. For anyone splitting up assets in a divorce, it is important to get the cost basis information during the divorce process. Make sure to get a statement of any investment account being split. Also make sure to get all the expense receipts for any investment properties that are being transferred. If you get this information during the divorce, you don’t have to go asking for it later only to find that the statements got thrown out during moving or mysteriously “disappeared”.
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140196043-studio-portrait-of-young-man-contemplating-gettyimagesFor many, a significant portion of their post-divorce assets consist of a part of their former spouse’s company-sponsored retirement account. In order to split a company retirement account, the plan administrator of the pension, 401(k), 403(b) or other company retirement account requires a Qualified Domestic Relations Order (QDRO) or Domestic Relations Order (DRO). A QDRO or DRO is typically drafted by an attorney and signed by a judge. It directs the retirement plan administrator to divide the retirement account between you and your former spouse, in the manner specified by your divorce decree. Once the QDRO has been approved by the plan administrator, they will transfer your portion of the retirement account into a new account in your name, within the same plan. You will also receive information on how to cash out the account and have a check sent to you (a taxable event) or rollover the account into an Individual Retirement Plan (IRA) or another retirement plan in your name (a non-taxable event). A QDRO differs from a DRO in that it contains specific wording that is required under Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) to divide a retirement account such as a 401(k) and 403(b). It is advisable to contact the plan administrator to obtain their QDRO model language before your attorney drafts the QDRO. Most company retirement plans have a template containing the language required to be included in a QDRO. DROs are more generic and do not contain the specific wording of a QDRO. Certain retirement plans (referred to as non-qualified plans), that do not fall under the ERISA jurisdiction, can be divided with a DRO. Note that a non-company IRA (e.g. Traditional IRA, Roth IRA, SEP IRA) does not require a DRO or a QDRO to be divided, but will require a letter of instruction detailing how the account is to be divided, along with a certified copy of the divorce decree. Typically, if you draw money out of a retirement account covered by ERISA early (prior to age 55 for a 401(k) or 59.5 for a 403(b)), you will be required to pay taxes AND a 10% penalty. However, in a divorce situation, if you were awarded money via a QDRO, you have the opportunity to take money out of a company retirement plan covered by ERISA, without the 10% penalty. Note that this withdrawal is considered taxable income and thus is subject to a mandatory 20% withholding for federal taxes and possibly state taxes too. It is very important to follow the process carefully when doing this; I highly suggest working closely with your financial planner or tax advisor. Lastly, keep in mind that dividing a company retirement account takes time. The QDRO model language needs to be obtained from the retirement plan administrator, forwarded to an attorney to draft the QDRO, which is then submitted to the retirement plan administrator for approval and division.
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138710659-financial-advisor-talking-to-customer-gettyimages5 quick Divorce financial tips: These five are only a starting point.
  1. Plan your cash flow and spending carefully.  Do not over exaggerate.  You and your spouse only have so much income between the two of you.  Unless you can increase income you both will need to decrease some areas of spending simply because you are going from one household to two on the same income.  Something has to give.
  2. Have a  financial specialist experienced in divorce matters suggest ways for you and your spouse to save on taxes by utilizing head of household filing status when possible and the best use of dependency exemptions when children are involved.  A financial specialist can also recommend tax saving strategies for spousal maintenance and/or child support.
  3. If existing debt is a problem consider using an accredited consumer credit counseling agency to help you set up a debt management plan.  This does not affect your credit rating since you will still be repaying all of the debt.  The agency will work to negotiate a lower interest rate with each of your creditors.  You will make one payment to the consumer credit counseling agency.  The monthly payment you make to the agency is often much less than the combination of the payments you were making before.  The agency makes payments to each of the creditors for you.  There is the potential to save a bundle in lower interest rates and in some cases no interest giving you the ability to pay off your debt earlier than you ever thought.  Two such agencies in the Minneapolis Saint Paul area are Family Means and Lutheran Social Services  and no you do not have to be Lutheran to utilize their services.  In worst-case scenarios, bankruptcy may be a consideration.  Both of these agencies provide bankruptcy counseling and are able to refer you to bankruptcy specialists if and as needed.
  4. If existing debt is a problem do not make it worse by adding to that debt.  Find other ways such as sacrificing today for a better tomorrow, increasing income, lowering expenses or some combination of all these.
