8th edition Divorce and Money How to Make the Best Financial Decisions During Divorce By Attorney Violet Woodhouse, CFP with Dale Fetherling Eighth Edition NOVEMBER 2006 Editor EMILY DOSKOW Pr oduction MARGARET LIVI NGSTON Proofreading ROBER T WELLS Index ELLEN SHERRON Cover photography TON YA PERME (www.tonyaperme.com) Printing CON SOLIDATED PRINTERS, INC Woodhouse, Violet, 1948- Divorce and money : how to make the best financial decisions during divorce / by Violet Woodhouse with Dale Fetherling. p. cm. Includes index. ISBN 1-4133-0522-9 (alk. paper) 1. Marital property Valuation United States Popular works. 2. Divorce settlements United States Popular works. 3. Divorce Law and legislation United States Popular works. I. Fetherling, Dale, 1941- II. Title. KF524.Z9 W66 2006 2006048312 Copyright © 1992, 1993, 1996, and 1998 by Violet Woodhouse, Victoria F. Collins, and M.C. Blakeman. Copyright © 2000, 2002, 2004, and 2006 by Violet Woodhouse. All Rights Reserved. Printed in the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise with- out prior written permission. Quantity sales: For information on bulk purchases or corporate premium sales, please contact the Special Sales department. For academic sales or textbook adoptions, ask for Academic Sales. Call 800-955-4775 or write Nolo at 950 Parker St., Berkeley, CA 94710. Dedication We dedicate this book to . . . Those grappling with the enormity of divorce and, thus, most in need of guidance. Our families and friends, who kept us sane through the writing pr ocess. Larry Woodhouse, for his continued friendship, and our children, Brooke and Tyler, all of whom have taught me the value of communication, negotiation, and compromise. Thank You Endless gratitude goes to our friend and colleague Karen Wenger for her expertise, long hours, and good humor in wrestling with some of the most complicated issues in this book, especially retirement benefits and investments. Emily Doskow, our editor at Nolo, who was most patient as well as wise in the way she dispensed legal and editorial acumen. Victoria F. Collins and M .C. Blakeman, who contributed so much to the earlier editions on which this work is based and who deserve recognition for their hard work, creativity, and cooperation. Special Acknowledgments To Dale Fetherling for his skill in providing organization and focus, for his gifts of balance and tolerance, and for his boundless respect for our readers A special thank you to the staff at Violet F. Woodhouse, A Professional Corporation, for its competence, integrity, and humanity and especially to my legal administrator, Tamyko Fur man, who routinely makess possible the impossible. Table of Contents Introduction: Your Financial Companion During Divorce 1 A Note on Same-Sex Marriage and This Book 4 If You Are Feeling Overwhelmed … 5 How to Use This Book 5 1 Legal vs. Financial Realities of Divorce 7 Lessons in Legal Reality 9 Your Best Strategy: Think Financially—Act Legally 15 Legal vs. Financial Stages of Divorce 16 2 Financial Realities No One Talks About 19 In Divorce, Everything Takes Longer and Costs More 21 When You’re Connected to Another Person Financially, You’re at Risk 22 The IRS Is Watching Your Divorce 23 Cash Is King 24 You’re Playing for Keeps 25 3 Emotional Divorce: Managing the “Money Crazies” 29 Reduce Stress Whenever You Can 31 Safeguard Your Sanity 33 Watch Out for Sore Spots 33 Be Prepared for Bad Scenes 35 Develop a Financially Focused Mental Attitude 37 Avoid the “All at Once” Syndrome 37 Manage the Ebb and Flow of Emotions 38 Don’t Let Financial Tasks Overwhelm You 40 4 The Hardest Part: Is My Marriage Really Over? 43 5 The Separation: What Happens When One Spouse Moves Out? 47 The Separation Date 49 Questions to Ask an Attorney 58 6 Closing the Books: What Do We Do With Joint Property? 61 Joint Account Checklist 62 Questions to Ask an Attorney 72 7 Getting Help: Who Can I Turn To? 73 Questions to Consider When Seeking Outside Help 75 Selecting Professionals to Assist You 77 8 Financial Fact-Finding: What Must I Know and When Must I Know It? 97 Advice to the Terminally Disorganized 99 If You Think Your Spouse May Be Hiding Assets 101 Don’t Forget the “Easy-to-F orget” Assets 102 The W-2 and the Tax Return 106 What About the Gifts Y ou Gave Me? 111 Financial Facts Checklist 112 Questions to Ask an Attorney 112 9 Facing the Future: What Must I Plan For? 117 Major Upcoming Life Events 118 Anticipated Financial Commitments 119 Major Goals That Will Cost Money 119 Where Does the Money Come F rom? 123 10 Protecting Against Risks to Life, Health, and Property 127 Insurance 128 Property and Estate Protection 134 Questions to Ask Your Attorney 136 11 Taxes: How Do I File and Pay? 139 Get a Rough Estimate of Your Tax Bill 140 What Status Can Be Used When Filing Tax Returns? 