My Today’s Alerts series highlights ideas generated in my divorce financial advisory practice.
For many divorcing couples, cash is tied up in their home or retirement plans. But couples need available cash to start their lives over again. What can couples do?
As always, consult your attorney as to whether you are able to sell assets or borrow money during your case.
1. Sell your home. In many cases, selling the home is the best idea for you and your spouse to generate cash needed to start over. If you are concerned about the children’s stability, find new accommodations nearby. Your children’s stability depends on you and the people they love, not the property they live in.
Many divorcing spouses are unaware that ‘separate property’ can be used to buy out a spouse. This includes money from (or advances on) inheritances or accounts owned before marriage.
Which leads nicely into my next point…
2. If one spouse wants to keep the house, how do you buy out or be bought out by your spouse?
Refinance the home with a cash out mortgage or home equity line of credit. But be aware, you are creating more debt and payments for the future.
This option sounds simple but it won’t work in most cases because there are so many variables to consider. The couple’s personalities and goals come in play here and I see a lot of complicated agreements and include loans from one spouse to another or other “required” payments under the decree. Co-ownership might work but what about the consequence of non-payment? And what if the resident spouse wants his or her new partner to move in or the resident spouse fails to maintain the property?
If you can go down this path, it is best to refinance or take on a line of credit before settlement or even before filing. Be certain your post divorce budget can afford new debt payments, property taxes, maintenance and insurance on the home.
Remember that debt typically sticks to the asset (house) that its attached to. If you get the house, you also get the mortgage. But if one spouse can get credit on his or her own and he or she will keep the home (and can afford it), apply for refinancing only under the name and income of that spouse.
3. Sell or consign furniture, property or jewelry you’ll no longer want or need.
4. Consider a new 0% credit card or transfer your balance to a 0% card.
But beware, like a refinancing or home equity line, you are creating more debt and payments for the future.
Divorce always increases family expenses. So the increase may only be temporary.
Credit cards only work well if you can get approved. As for transfers, be aware that the credit card company will charge a one time transfer fee of at least 3%. Well, 3% is still less than the 11-25% you may be paying now. And it buys you time to determine how money and expenses will be divided in your case.
5. In the settlement, transfer highly appreciated or income generating stock, bond and other property or investments to the spouse in the lower tax bracket. Less money ends up with the IRS and more to the family in the long run.
6. Borrow against taxable (non-retirement) investment accounts. Several investment firms offer pledged assets lines (‘PAL’) with no upfront costs. This is a complex form of borrowing and, again, you are creating debt that must be repaid. Be sure you understand all implications of dividing the account, especially if it already has a PAL.
7. If you are awarded your spouse’s qualified plans like a 401(k), you (as the alternate payee) have a one time opportunity to “cash out” without the required 10% penalty, but you’ll pay taxes. You’ve got to get the steps right, or the IRS will come after you for taxes and penalties so work with an experienced financial analysts like a Certified Divorce Financial Analyst (CDFA). This works best if you will be in a low tax bracket the first year after divorce.
8. DON’T borrow from your 401(k)! If you are laid off or want to leave your job, the loan becomes a withdrawal with at 10% penalty and taxes due unless you pay off the loan. There are exceptions to the penalty (like when you are over 55) but otherwise, that’s a very expensive way to borrow!
9. When possible (and state law may not let you) and it you can avoid negotiating it DON”T agree to “split” the same expenses for the children or property. It is a mystery to me that a contentious divorce would include a provision that requires the spouses to split activities for the children or repairs to a co-owned home. When you ex doesn’t pay, what are you supposed to do? Your repairman or children’s teacher’s don’t care what your decree says! Your options include getting your attorney to request the money or taking him/her to court which, even if he or she pays the legal cost, depletes money for the rest of the family. Not to mention the time this all takes. Agree to pay for specific expenses on your own and have your ex do the same. Of note, this may not be possible for some expenses – like unreimbursed medical costs.
Be sure to review the costs and benefits of each of these options with a Certified Divorce Financial Analyst or CPA and your attorney. For CDFA’s in your area go to http://www.institutedfa.com.
Silicon Hills Wealth Management and Divorce Planning of Austin work with clients and their attorneys to help insure that financial accounts are divided in the most efficient manner possible.
Neither Silicon Hills Wealth Management nor Divorce Planning of Austin are accountants and do not provide tax advice. Please consult with your tax professional regarding your specific circumstances.
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