Avoiding Mistakes in a Divorce
Marriages sometimes fail and usually the end is triggered by a specific event. Infidelity is very high on the list and is one of the main reasons why the petitioner feels justified in going after the ‘respondent’ with vengeance in order to right the wrong. Let’s take a step back however and look at things in their true colors.
No one “wins” in a divorce. The emotional, physical and financial drain is exhausting for everyone involved. Big decisions have to be made that can have a big effect not only today but for years down the road. I’d like to share a hypothetical example of how a proposed settlement might look good on paper, but after a closer look wasn’t equal at all for a divorcing couple. Below is a list of their current assets:
Dave and Sara | |
Assets | Value |
Cabin | $300,000.00 |
Home | $450,000.00 |
Dave IRA | $500,000.00 |
Sara IRA | $300,000.00 |
Brokerage Account | $300,000.00 |
Cash Savings | $200,000.00 |
Total Marital Estate | $2,050,000.00 |
Total marital estate is $2,050,000. Dave is proposing that Sara keep the cabin, $225,000 of his IRA, the investments in the brokerage account (he keeps the cash in the account) and Sara also gets $50,000 of the savings they have in the bank. Below is how it all looks:
| Dave Gets | Sara Gets |
Cabin | $0.00 | $300,000.00 |
Home | $450,000.00 | $0.00 |
Dave IRA | $275,000.00 | $225,000.00 |
Sara IRA | $0.00 | $300,000.00 |
Brokerage Account | $150,000.00 | $150,000.00 |
Cash Savings | $150,000.00 | $50,000.00 |
Total | $1,025,000.00 | $1,025,000.00 |
At first glance this looks equal to Sara and her attorney and Sara signs off on the deal. A CDFA would have taken a closer look. What Sara and her attorney didn’t consider was that even though Sara got the cabin valued at $300,000 that wasn’t a true value. The cost basis in the cabin was $100,000 and after Sara sold it so she could purchase a new home she paid taxes on $200,000 worth of gains (20% Fed and 5% State in this example) which netted her $250,000. Sara was also happy to receive the securities held in the brokerage account because she was emotionally tied to them. Dave was happy to give them to her and take the cash because he knew the cost basis was $25,000. After Sara had to sell the holdings because she needed more money for her new home and other expenses, she had to pay taxes on $125,000 worth of gains. After tax she netted only $118,750. Below is how the after-tax split looks:
| Dave Gets | Sara Gets | Sara Nets |
Cabin | $0.00 | $300,000.00 | $250,000.00 |
Home | $450,000.00 | $0.00 |
|
Dave IRA | $275,000.00 | $225,000.00 | $225,000.00 |
Sara IRA | $0.00 | $300,000.00 | $300,000.00 |
Brokerage Account | $150,000.00 | $150,000.00 | $118,750.00 |
Cash Savings | $150,000.00 | $50,000.00 | $50,000.00 |
| $1,025,000.00 | $1,025,000.00 |
|
Net after tax | $1,025,000.00 |
| $943,750.00 |
|
|
|
|
Difference | $81,250.00 |
|
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As you can see in this basic example, equal on paper may not be equal when all factors are considered. Sara received $81,250 less than Dave. Involving a CDFA in your case can help you understand the true value of different assets and help you visualize what your needs may be in the future. CDFA’s are also trained to consider expected growth rates of different assets. This can help you understand how a proposed settlement can look today and how it will look 10-20 years from now. We can work hand in hand with your attorney to help avoid unintended mistakes. Please feel free to give us a call no matter what stage you may be at in your divorce.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The above is a hypothetical example for illustration purposes only and does not represent an actual investment.
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