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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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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.
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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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161542267I teach a cash flow planning course throughout the metro area. One of the ways I begin, is by asking everyone to tell me the first word that comes to mind when they hear the word budget? Often it is a negative type of word like restricting, confining, or boring. When I ask a similar question about cash flow, common responses are future and choice. The chart below illustrates some of those differences. Pic   Money is one of those issues often cited as a reason for divorce. I would offer that money itself does not cause divorce. How spouses handle money differently and an inability to recognize their different money personalities and learn effective ways to work through those differences can lead to divorce or at least cause significant strain in a marriage. Establishing reasonable and necessary future living expenses post-divorce is one of the two pillars of any divorce process. Both spouses will need to establish their own living expenses independently of one another. If money was a source of conflict in the marriage, imagine the conflict that exists during the divorce process. The reality is the money conflict can and often does escalate in divorce. In my work as a financial neutral, financial mediator, and financial planner, I work with you and your spouse to help you focus on your future. One approach to creating a future oriented cash flow plan for your post-divorce life is to add up all of your expenses necessary for your basic living needs. This would include things like housing, food, clothing, and medical care to name a few. If you are familiar with Maslow’s hierarchy of needs, this would be the lower level (safety and security) in the hierarchy. Keep in mind that at this basic level food does not include dining out. Clothing does not include upscale designer clothing. Items in this safety and security level are for basic needs. After taking care of basic needs you can then address expenses that you have total control and choice over such as dining out, entertainment, cash spending money, gifts, personal care, etc. Finally, you may want to consider future goals and needs like retirement, creating an emergency savings plan, a different automobile, or an education. Think of separating these expenses into three different categories. I ask my clients to visualize these as three distinct buckets. The buckets are one for basic needs, two control and choices, and three future needs and wants. It is important to recognize that during and after the divorce, you may need to at least temporarily forgo some if not all of the future needs and wants, and substantially minimize the control and choice buckets due to the initial financial strain of divorce. It is equally important to recognize this time-period does not necessarily last forever. Incomes can and do increase over time and some expenses such as child-care reduce and ultimately disappear at some point. A well-developed future oriented cash flow plan can give you the peace of mind to know you will be financially secure. It can give you the opportunity to choose what is important to you about money, prioritize your goals, and create a solid model and roadmap for your life ahead. A financial neutral in collaborative divorce process will help you create this type of plan. A short three-minute video on the history of cash flow and money management is available by clicking here.  
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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.
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184951937There 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.
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After your divorce, getting along at the holidays can be a stressful situation when you have kids. On top of trying to work out holiday visitation schedules and travel plans, you may also be worrying about what to get your kids. You might not have the resources to buy things like you did before the divorce. Maybe you have the resources and your ex doesn’t or vice-versa. So what do you do about those big-ticket items that your children have been eying since September? Being divorced brings on divisions over gift giving. Set aside some time with you ex, meet for coffee and talk about what your child wants or would like as gifts, and divide up the list, so you’re not duplicating each other and know what the other is buying. Also discuss whether or not a gift will be left at one parent’s house or if it can travel back and forth. If you have a hard time sitting down and talking in person, do it by email or phone. Sometimes it’s easy to ignore or “cross that bridge when we get there” but setting gift giving boundaries ahead of time creates less drama later on. It’s all too easy for the holidays to become a competition, to see which parent can buy the most stuff, the best stuff, or the most expensive stuff. Even parents that are great at co-parenting can fall victim to this game. You and your ex have to make sure this doesn’t happen to you and your child(ren). That behavior takes the focus of the holiday away from your child and spending time together. If one of you buys your child a puppy, a new video gaming system, and a big-screen TV and the other buys a few toys, feelings are likely to be hurt. The spouse who buys the big gifts often does not realize he or she is hurting the other parent and thinks they are simply making the child happy. However, if you’re the spouse who doesn’t splurge, you might end up feeling like you’ve failed your child or she will love the other parent more. Avoid this situation but having that gift giving conversation ahead of time; set a dollar limit or range if you need to. Holidays are hard. It’s important to remember the reason for the season, no matter what holiday you are celebrating. Try to focus yourself and your child on the fact that the holidays are not all about gifts. Spend time together doing holiday crafts, going to services, going to a concert, decorating your home, or baking. Check into age appropriate volunteer opportunities at a local shelters to serve meals to the homeless, packing shoe boxes for children overseas, or volunteer to wrap presents for needy children. Take your child shopping to buy a small gift to give the other parent. 20 years from now your child won’t remember which parent bought them the most gifts, so use this opportunity to show your child that giving back to others is more rewarding than receiving gifts – a life lesson they will remember for years to come.
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81897035The 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.
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184971497According to a Holiday Consumer Spending Survey by Consumer Affairs the average person celebrating Christmas, Kwanzaa and/or Hanukkah will spend $804.42 on gifts this 2014 holiday season. If you are separated or going through a divorce, chances are that figure is simply not feasible for you. The good news is, that is just an estimated average, and for the most part completely unnecessary. The holidays can often be a budget breaker – but they don’t have to be! Saving for the holidays should not start on black Friday! Develop a budget that accounts for gift giving year round. Consider all the holidays, birthdays, and any anniversaries that you typically choose give for. If you have kids, once they are in school they will likely get invited to many birthday parties. You should also account for these occasions and develop a system that works for your budget to allow your child to take a gift to the party. Whether that means stocking up when a popular age-appropriate gift goes on sale, or just having the room in your gift budget to account for these gifts. Often times these party invites may come with less than a week’s notice. Being mindful of your gift giving budget will help you not to blow $50 on a gift on a whim. When you were married, and probably had more disposable income, you may have fell into a gift giving routine that included birthday and Christmas giving to you friends and neighbors and their children. Decide where your gift giving priorities lie, and don’t feel guilty being straightforward and setting lower expectations with people. Giving makes people feel happy, and if that’s the case for you, you don’t need to completely cut back. Look for ideas on Pinterest – handmade gifts go a long way. Find a fun quote that fits your Mom/Aunt/friend/etc., print it off, and put it in a dollar store frame, viola! Dust off a bottle of wine to give to your wine loving friend. Go on a nature walk, find some pine cones and create a holiday wreath. If you like to can foods in the fall, make jam, or bake, those goodies make wonderful gifts! Turn your children’s old broken crayons into brand new fun shapes with the help of inexpensive molds. Find clip art online and create a personalized children’s coloring book using the child’s name throughout the book, which you can print off at home. The possibilities are endless, and inexpensive, handmade gifts don’t look “cheap,” they look thoughtful!