  5. With retirement assets, it is common for a financial specialist trained in divorce matters to help one spouse or in some cases both spouses recommend strategies to come up with down payments for new housing purchases.  This usually involves the use of a Qualified Domestic Relations Order (QDRO).  A portion of an employer retirement plan is awarded to the lower income spouse, income taxes on the distribution are planned for, and if the distribution is incident to a divorce the spouse awarded a portion of the employer retirement plan will avoid the pre 59 ½ early distribution penalty.
Utilize an experienced divorce financial planning specialist.  They are your best resource for helping you keep more of your money in your family.
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In part I of keep more of your money in your family; choosing your process wisely I wrote about the well known traditional litigated court based divorce process and mediation. In this issue, I will cover Collaborative Divorce. Collaborative divorce is an option you and your spouse should thoroughly explore before making any choice about divorce process. It is my belief that you and your spouse should first decide upon process before you ever hire an attorney. You can then match the right attorney to the right process. Just because they are, a divorce attorney does not mean they can be effective and efficient in all processes. In a collaborative divorce , a collaboratively trained attorney through the entire process represents each spouse. A financial specialist helps couples sort out their financial issues including gathering all the financial data necessary for the divorce decree and presenting it to their respective attorneys in a format that helps attorneys review the numbers more efficiently. Contrast this with you and your spouse providing each of your attorneys the financial data, the two attorneys talking together about the financial data and then going back to you their client to discuss those conversations then going back again to the other attorney to discuss. Let me ask you on just this one basic step in the financial process, do you think you would keep more of your money in your family? Do you want to be paying two attorneys to do this financial data gathering or would you prefer to pay one financial specialist? A financial specialist is the one person who is in the best position to help you keep more of your financial resources in your family throughout the divorce process. They can save you taxes, come up with some creative options, and other ideas that allow both you and your spouse to create the best financial outcome for each of you given your existing resources. In any divorce with minor children, a parenting plan is created and documented. In the collaborative divorce process, this is usually completed with a child specialist. This person helps parents articulate and document a well thought out plan to co-parent their children. The child specialist meets with the parents and often times meets with the children separately and then with everyone together. This level of attention to the family well-being is not found in other processes. You can of course work with two attorneys or a mediator to come up with a parenting time schedule and perhaps another piece or two of a well thought out plan. What you are not likely to get is a complete parenting plan that increases the likelihood of your children successfully navigating your divorce with you and your spouse. Also available in the collaborative divorce process is a neutral divorce coach. The divorce coach helps spouses communicate effectively during the divorce process and come up with a plan for post divorce communication and relationship. This can lower conflict, which can decrease costs. If emotions run high at some point during the divorce process, a coach acts to ground you in the areas that are important to you. This enables both you and your spouse, to effectively communicate your needs, interests, and concerns all necessary to produce the higher-level outcome intended to last for a long time. It is interesting to me that I often hear people say they are concerned about divorce costs when learning about collaborative divorce. Yet the collaborative divorce process minimizes attorney involvement since much of the work with the neutral financial specialist, neutral child specialist, and neutral divorce coach is completed without attorneys present. Attorneys usually are the highest paid professionals in any divorce process and most are not trained in financial issues, child and family systems, or other family relationship dynamics. What attorneys are trained in is the law. So imagine yourself utilizing a divorce process providing you with a menu of professional resources to help you and your family work with specialists in their respective fields and yet always have access to your own attorney who will be your advocate.   Of the three processes discussed in this two issue article which do you think will allow you to keep more of your money in your family, traditional litigation, mediation, or collaborative divorce? Remember to help you keep more of your money in your family choose your process wisely. In Part II of Keep More of Your Money in Your Family, I will write about choosing your attorney wisely.
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561097939-man-inserting-coin-into-piggy-bank-gettyimagesGetting married sometimes can be expensive if you let it. Getting unmarried can be even more expensive if you and or your spouse allows it to get that way. In divorce, emotions are high and often contribute to higher levels of conflict. Conflict is expensive. Many divorcing couples want to know how they can keep more of their financial resources between themselves and in their family. After all the more that goes to pay for divorce costs means less for each spouse and for their children if they have children. In this upcoming series, I will write about some tips on how to keep more of your financial resources in your family. Here is the first tip:
  1. Choose your process wisely. Study your options and know what you and your spouse want. I ask divorcing clients what would need to happen in your divorce so you could look back three years from now and say this was a successful transition for your family and you. Paint that picture for me. Be honest with yourself.
