Frequently, people wait too long to plan for their financial security. This is particularly true in divorce. Men and women often get caught up in the emotional struggle of their relationship and concerns regarding custody of their children. In the divorce process, they may forget to plan for their financial future.
If you earn a high level of income, own high value assets, or benefit from a high net worth, you should consider implementing this 10-Step Financial Security Plan as part of your South Carolina divorce.
1. Start with the Experts
The most important financial step that you can take in your divorce is to consult with a financial planner, a tax advisor, and an experienced Mount Pleasant divorce lawyer before you do anything. They can explain:
– significant tax consequences from a divorce, e.g., capital gains, capital losses, deductibility of alimony, and timing issues,
– the potential costs and benefits of alternative divorce settlement and litigation strategies,
– how to restructure your personal and business budgets,
– ways to increase your income, and
– how to shelter your assets in a South Carolina divorce.
2. Increase Your Liquidity
Before you file for divorce, you should anticipate how your life may change during the divorce process and after your divorce becomes final. A good starting point is to increase your financial liquidity. The cost of litigation, time taken away from income producing activity, and increased living expenses from separated households may quickly drain your liquid assets.
3. You Get What You Pay For
Too often, people in a divorce try to “save” money by scrimping on the cost of their divorce lawyer, tax advisor, or financial planner. Shopping for the cheapest hourly rate for a Mount Pleasant divorce attorney can be one of the more financially and emotionally expensive mistakes that you will ever make. You should hire the best divorce lawyer that you can afford.
4. Pay Your Bills
Your divorce may be one of the more stressful times in your life. It is easy to become consumed by the divorce process and the uncertainty of the future. Emotions run very high. Sometimes, people in divorce forget to pay their bills on time, although they have plenty of money in the bank. Missing a monthly mortgage or credit card payment can cause damage to your credit rating, which can plague you for years after you complete your divorce. To the extent possible, you may want to put your regular monthly bills on an automatic pay basis.
5. Rely on Your Divorce Team in Settlement Discussions
Before you make or accept a divorce settlement offer, you should discuss with your divorce lawyer, financial planner, and tax advisor the potential effect of settlement alternatives on your current and future tax liabilities, income potential, retirement plans, ongoing obligations, financial flexibility, and other financial matters. Their expert advice could be critical to your financial future.
To use a simple illustration, if you are the paying spouse in a South Carolina divorce, you would rather characterize the payments to your former spouse as alimony instead of child support. You can deduct your alimony payments from Federal and South Carolina income taxes. In contrast, you cannot deduct your child support payments. Likewise, if you are the spouse receiving payments, you might want to characterize as a property division any payment that you receive during the first 12 months after your divorce. Receipt of cash as part of a property division within the first year is typically not taxable to you as income.
6. Not All Financial Assets Are Created Equa
When you prepare your financial declaration as part of your divorce, you may list a vacation home with an appraised value of a certain dollar amount and you may also list a money market account that has the same cash balance. However, the money market is almost certain to have greater worth to you. Cash is almost always “King.” The principal exceptions are typically items with a high emotional value to you.
Other liquid assets without significant tax consequences follow closely behind cash in terms of economic value. In determining the economic value of an asset (such as your house, an investment, or your business), you should consider:
– tax consequences (particularly any capital gain tax liability or capital loss that you could use to offset income subject to tax),
– costs of conversion to a liquid asset (e.g., sales commissions from the sale of a residence, investment, or business),
– the discounted net present value of the asset – as contrasted with its appraised value, and
– your needs and the needs of your former spouse in the short-term and the long-term for liquid assets and future use of the asset in question.
7. Value Is in the “Eye” of the Beholder
The value of many assets in a divorce will often depend on an expert appraisal. While there are general appraisal standards, any appraisal involves subjective analysis. And, more significantly for you, just because an appraiser says your house may be worth a certain dollar amount, there is no guarantee that you can sell your house for that price within a reasonable period of time. The same can be said for the value of your business, particularly the “goodwill” of the business. Personal property items such as jewelry, collector cars, a yacht, or antiques can be even more difficult to value objectively in the midst of your divorce.
One of the more challenging questions may be the premarital value of an asset (such as a retirement plan). Determining the premarital value of an asset can be critical since the premarital value is usually excluded from the division of marital assets in a South Carolina divorce. Be cautious and seek expert advice.
8. Be Wary of a Stock Option
One of the more difficult items to value in a divorce is a stock option. A stock option may be worth little or nothing today. However, a stock option may be worth tens of thousands of dollars at some future date. Before you decide whether you want to receive a particular stock option as part of the division of marital property, you will need an expert to advise you on the likely future value or lack of value of the stock option.
9. Insure Alimony and Child Support Obligations
When measured over time, alimony and child support payments can have a value far in excess of $1 million. If you are the person receiving those payments, you want to be certain that you will not lose that income stream if your former spouse dies. South Carolina law permits a divorce court judge to require your former spouse to purchase and maintain life insurance in an amount sufficient to pay off the remaining alimony and child support obligation if your former spouse dies. You should work with your divorce lawyer to make sure that your former spouse has sufficient life insurance to cover the alimony and child support that is owed to you.
10. Don’t Forget Private School and College Expenses
Anticipated educational expenses can be one of the more significant factors in any divorce settlement negotiations. Experts tell us that college tuition is increasing at a higher rate than virtually anything else in the economy. The cost of private school tuition in Charleston does not lag far behind.
Paying for these rapidly increasing educational expenses is difficult in the best of times and can be punishing after a divorce. It is possible for your child to emerge with a college degree, hundreds of thousands of dollars of debt, and no job. Private school or college tuition could become the “tail” that “wags the dog” in your divorce, particularly if you have several children Consequently, you should discuss this matter in detail with your Mt. Pleasant divorce attorney before you get deeply involved with your divorce.
Your divorce judge may – but is not required – to order the payment of private school and college tuition as part of child support. In deciding whether to require your spouse or you to pay extra child support for private school or college tuition, your divorce judge is likely to consider a series of factors, including: (a) the respective abilities of your spouse and you to pay such expenses after your divorce is final; (b) whether your child will be able to attend the school without additional child support; (c) the potential educational benefits of the school in question; (d) the availability of student financial aid; and (e) the ability of the child to earn money to defray some of the educational expenses.
This general outline is only the beginning of what you should do to build a financial security plan, if you have a high net worth and are facing the prospect of a divorce. For additional information, you should read my South Carolina Divorce Guide and my blog posts. If you are considering a divorce, please call me today to discuss other steps that you may want to take to protect your financial future. If you live in Mount Pleasant, Berkeley, Charleston, or Dorchester County, I would be glad to help you.