Don’t be the ex-spouse who never saw these coming
If you’re heading towards Splitsville, you’re likely steeling yourself for some financial downsides. You may be budgeting for less income, a solo payment on a car or utility bills, and of course, legal fees. Unfortunately, chances are that more financial downsides await you—and worse, they’re probably ones you didn’t expect.
Sometimes, experts say, divorcing couples are caught off guard by simple miscalculations, like the true cost of housing or child support. Other times the surprises are the result of something far less innocent. “I deal with a lot of cases where the spouse says, ‘I was married for 20 years—and they just weren’t the person I thought,’” says Jeffrey Landers, head of Bedrock Divorce Advisors in Palm Beach, Fla., and author of Divorce: Think Financially, Not Emotionally.
There is even a financial planning designation that specializes in this complicated stuff: Certified Divorce Financial Analyst, or CDFA. While nothing can really prepare you for the emotional tumult of divorce, you can lessen the financial impact by being aware of the potential money surprises lurking around the corner.
As you and your soon-to-be-ex partner are deciding how to divvy your assets, there’s an annoying third party who may show up: The taxman, who will want his cut of the profits on anything that is sold. So while you might be counting on a windfall from the sale of you and your partner’s home or stock portfolio, you might find your actual gains are more like a trickle.
“If you take the stock, you better know what the basis is—or you could be stuck paying a huge capital gain.”
~ Financial planner Charles Weeks
“Taxes could also be owed on retirement plan assets that are transferred, especially if distributions were taken as part of the transfer,” says Sallie Mullins Thompson, a New York City financial planner. When it comes to real estate, the general guideline is that $250,000 in real-estate capital gains are considered tax-free ($500,000 for a joint return). That’s not a high bar to exceed, especially if you live in a pricey area and have owned your home for a long time.
Same tax concerns go for non-retirement-plan stocks. “Would you rather have $1 million in cash, or $1 million in Apple stock?” asks Charles Weeks, a Philadelphia financial planner. “If you take the stock, you better know what the basis is—or you could be stuck paying a huge capital gain.”
The real cost of housing
If you and your partner own a home together, you’re likely planning for one person to take over the title and mortgage on the home, or sell the place and get new ones of your own. Just keep in mind that the cost of housing is often far more than the check you write to the bank. There’s regular payments like property taxes and utilities, of course. But there are also random expenses that come up unannounced, like a new boiler or roof.
“Most Americans already spend around 37% of their income on housing, and a divorce causes the amount spent on housing to go up dramatically,” says Chris Schiffer, a financial planner in Warren, N.J. If one or both of you will be renting, you also might have to cough up a brokers’ fee and security deposit(s) on a new place. And furnishings for a second pad (it’s not like you can split the living room couch in two).
Paying for the kids
In most cases, child support is pretty standard, calculated by state formula. However, that calculation doesn’t touch the “add-on” extra-curricular activities—tutoring, sports, music classes—that can result in big additional outlays. And don’t forget the older-kid costs, like orthodontia, that may not be part of your life yet.
In many cases, support agreements end when the child turns 18, without a plan for how college bills will be covered.
Then there’s college. In many cases, support agreements end when the child turns 18, without a plan for how those often-vast bills will be covered. To the best of your ability, negotiate all this up front, suggests Landers. For the extra-curricular, he suggests figuring out a fixed amount to roll into regular child support, so you don’t have to go begging your ex every time your kid wants to take an after-school class. “You don’t want to have to submit every receipt, and every invoice, and get into arguments ad infinitum,” he says.
Does your spouse have debt? Does she pay all her bills on time? If you aren’t absolutely sure, get ready to find out. You might be on a joint credit vehicle, like shared cards, where payments aren’t being made. Your spouse might have a hidden gambling problem or shopping addiction that comes to light. Or it might turn up that they have a secret bank account or business that you knew nothing about.
Says Landers: “Maybe the spouse has been hiding money. Maybe assets that were supposed to be there, aren’t there anymore. Maybe there were loans taken out against stock portfolios or retirement accounts. Maybe there are back taxes due. I could go on and on.”
That’s the kind of surprise party that nobody enjoys.