    1. If you want a knock down drag out divorce, you know the Katie bar the door kind or I will show him/her, or I will make him/her pay, a more traditional litigation process certainly fits that bill. Moreover, that bill will be very expensive. On top of that, someone else, a judge, will be making decisions for you since you and your spouse are not able to reach agreements on your own.   If you think, you are going to win and be the victor you have already lost because there are no winners in divorce. Most judges tend to think the best outcome if they have to decide your divorce is one when both spouses equally share the pain and both spouses are somewhat dissatisfied.
    2. You may consider mediation. Most people have heard about mediation. Mediation can be less expensive than a traditional court based process.   Mediators however, are not able to provide legal advice. This is true even if the mediator is an attorney. Sometimes couples choose to have their own lawyers present at mediation sessions to overcome the no legal advice dilemma. Mediators, even if they are an attorney are not able to draft/prepare final divorce decree documents. If a mediator helps you reach agreements, you, and your spouse take those agreements to an attorney to draft the final documents and that attorney can only represent one of you, not both spouses. I always encourage my divorcing clients to each have their own attorney when reviewing any final documents resulting from mediation. You may run into one or both of the attorneys encouraging you not to accept the mediated agreements or parts of the agreements. In my practice, I recommend to clients attorneys that I know and have worked with, are settlement oriented, and not inclined to escalate conflict in an already mediated agreement. That is not to say there will not be some tweaks here and there because there always are and for good reason.
In part II of Keep More of Your Money in Family, I will talk about collaborative divorce, the professionals involved, and how it can help you keep more of your money. Stay tuned more to come.
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183748731-woman-dreaming-of-new-house-and-car-gettyimagesIn my financial planning practice and working as a financial neutral helping divorcing couples sort out financial issues it is often challenging for clients to clearly articulate future goals. I am not talking about the kinds of goals such as I want the house or this or that possession. Those types of statements really are what we call positions. I am talking about big picture interest based goals for your future. You might ask why this is important. I just want to be done with this divorce so I can move on. The problem is being done does not necessarily mean you will be better prepared to move on. More than likely if your focus is to be done, moving on will probably be very challenging for you. Establishing your goals at the very beginning of a collaborative divorce is critically important because goals establish a foundation for future discussions, negotiations, and more importantly stronger communication channels with your soon to be ex-spouse. Goals may be about any particular topic. Usually they fall into the three broad categories of parenting, financial, and relationships. Let us say for instance it is important for you to remain in the same school district so your children are not uprooted to new schools at the same time you and your spouse will soon be living in separate residences. Moving to a new school district while moving to two separate households may create significant insecurity for your children. This goal example states what the goal is: keep the kids in the same school district, and the why: to minimize the insecurity to your children. From this one goal, we can then figure out the who, when, and how. This single goal may produce discussions about housing, transportation, children’s activities, financial decisions, and overnights with one parent or the other that can lead both spouses to be stronger co-parents for the benefit of their children. Another goal example in the area of financial matters may be; we want financial viability for both households so we can have a sense of financial security. Note this is not a statement about who gets what but rather a statement about how you want to feel. No one ever tells me his or her goal is financial insecurity. An example of a relationship goal may be; we want to continue extended family relationships and participate together in family events as possible and to recognize these relationships do not necessarily end just because our marriage is ending.  Another relationship goal would be to describe how you want your relationship to be with your spouse post divorce. Establishing clear big picture goals early on in the divorce process can help to keep you and other professionals on track. Goals give you and your spouse anchor points for the discussions and decisions that will need to be made concerning your futures. We all remember the old saying if you do not know where you are going any road will get you there. Divorcing couples will be wise to discuss together where they want to go by setting clear individual and joint needs and interest goals. Know where you are going. The Collaborative divorce process gives you this opportunity. Choose your process wisely.
