You Work Hard for Your Money

You work hard for your money. Then you have problems with your spouse or partner. You wonder whether all your hard work was for nothing or is going to benefit the soon to be ex.

1. Know what you have. You need to be aware of what assets you’ve got. Consider making copies of every financial statement and document you can find. Any tax return, bank or retirement account, credit card statement, or estate planning document may be helpful. Clients are always surprised when these papers mysteriously disappear. If you need to have your lawyer track down the information, it can get very expensive and time consuming. Figure out whose name or names are on the real estate, vehicles, loans, and credit cards.

2. Prepare for the cost of your attorney. Lawyers charge anywhere from $175 to $350 per hour. Your attorney may bill you for every minute of their time, including phone calls or the cost of tracking down information. You can reduce these costs by preparing as much information as you can. I really appreciate it when clients come prepared and want to get involved in gathering information. Remember that when it comes to your family and your family’s facts, you are the expert.

3. Make a budget. You will need to figure out how to allocate money during this difficult time. Most clients are transitioning from a two adult household to one adult in each household. In addition, Courts in Colorado require that you prepare a Sworn Financial Statement. For your Financial Statement, you will need to know what income you are earning, what deductions are being taken out of your paycheck, what your expenses are, and what your assets and debts are.

4. Begin to plan for your new life. If you are earning a paycheck and it is directly deposited into a bank account that you and your spouse or partner share, you may want to open a separate account in your own name and have the funds deposited there instead. Just because the funds are in an account with only your name does not magically transform the funds into property that you automatically keep. But the money will be there when you need it and you probably will. Several times I have seen one of the Parties tap into a joint checking account and clean it out, leaving the other Party without any funds. Another solution is to direct your bank to freeze your joint accounts so that both signatures are required for any withdrawals. You may also want to consider closing a home equity line of credit or open margin account with your brokerage account. If your spouse abuses the line of credit or borrows against the joint brokerage account to buy investments, it makes the finances more complicated and more risky for you.

5. Watch your credit. The Fair and Accurate Credit Transaction Act of 2003 (FACTA) added sections to the federal laws to help consumers fight identity fraud. Under these laws, consumers can request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion). The official website that was established is www.annualcreditreport.com. Colorado residents are also entitled to a free annual credit report from each credit reporting agency. So Colorado residents can get a free report from each bureau annually under federal law and an additional free report under Colorado law. You want to figure out what debt is out there in your name and jointly with your spouse or partner. Since the credit reporting agencies maintain individual credit files for each U.S. resident and have not combined files for spouses, you will only be able to obtain your own credit report, which includes any joint credit accounts. Talk to your attorney about closing open active accounts and open inactive accounts.

6. Talk taxes. Many aspects of divorce and dividing property involve tax issues. Maintenance or alimony is tax deductible by the payor (one who pays) and is taxable income to the payee (one who is paid). The Internal Revenue Service (IRS) does not consider voluntary payments of alimony or maintenance to be true “alimony.” The payments must be in cash or a form of cash (check, money order). Transfer of services or use of property does not qualify as alimony. Child support payments are neither deductible by the payer nor taxable to the payee. Also consider whether you are receiving in the divorce an asset that will have appreciated. Remember when you sell an appreciated asset, you pay capital gains tax on the increase. So you will pay capital gains tax based on the value of the asset when it was purchased jointly (during the marriage) not when you received the property in the divorce. So an asset that has appreciated may be worth less in the long run than cash or an asset that has not appreciated.

There is no recognized gain or loss on the transfer of property between spouses if the property transfer is because of a divorce. If the property transfer occurs within one year after the date that your marriage ends and is related to the end of your marriage, then the IRS considers the transfer “incident” to your divorce. The IRS considers that the property transfer is “related” to the ending of your marriage if the transfer is part of your divorce or separation agreement and occurs within 6 years of when your marriage ends. If you are outside the 6 years after your marriage ends, you need to talk to your tax professional because in certain circumstances, the property transfer may be related to the ending of the marriage.

7. Secure your future. Consider whether your separation agreement or Court Orders should include having your ex-spouse carry life insurance for the benefit of the children or to cover future maintenance payments. You will also need to change your beneficiaries on your own life insurance policies, retirement accounts, and revise your will. You may be entitled to a portion of any retirement benefits earned by your spouse during your marriage. You may need a Qualified Domestic Relations Order (QDRO) (called a Court Order Acceptable for Processing (COAP) for federal government plans) to accomplish the division of the retirement benefits or pension. If you were married for at least ten years and do not remarry, when you reach retirement age, you may qualify for Social Security benefits based on your ex-spouse’s lifetime earnings, even if your former spouse has remarried or has not yet retired.