Thank you for listening! Find a transcript of this episode below.
In this episode, I want to discuss do it yourself divorce and specifically whether or not it can work. Do it yourself divorce, just to make sure we're all on the same page, means not having an attorney represent you or your spouse during the divorce process. Basically, the two of you decide to work out all of the issues together yourself and you don't involve lawyers in the process and it actually has a term also called Pro Se divorce. If you ever see the term Pro Se divorce, it's a form or it's the same thing as do it yourself divorce and a lot of people choose this process and actually, I was speaking to several attorneys recently and they said it's becoming a more and more common practice and for good reason. In many cases, depending upon your situation, you might not need an attorney.
So in this episode I want to discuss some of the situations in which do it yourself divorce can work and some little tips to help you navigate that process should you proceed with do it yourself divorce, and also just some other considerations to think about. Now, when you go the do it yourself divorce route, there are three specific benefits that I like for people to keep in mind. Number one is that it is generally a much cheaper process. Look, you can pursue a do it yourself divorce if in the base level for only the court filing fees. I'm gonna talk about that in a little bit about going to the court, but basically, you are saving perhaps many thousands or tens of thousands of dollars by doing the process yourself. Just cheaper. You're not paying hundreds of dollars per hour for lawyers fees.
The second thing, the second benefit is that it's usually a less contentious process. Now, in the context of divorce, almost everything is contentious and let's get that out of the way. But there are degrees of fighting, you're getting divorced for a reason. Things aren't working out. We got it. So when I say a less contentious process, when you go do it yourself divorce route, it means that you and your spouse can have civil conversations, and even though this is a painful process, you can work things out between the two of you in a civilized manner. Yes, there are still emotions involved. Yes, you probably aren't going to be happy about all of this, but you can talk with each other and talk to each other and therefore work things out. Also as part of that is you can split your stuff up in a reasonable way. You're not going to be spending $5,000 trying to determine who gets the blender that's in the house or the food processor or whatever else.
Then the third benefit is, or I'll just say the third, this isn't necessarily a benefit, but the third thing to keep in mind is that almost anyone who's against do it yourself divorce is an attorney and there's a reason for that is because the attorneys do not get their fees as part of the process. So, there are downsides to do it yourself divorce, and I'm going to get into those in a little bit, but most of the time it can work if you think it can work and you fit the right conditions. Now, what are those conditions for do it yourself divorce? There are some things that really should be in place, otherwise you're going to run into trouble and the money you save is not going to be worth the effort of doing this yourself, and it's probably a better, probably would've been a better solution to pursue another divorce methods.
So, I like to keep things simple. I'm going to keep it a list of three things, three conditions that you should have before pursuing do it yourself divorce. The first one is both of you should have a very clear understanding of all of your assets and your debts. Or to put it another way, you both need to have a clear picture of everything that you own and that you owe. You need to know, if you have a house, how much is the house is worth and be able to agree upon that. If you have a mortgage, if you have credit cards, if you have a 401k or a pension plan or other retirement accounts, if you have cars, if you have other assets around, you need to know what those things are and both of you need to be on the same page regarding them. If you're not, do it yourself divorce is probably not the best option for you.
The second thing is you cannot have complex custody issues. Complex custody issues are a challenge to say the least. An attorney I work very closely with who will probably be on the podcast in the coming months, specializes in complex custody cases and just from knowing her and the types of issues she deals with and the book that she just wrote on the subject, it is one of the toughest things that you can deal with as part of the divorce process, and if you have a complex custody issue, do it yourself divorce is not for you. Now, the third condition that you need to have is the ability to negotiate a reasonable agreement with your soon to be ex-spouse. Now, I didn't say you have to like your soon to be ex-spouse, but you have to both be in a position to understand and agree to something that's fair.
Now, there is no divorce agreement in the history of divorce agreements that's perfect, right? Almost never do I see two people smiling at the end of the divorce settlement and saying, "I got everything I wanted, I'm ready to go," and if that does happen, there's probably an issue and someone got cheated. Most of the time, this has to be some sort of an agreement where neither one of you are perfectly happy, but you can live with the results of the process and if one of you is trying to "win" in the divorce process or trying to punish the other spouse or has some other issues that prevent you from negotiating something reasonable, then do it yourself divorce is not for you and you should most likely pursue other methods.
So let's say you have those three things, look, you have, you understand what you own and what you owe, and the other thing I meant to say about that one is that if you have complicated assets, do it yourself divorce is usually not the right idea. Second is you don't have complex custody issues, and third is you think you and your spouse can work out something reasonable. So what do you do if you're going to pursue a do it yourself divorce? Well, what I recommend is you write up your agreement. You put it all on paper. I've seen spouses negotiate it and sit down around the kitchen table and come up with an agreement. I've seen spouses do it by email. I have a number of people that I've worked with over the years who will email each other back and forth some detailed agreements.