141 When in Doubt, File Separately 143 What to Know If You File Jointly 147 Dividing the Joint Tax Liability—Or the Refund 150 Tax Issues Inv olving Temporary Alimony or Child Support 153 Get Your Tax Agreement in Writing 154 Questions to Ask Your Tax Adviser 154 12 Property and Expenses: Who Owns and Who Owes What? 155 Who Owns What—Marital Property and the Laws of Your State 156 Who Knows What—Using Legal Discovery 159 Net Worth—What Do You Own and What Do You Owe? 160 The Difference Between Assets and Income 172 Cash Flow—Where Does the Money Go? 173 Questions to Ask Your Attorney 177 13 What Will Happen to the House? 189 Financial Versus Legal Realities 191 The House—Keep It, Transfer It, or Sell It? Now or Later? 192 Steps Toward Settling the House 192 Questions to Ask Your Attorney or Financial Adviser 224 14 Retirement Benefits: Who Gets What? 227 Understanding Retirement Plans 231 Qualified Domestic Relations Orders 240 The Legal Value of Your Retirement Plans 243 The Financial Value of Your Retirement Plans 246 Calculating the Financial Value of Plans 250 Additional Financial Factors Affecting Retirement Plan Divisions 256 The Division Decision: Now or in the Future 259 Questions to Ask an Attorney 263 15 Financial Investments: How Do We Divide the Portfolio Pie? 267 Concepts to Consider 270 Steps to a Settlement 277 16 Evaluating Employee Benefits and Stock Options 315 Employee Benefits 316 Stock Options and Nonqualified Deferred Compensation Plans 321 Questions to Ask an Attorney or Tax Specialist 330 17 How Will We Divide Debts? 331 General Rules on Who’s Responsible for Debt 332 If You Live in a Community Property State 334 Listing Your Debts 334 Marital Debts and Bankruptcy 335 Dividing Debts at Divorce 347 Dividing Debts When There’s Nothing to Fight Over 348 Questions to Ask Your Divorce Attorney 349 Questions to Ask a Bankruptcy Attorney 349 Online Resources 350 18 Child Support and Alimony: What Might I Pay or Receive? 351 Child Support—Legal, Financial, and Emotional Realities 354 Steps to a Settlement 357 Alimony—Legal, Financial, and Emotional Realities 380 Steps to a Settlement 382 Questions to Ask an Attorney 401 19 Negotiating and Finalizing the Best Possible Settlement 403 Have You Done Your Financial Homework? 404 Tallying Your Marital Balance Sheet 405 How Are the Offers and Counteroffers Made? 410 How Do Y ou Finalize the Settlement? 414 Divorce Ceremonies 416 20 After the Divorce: How Do I Get From “We” to “Me”? 417 How Do I Finish the Business of Divorce? 418 Can I—Or My Ex-Spouse—Change the Settlement? 422 What Do I Want to Do With My Life? 424 If You Find a New Love, Protect Your Old Assets … and Your Alimony 430 Ho w Can I Mov e Beyond the Divorce? 433 Appendix 439 Index Introduction Your Financial Companion During Divorce A Note on Same-Sex Marriage and This Book 4 If You Are Feeling Overwhelmed … 5 How to Use This Book 5 2 DIVORCE AND MONEY You’ve just been through the worst week of your life when the person you’re divorcing suddenly calls and demands copies of your tax returns for the past five years. Y ou brown-bag your lunch and take the bus to work so you can make ends meet while the divorce settlement is pending. One day, you re- ceive an unexpected bill in the mail. Your soon-to-be-ex-spouse charged an expensive vacation on your joint credit card, and now you have to pay for it. No … divorce is not the best time in the world to deal with money. But it may be the most crucial. In fact, making financial decisions is possibly the most important job you have when a marriage ends. How can you make the right decisions? How can you deal with tedious financial details when you’re going through such a stressful event? Unfortu- nately, it’s hard to find answers to those questions. Legal advice is plentiful, and therapists or support groups can help you through emotional upheavals. But who can show you how to make sense of your financial life? That’s where this book comes in. It explains what you must know to avoid the financial disasters of divorce. Specifically, this book draws on our years of experience as financial planners to help you understand: • what you own and owe • how divorce affects you tax-wise • how best to divide your property, investments, and other assets • what can happen to your retirement nest egg or your business when you divorce • what to do about alimony and child support • how to prepare for negotiating a final settlement, and • how to gain financial stability in your new life as a single person or single parent. Each divorce is different, of course, so we cannot promise to provide complex financial advice for every possible situation you may encounter. But we can let you know where—and to whom—you can turn in finding answers for yourself. As we see it, divorce is a crash course in managing personal finances—a course you must take whether you signed up for it or not. And the first [...]