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By Stacey Lau Zwicker, Vice President, Goldman Sachs Personal Financial Management
In the age of Covid-19 many of us have had the unexpected joy of spending found time with our loved ones. It’s especially true if you have college-aged kids or young adults who could work from home. This newly reorganized way of living – with each of us working in our own space and coming together to make meals – has been a journey that some of us will remember fondly.
But while some of us have developed a new rhythm of living together, these times have not been harmonious for all.
For some couples, the pandemic has put additional stress on an already strained relationship.
It seems that forcing two individuals to be together all the time can help you figure things out pretty quickly.
Some people have discovered that being with their significant other 24 hours a day (and for days on end) has been a bridge too far.
As a financial advisor, I’ve helped many clients navigate through the financial decisions in a divorce. A common problem I see is that people often feel stuck in the process – even after having made the tough, painful decision to split up with their partner. Fear of the unknown can set in, and it can take effort to move forward. And that’s understandable. In my experience as an advisor, this could be the biggest financial negotiation of your life.
One way to help you get unstuck is to have a financial plan that focuses on the future.
Having a plan can help give you a sense of clarity and control over the divorce process and its outcome. More importantly, it can help give you the confidence you need to tackle the myriad financial decisions that will impact your future.
In my experience, I have often seen spouses split duties along practical lines. When divorce happens, a couple who once shared responsibilities may now take on roles that they may be unfamiliar or even uncomfortable with.
After splitting up, each partner has to figure out how to tackle the management of his or her own finances and household, where previously this may have been a shared task. And if you’re not used to managing finances on your own, it can be an incredibly stressful time.
The initial questions come in a hurry. How am I going to make it? How much do I need? Where do I start? Making decisions in a vacuum is impossible. This is why divorce can trigger a lot of financial fears.
So how do you make the right decision when you don’t know how all the pieces fit together? You develop a financial plan. It can help you see where you are financially and help give you a glimpse of what life could look like on the other side of divorce.
Hiring a financial advisor may not be the first thing that comes to mind as you’re going through a divorce. Many people tend to focus on hiring the right lawyers. (And that’s important, too!)
But while your lawyer can go over the legal aspects of divorce (like custody arrangements and financial support negotiations), a financial advisor can help you with the financial part of your divorce.
If your financial situation is complex, it makes sense to bring in professionals to help. After all, money often doesn’t come with instructions. Not only can a financial advisor work with you (and the rest of your team of professionals) to put together a plan, but they can also walk you through some of the money decisions you’ll have to make during a divorce.
Let’s take a look at some of the ways a financial advisor can help.
A financial advisor can help you gather the information required to prepare a personal financial statement. It will list your assets and debts and help you calculate your net worth. Assets can include cash, stocks and bonds, retirement accounts, investments in real estate, your home, business, life insurance policies, etc. Debts include mortgages, car loans, credit cards and the like.
The next step is to put together a budget. How much does it cost to run your household?
If you’ve never had a budget before, this may be an eye-opening experience. Start by reviewing a year’s worth of credit card bills and bank statements – this will help you figure out your income and expenses. It also helps answer the question: Will I be okay financially?
Once you’ve prepared a personal financial statement and come up with a budget, you will have the information you need to fill out the disclosure forms for your divorce lawyer.
There are two main disclosure documents filed in divorce proceedings that a financial advisor may be able to help you with:
1. Statement of Assets and Debts
2. Statement of Income and Expenses
Your negotiation is going to be over the assets and debts accumulated during your marriage and potential ongoing support.
In a divorce, there comes a time to split your assets, which may include things like your house or investment accounts.
Whether you’re putting together a personal financial plan or financial statements for your lawyers, you’ll need to know the approximate cash value of your assets. This helps to ensure that you and your partner can come to an agreement that’s fair and equitable to you both.
When calculating the value of certain assets (say, a taxable brokerage account), there are a few important concepts to be aware of.
Cost basis is one example. Generally speaking, the basis of an asset, as defined by the IRS, is its original cost to you – or in other words, the amount you paid for that asset.
Once you know the cost basis of your assets, you can use it to help calculate the cash value of those assets. (Because these calculations can be complex, it’s a good idea to consult a financial advisor or a tax professional for assistance.)
If you’re splitting your investment holdings, you usually don’t have to figure out the cost basis of an asset on your own. Generally, your brokerage statements will have this information.
Another key concept to understand is the difference between the market value and cash value of your assets. The distinction is important because, sometimes, market value is incorrectly used as the basis when divvying up assets. Again, this is where working with a financial advisor can be helpful.
Good to know: When the time comes to divide assets, be aware that you may not be able to split everything easily. Houses are a good example. But to avoid getting sidetracked, we will save this discussion for another day.
Sometimes couples may choose to divide their assets by giving up one particular investment account in exchange for another.
One common situation I have seen is where one spouse takes the $1,000,000 retirement account in exchange for the $1,000,000 brokerage account because the other spouse said that a retirement account was “safer.”
But bear in mind that in many cases, you can’t access the funds in your retirement account without penalty until you’re 59½ (some exceptions may apply).
On top of this, withdrawals from your traditional IRA in retirement are usually taxed at ordinary income tax rates.
A brokerage account, on the other hand, is fully accessible at any age and only the gains in the portfolio are taxed.
In another example, one of my clients was offered the “pre-invested” account by her spouse.
The idea was the spouse would take the cash, and she would take the pre-invested account (an account that holds the stocks he invested in), so she wouldn’t have to make any investment decisions.
While this sounded appealing to my client initially, after taking a closer look, we found that the pre-invested account had substantial short- and long-term gains embedded in it, meaning that to convert anything to cash, capital gains taxes would have to be paid.
Divorce can be messy – mentally, emotionally and financially. What we’ve covered in this article are just a few examples of the complex financial decisions you may face in a divorce.
Another question I get a lot from my clients is whether it’s better for them to take the house and have their spouse take the retirement accounts. It depends. For instance, do you know the value of your house? Can you afford to keep the house?
These are important questions that involve a lot of different considerations (tax implications, for example). But you don’t have to go it alone. These are exactly the kinds of questions that a financial advisor can help you navigate.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC (“GS&Co.”) and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization. Advisory services are offered through United Capital Financial Advisers, LLC and brokerage services are offered through GS& Co., member FINRA/SIPC.
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