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Allocating assets and liabilities between spouses is one of the financial pillars in any divorce. In my work as a financial neutral and also when working on behalf of an individual in a divorce the subject of credit card debt is often a topic that needs to be addressed. This is especially true when credit card balances are not paid in full each month. The usual credit card ownership arrangements are joint or individual. There is another form of credit card ownership when one spouse is the primary account holder and the other spouse is an authorized user. In this situation, both spouses have a card on the same account issued in their individual name. The thorny part of this is the primary account holder controls the decision-making authority relative to the account. The primary account holder can close the account. The authorized user generally is not able to close the account. However if the primary account holder defaults on the account the card issuer will seek payment from the authorized user. Does not seem quite right, does it? As an authorized user, you are unable to close the account yet if the primary account holder does not make payments, the authorized user can be liable for payment. What can you do to protect yourself? Here are 5 suggestions:
  1. First, run a credit report on yourself from all three major credit-reporting agencies. These agencies include Equifax, TransUnion, and Experian. The best place to obtain this report is from www.annualcreditreport.com . Your report is free from this site and they will not solicit you for other purchases with one exception. Please note these reports do not include your credit score. You can obtain your score if you like for a nominal fee.
  2. Once you have the report from each of the three reporting agencies review all three reports carefully. The report will tell you if you own the card jointly, individually, or if you are an authorized user. This is a great time to verify the accuracy of all the data contained in the report.
  3. If you have a card issued in your name that for some reason does not appear on your credit report, call the issuer to determine your ownership status.
  4. If you are listed as an authorized user on any credit cards, call the issuer to determine how you can be removed.
  5. Let your attorney know you want any authorized user status clearly dealt with in your negotiations with your spouse. You do not want this thorny issue sneaking up on you down the road. In collaborative divorces, a well-trained financial neutral and the attorneys representing their clients are well aware of this issue.
Is a collaborative divorce right for you? Check out this link to learn more. Choose your process and your professionals wisely.
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77380996-man-and-woman-building-a-stack-of-bills-gettyimagesYour divorce, regardless of process will not be free. While a free divorce is impossible you can self manage many of the costs of your divorce. In my work as a financial neutral working with couples and individuals going through divorce there are five key tips I have observed that can help clients reduce the financial and emotional costs of divorce. Do everything possible to minimize conflict with your spouse Divorce is not without conflict. Conflict is expensive. The greater the conflict between you and your spouse the more your divorce will cost in terms of money and in terms of emotional wear and tear. If you and your spouse can openly and respectfully discuss what you can agree to and seek help to work through the issues where you have differing opinions the financial and emotional costs can be reduced. You will save money and time when you put your heads together to resolve your differences instead of butting them against each other. Get organized and be prepared If possible, work together with your spouse to gather all financial records necessary for any divorce process. This includes but is not limited to statement copies for everything you own and everything you owe to someone, tax returns including W-2’s, paycheck stubs, bank accounts, credit card accounts, retirement accounts, other investment accounts, insurance information, mortgage and other loans, and information concerning employer provided benefits. Consider putting together a 3-ring binder or electronic file folders containing each of these items. Your divorce decree requires the itemization of every asset and liability. It is foolish, costly, and to your detriment to not be fully open and transparent with your spouse. Being organized, open and completely transparent will help reduce costs. Establish and communicate expectations Communicate clearly with the professionals you are working with while at the same time listening carefully to the professionals you do engage. Consider this a two-way dialogue and recognize that you probably do not know what you do not know. Your divorce professionals have the expertise and wisdom to guide you through this difficult time. The wise professionals want to do this in a timely and cost effective manner. Beware of the so-called professionals who promise to get you the best deal. Best deals come at a price both financially and emotionally. Identify your needs and interests, and those of your spouse Whenever possible discuss these with your spouse in an open and respectful manner recognizing each of you will have unique needs and interests. You and your spouse will also have shared needs and interests. Needs and interests are not positions. Needs and interests are the underlying reasons and factors why something may be so important to you or your spouse. A position is more like a demand or a must have without stating any particular reasons. If your spouse seems locked into a position, ask them why this particular issue is so important to them and listen carefully for the underlying reasons. If you can find a way to satisfy those reasons, you are on the road to resolution. Collaborate, compromise, and cooperate Ask yourself, if you make every decision a battlefield how do you think your spouse will respond. Drawing lines in the sand will only isolate you and make it harder to reach agreements not to mention cost a lot more money and take more time. Remember you got married together and you and your spouse will get divorced together one way or the other. You and your spouse get to choose how. Every divorce and family is unique and comes with its own set of circumstances. The complexity of the relational, financial, and legal issues of your divorce along with the ability of you and your spouse to follow these five tips will ultimately determine how long your divorce will take and how much it will cost. Choose your process and your professionals wisely. Check out this link to learn more and find out if a collaborative divorce is right for you. For more information and resources check out my website under the about us section at www.integrashieldfinancial.com.   There you will find a video featuring actual collaborative divorce process clients, a divorce knowledge kit, resources for those with children, and a link labeled Collaborative Divorce with Dignity and Respect.
