Negotiating Your Future

Once you’ve got a handle on your current financial situation by developing your budget, it’s time to start thinking about the future.

What Do I Want to Keep?

In the heat of the moment, many women make rash decisions and declare, “I don’t want anything; I just want to be free!”  Try to remember that this is a “business decision” not a personal decision.  Keep your best interests in mind, when planning for the future.

List the items you’d like to have after the divorce.  This includes both assets and the related liabilities (mortgage or loan).  Be sure to bring this list when you meet with your attorney.

Also remember that the kids should be allowed to keep their own belongings.  This should never be a question.

Retirement Accounts

One thing many people forget to consider during a divorce is the value of your spouse’s retirement savings.

If your spouse has an employer-sponsored retirement plan such as a 401(k) or pension plan, you’re legally entitled to part of the balance.  However, it’s important that you protect your share.

A Qualified Domestic Relations Order (QDRO) is a court order that instructs your spouse’s pension plan on how to pay you your negotiated share of the plan benefits. A QDRO gives you protection that a marital settlement agreement does not.  Just because your divorce decree states that you have a right to part of your spouse’s retirement funds, don’t assume that your interests are secure.  Talk to your lawyer about getting a QDRO.

QDROs only apply to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). They do not apply to military or government pensions, which are governed by other laws.

Consult a financial advisor to make sure you understand all the requirements and tax ramifications when dealing with retirement funds.  You don’t want to pay penalties because some small detail was overlooked.

Future Value of Earnings

Another thing that many women forget to consider is the future value of their husband’s earnings.  You need to think about your spouse’s current income, but also consider his increasing future income, particularly when it comes to alimony and child support.

This needs to be a part of the settlement discussion, especially if you supported your husband financially while he attended college or graduate school, or while he started a new business.  In such cases, you may be entitled to a portion of his future earnings because you helped create his success.  The amount and duration of this type of settlement can be negotiated.  Don’t overlook this.

Some Questions to Consider:

What do you expect your husband’s income to be in the future?

Will his pay increase over time?

Did you help him pay for education or professional training and have yet to receive any income benefit?

What will your income requirements be in the future?

How much will your personal income contribute to your overall needs?

How long will you need income support from your former spouse?  While the kids are in school?  Through retirement?

Are you the primary income producer, and will these questions be asked of you?

Calculating Future Value of Earnings

To make these calculations, it’s best to seek assistance from a financial advisor, certified financial planner or accountant.  Your attorney also may be able to provide help with this calculation.

Because of inflation, the value of a dollar may be worth less in the future than it is today.  So, many financial professionals add up the expected future income, but then discount it to take inflation into consideration.  Once this is calculated, you and your advisor can decide whether to take the money as a lump sum or to expect payments over a period of time.

For example, if you received a lump sum of $10,000 in 2010, it has the same buying power as $7944.97 in 2000.  Looked at another way, if you were given $10,000 in 2000, you’d need $12,586.59 to equal the same buying power in the year 2000.

Protecting Future Payments

If part of your divorce settlement includes future payments, be sure to protect your interests.  Payouts that depend on future earnings can be secured by a life insurance policy purchased before the divorce is granted. You should be named the owner of the policy as well as the beneficiary.  This will prevent your spouse from changing the beneficiary. A large one-time premium payment can make sure the policy remains in existence for as long as necessary.

Tax Ramifications

Once a divorce is finalized, each party enters a new tax situation. The recipient of maintenance money may need to file quarterly estimated tax payments. Now, more than ever, it’s important to get good tax and investment advice based on your new financial situation. And once it’s all done, don’t forget to change your estate plan to conform to your new situation.

Issues related to child support bring another dimension to the issue of ongoing payments. Child support is typically neither a deduction nor income to either party. However, most attorneys will require a decision regarding which parent gets to claim the child as a dependent on his or her tax return.

Protect Yourself (and Your Credit)

As soon as possible, you should cancel any joint bank accounts and open individual accounts. Cancel all credit cards and get new ones in your own name. Close all unused credit accounts, and notify your creditors of your change in marital status.

When your divorce is final and assets have been legally divided, change names on house deeds, stocks and bonds, and car titles, as necessary. Remember to update beneficiaries on investments, retirement plans, life insurance policies, and savings accounts.  Another important task is to update your will. Check your credit report to make sure your spouse hasn’t incurred debts in your name since your divorce or separation.

Paying for an Attorney

Don’t be afraid to pay for a good attorney.  Often, women worry that they can’t afford good representation, or they shouldn’t dip into joint accounts to pay for one.  As a result, many women get the “short end of the stick” during divorce proceedings.

There are several ways you can pay for a divorce attorney.

Your legal fees can be paid out of your own pocket, or from a joint account.  Any joint account you share with your spouse at the time of divorce is considered part of the “marital estate.”  Some of this money is yours.  Don’t be afraid to use it.

Some corporations provide legal benefits for their employees.  This often works like a medical benefit, where you sign up in advance, and a small amount of money is automatically deducted from each paycheck to pay for your legal services.

You can also obtain legal aid through various community resources.

Another option is to ask friends and family for help.  Don’t let shame prevent you from asking for assistance.  To make the best long-term decisions, it’s important that you don’t skimp in the short run.  Paying for good legal representation is an investment in your future.

Stay tuned for Part 3 where we’ll include worksheets to help you track you budget and finances during and after your divorce.

Finances and Divorce, Part 1