... you in your divorce Some require small membership fees for full participation • www.aaml.org • www.divorceasfriends.com • www.divorcecare.com • www.divorcecentral.com • www.divorcedirectory.com • ww.divorceinfo.com w • www.divorcenet.com • www.divorcesource.com • www.divorcesupport.com • www.divorcewithoutwar.com • www.lifemanagement.com/flyingsolo chapter 1: legal vs financial realities of divorce 17... hasten the divorce process may take care of some emotional needs, but it probably does not make sense financially Nor should you calculate your finances based on a situation or arrangement that hasn’t yet come to fruition or that may prove only temporary 26 divorce and money Women and Men Divorce and Money Throughout this book, we aim to provide an objective, professional view of money issues in divorce. .. “truths” about money and divorce, and you should refer to them any time you have to make tough decisions: • In divorce, everything takes longer and costs more • When you’re connected to another person financially, you’re at risk • The IRS is watching your divorce even when you’re not • Cash is king • You’re playing for keeps; don’t sell off tomorrow for today In Divorce, Everything Takes Longer and Costs... 10 divorce and money The following five guidelines explain the legal basics of divorce: • Most divorces are settled out of court • Generally, divorce law is local • Don’t expect the legal system (or a lawyer) to take care of you • Your future is in your hands—not the court’s • It’s easier to write laws than to enforce them Most Divorces Are Settled Out of Court You may imagine that you’ll have a divorce. .. Arendell in the book Mothers and Divorce, the woman recalled her divorce and commented, “Part of the problem was my own fault I gave the appear­ance of being knowledgeable I knew more about buying pro­ perty and bank accounts than my lawyer did, but I didn’t understand all the tax things And so I was reluctant to ask some of the things I should have asked.” Your Future Is in Your Hands—Not the Court’s The... alimony and child support payments on time Your Best Strategy: Think Financially—Act Legally Make your financial concerns the centerpiece of your divorce, and work within the framework of the law That is the most powerful position you can take If you think financially and act legally, you will be able to anticipate risks and assess your needs, before a financial disaster hits 16 divorce and money No... through your divorce In addition, several sites specialize in divorce information Typically, these sites include forums, message centers, and chat rooms on topics such as custody, mediation, infidelity, parenting, child support, debt, grandparent issues, and divorce in the military Many contain articles and books on divorce- related subjects and state-by-state explanations of the law Some can help you... several worksheets in Chapter 12 to help you  divorce and money Chapters 13 through 16 cover specific assets—family home, retirement benefits, invest­ments, and other employee benefits Chapter 17 deals with your debts And in Chapter 18, you will evaluate the likelihood of paying or receiving alimony and/ or child sup­port and in what amounts Your analyses and calculations from Chapters 12 through 18... of Divorce Lessons in Legal Reality 9 Most Divorces Are Settled Out of Court 10 Divorce Law Is Local 11 Don’t Expect the Legal System to Take Care of You 12 Your Future Is in Your Hands—Not the Court’s 13 It’s Easier to Write Laws Than to Enforce Them 14 Your Best Strategy: Think Financially—Act Legally 15 Legal vs Financial Stages of Divorce 16  divorce and money. .. Days” and are especially important if you are in the initial stages of divorce Chapters 8 and 9 help you start gathering financial data and thinking about the future In Chapters 10 through 12, you begin to seriously evaluate your assets, debts, income, and expenses Whether you are a “do-it-yourselfer” or you consult an attorney, you must figure out what you own and owe, and what it costs you and your . or hope to sell. The choice is yours. Divorce is painful enough. Don’t let money prob- lems make it worse. 4 DIVORCE AND MONEY A Note on Same-Sex Marriage and This Book In the vast majority of. 15 Legal vs. Financial Stages of Divorce 16 8 DIVORCE AND MONEY S ooner or later during a divorce, you will discover the one insight that is central to this book and to the successful outcome of. versus the financial field. 10 DIVORCE AND MONEY The following five guidelines explain the legal basics of divorce: • Most divorces are settled out of court. • Generally, divorce law is local. • Don’t