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170652636-couple-meeting-with-financial-advisor-gettyimagesI’m not always a very wise shopper.  I tend to fall into the trap of thinking something is a good deal if I save money.  And at least in the short term, my cheaper purchase may do just fine. But inevitably, cheap purchases lack staying power and don’t hold up well.  I was reminded of this recently when looking in dismay at the boots I bought on sale at a discount shoe store.  After one season of wear, the leather has frayed on the toes of both boots, and they won’t be wearable next season. In contrast, the Frye boots I splurged on when I was accepted into graduate school decades ago still look great.  I knew at the time that these boots were an investment meant to last. When some potential clients hear about Collaborative Team Practice, their first response is,  “That sounds too expensive.  I don’t want to spend much money on a divorce.”   Because most people have to budget money with some care, it can easily feel like professional fees are not where limited resources should go.   But be aware of the trap of thinking something is a good deal if it saves money. A quality divorce process is an investment in the future, especially when children are involved.  Collaborative professionals are experts in conflict resolution and creative problem solving, and can respectfully support families through the crisis of divorce to sustainable resolutions.  Collaborative professionals are deeply knowledgeable in their areas of expertise—family law, financial resolutions, children’s needs in divorce, parenting plans and co-parenting skills.  Simply put, the right Collaborative professional will help you understand what you may well not know about how to make the best possible decisions on behalf of yourself and your family. The least expensive divorce options may seem adequate at the time, but the results are often not sustainable.  This may mean heading back into a post-decree legal process that  is guaranteed to be costly.  Collaborative Team Practice is not the best fit for all divorces, but when it is, it is clearly an investment in quality outcomes with staying power for the future.  For more information, check out the Collaborative Law Institute website.
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clockGetting unmarried and taxes can become a consideration in terms of whether to have a divorce final by year-end or final after January 1. I have worked on a number of divorce cases where this very topic deserved a thorough analysis to determine which tax filing year to have the divorce final. Here are a couple of important points to remember. If you are married for the entire year, the choices you have for tax filing are joint or married filing separately. If the courts deem the divorce final no later than December 31, you are considered divorced for the entire year and are not able to file jointly or married filing separately. An entry of divorce on December 31 requires filing as single or if qualified as head of household for the year ended December 31. How do you determine which year is best? Usually this requires completion of the various tax return scenarios by a qualified tax advisor normally a CPA or Enrolled Agent. They will run the numbers for a joint return as if the couple was married the entire year. Next, they will run the numbers as if they were divorced for the year with either a single or Head of Household filing status if qualified. Whatever method results in the lowest combined tax for the couple preserves more of the family assets and resources. Sometimes this can amount to thousands of dollars. I recently concluded a collaborative divorce case as a financial neutral for a couple where this very issue came up. My initial analysis revealed the couple could in-fact save thousands of dollars by having the divorce final by year-end vs. filing a joint return for 2014 and the divorce final in 2015. A thorough and complete analysis by a CPA confirmed the couple would save approximately $20,000 in income taxes by having the divorce final no later than December 31. Needless to say, this couple would much rather have the $20,000 in their pockets vs. having to forfeit that amount to the I.R.S. Although divorce documents are e-filed with the courts, there is no guarantee the divorce will be final by December 31. Once the documents are received by the courts, the file is assigned to a judicial officer for review. Files submitted in late November and December are not automatically reviewed and approved by year-end. Attorneys working on the case will often make requests to have the review and entry of divorce completed by December 31. I hope that in this most recent case it will be. It is always worth a try especially when you have $20,000 on the table. Do not overlook the tax strategies and any potential savings when divorcing near year-end. It could potentially save you and your family a bundle.