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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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117144501-couples-therapy-gettyimagesFinancial decisions are some of the toughest issues to work through in divorce. Deciding how to divide up assets or liabilities or devising long-term support scenarios to cover the expenses of two homes can be difficult. When you add in the emotions related to finances and personal financial experiences – it can get really complicated. In a collaborative divorce, where both parties agree to negotiate and settle their case out of court, financial agreements are often more thorough and more complete. Resolutions may include tax implications, cost basis analysis, or long-term financial projections. During the process, couples can more completely analyze the financial options and, often most importantly, the team can work to address emotional feelings about finances. In one type of therapy, called dialectical therapy, clients are urged to balance their logical minds with their emotional minds. According to the theory, all couples have both types of thinking. Logical thinking is orderly, concise and reasoned. A logical decision would be to keep money in bonds that are likely to be fairly stable over time instead of a risky stock investment that is volatile along with the markets. Emotional thinking, on the other hand, focuses on an individual’s feelings or history with decisions. An emotional decision may be to pay off a home mortgage because it “feels” good, even though having a mortgage may have more financial benefit. Other emotional decisions may rely upon personal experience. Someone may make the emotional decision to keep cash under the mattress in case he needs it in an emergency because that is what his father did and advised him to do. In a collaborative divorce, couples work with a financial neutral to help balance these two sides. In dialectical therapy, the overlapping space between the logical mind and the emotional mind is the wise mind. In divorce, couples who use their wise minds often have the best outcomes. They will balance the logical, smart decisions with options that feel good. While outcomes may not be perfect, they are more likely to feel good if they are in the wise zone. Take for example a couple that has equivalent amounts of financial value in home equity and a stock portfolio. The logical option may be to divide both equally – split the stock account in half and sell the home sharing the equity equally. Maybe one spouse is emotionally connected to the house and the other likes the risk of the stock market. Dividing the assets this way may make emotional sense, but is it wise? A wise option could be to evaluate the home market and estimate future value while looking at the stock portfolio and the level of risk associated. Analyzing the cost basis in both investments and potential tax implications could also help the couple create a wise resolution. Collaborative divorce allows couples an opportunity to commit to an out-of-court, non-adversarial process to reach mutually acceptable resolutions. Good collaborative professionals can help couples bring their best selves to the process and use their wise minds for the best possible outcomes.  
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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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116029268-charity-donation-form-gettyimagesThe holiday season is when many people do a significant portion of their charitable giving for the year. Once you have decided which charitable organization to support and how much, you should also consider how to give that support. What I am getting at is that you can be charitable and tax-savvy by donating highly appreciated stock. Donating a highly appreciated stock or mutual fund is a great strategy for getting rid of an investment that you have been holding because you do not want to pay the capital gains tax. The beauty of donating “in-kind” some or all of a security holding is that you get the full charitable deduction without paying the capital gains tax. “In-kind” means that the investment is not sold, but is transferred as-is to the charity instead. This way you do not have to pay the capital gains tax, because you did not sell the investment. The charity will likely sell the investment to meet their funding needs, but as a non-profit organization, they pay no tax on the sale. The catch is that you have to have owned highly appreciated investment for more than one year. If you transfer an investment that you have owned for less than one year, you can only deduct your original cost in the investment and not the appreciation! Of course this strategy is a bit more complicated than writing a check. You will need to obtain account information from the charity as to where to transfer the highly appreciated investment. You will then need to contact you investment broker and direct them to transfer the investment to the charity’s account. It is not difficult though; most charities are more than happy to help and it is something that investment brokers handle for their client on a regular basis. The transfer has to occur by December 31st to qualify as a current year contribution. You cannot donate investments that have lost value and deduct their higher original cost. If your donation totals more than $250, the donation must be recorded – meaning that the charity must send you a written statement describing the donation and its value. You or your tax preparer will also need to fill out and include Form 8283 Noncash Charitable Contributions in your tax return, listing information about the charity and investment contributed. Despite the extra work, donating highly appreciated stocks or mutual funds can be a win-win for you and the charity. This holiday season think about sharing some of your investment success with your favorite charity instead of with the IRS in April.
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77006495-model-house-next-to-paperwork-and-keys-gettyimagesA 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:
  1. Each of you open individual accounts in your own name
  2. 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.
  3. Both of you sign the letter
  4. 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).
  5. 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.
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171328306-college-planning-gettyimagesParents 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:
  1. 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).
  2. If custody time is equally split, the parent providing more financial support over the past 12 months.
  3. The parent that provides more than half of support now and will continue to do so in the future.
  4. 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.
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144560286When 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 66th 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.
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128224042At 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.