I know spouses who do it in any number of methods and ways, but whatever it is, you need to put it on paper and you need to work out, you say, "Hey, here's what we're going to do." I like to do things big to small, so if your biggest asset for most people is a house, second big asset is a retirement account, but if that, let's just assume for a moment your house is the biggest thing, you'd say, "All right, here's what we're going to do about the house. We're going to put it up for sale. We're going to split the proceeds 50-50," or whatever you think is right or one is going to keep the house or whatever else, and then when you come to agreement about the house, you move on to the next asset and the next asset then the next asset, and or maybe if you have debts to consider, then you go through down the line on the debts. But the point is is you negotiate something reasonable and you go through each thing and you put these items on paper and you come up with what you want your agreement to be.
Now it doesn't stop there. Next thing you have to do is you have to figure out how you're going to actually file the paperwork. One complexity about the divorce process that's really challenging is that every county has a different divorce procedure in the United States. I'm going to give you an example. I'm based in Dallas, but I travel very frequently. Dallas, where I am in the city of Dallas, there is about four to five counties within a 20-minute drive of where I live. Each one of those counties handles divorce totally differently, even though they're all in the city of Dallas or the Dallas metroplex, each county has different rules, different procedures, different judges, different processes, so that's one issue.
Another issue that's involved is they have different paperwork and so you need to understand what county you're going to file in and how to do that. Now, one, there's a few solutions that are out there in terms of figuring out the right paperwork to get. One thing you can do if you really want to keep costs to a minimum is drive to your county courthouse. If you go to your county courthouse, you go to one of the clerks at the windows and you can ask them, "What divorce paperwork do I need?" and they can point you in the right direction. Some counties actually have it on their county website, but you need to make sure you get your appropriate county's paperwork because even though the laws might apply on a statewide basis, the exact procedures occur county by county.
Second thing you need to or so one method I said is is going to the clerk. Another method potentially is going online. Now, aside from going to the court's website, you can also use one of the online divorce services. There are many do it yourself divorce services that guarantee that they'll provide you the right paperwork and it'll be filled out correctly and whatever else, and usually those services go anywhere from I've seen $150 upwards to about a thousand dollars and, if you get a reputable one, there's a lot of questionable ones out there, but if you get a reputable one, they can help you in that process and through that process.
Now, another thing you can do is either work with a paralegal or an attorney on an uncontested divorce package. Many attorneys in just about any city have an uncontested divorce pack, uncontested divorce package where it is usually a fixed fee package that you pay and they guarantee that the paperwork works or will be handled appropriately for you. So it's usually between a thousand and $3,000 depending upon where you are, but you get to guarantee that everything you've done is ... That everything that you've done and submitted is correct. Here's why this might be a good option. You might have all the paperwork, you might go to the court, you might have everything correct, you might submit it in the right way, but guess what? Unfortunately, this is a complicated process and papers can get rejected for oftentimes some of the silliest, smallest reasons.
Court paperwork, I've almost never ... I'm sure there's a state somewhere that's good, but I haven't found it yet. Almost no court paperwork is easy to navigate. It is complicated. I haven't talked about this example in a while, but the state of New York where I have lots of clients, New York, California, Texas are my three biggest but all across the country, lots of clients. But in New York, the New York paperwork is so difficult to complete. Even just the basic paperwork, I hate looking at it. It's necessary, but it is not very user-friendly. The point being is if you have a little bit of money saved aside, it can be cost efficient just to say, "Hey, we want an uncontested divorce, here's everything we've already agreed to. Can you just check over it and fill out the paperwork for us, please, attorney," and you can do that for a fixed fee.
So it's okay if you're going through a do it yourself divorce to get limited help. So that's the other thing I would say is so those are the options for filing the paperwork but just my last tips for those considering do it yourself divorce is consider getting some additional help, what I call as the sanity check. One of the most common things or the biggest things I recommend is maybe once you've come up with a full agreement and you got everything down, it can be worth having an attorney or an associate or a paralegal or me, via a coaching session say, "Hey, this is everything that we've agreed to. I think it looks good. Why don't you read over it? Give it a check and let me know what you think," and oftentimes you might see something. Someone who looks at these, hopefully for you, this is the only time you have to deal with this, but someone who sees hundreds or thousands of divorces can say, "Hey, you're missing one, two and three," or "Hey, it might be better if you consider this thing for a tax purpose," or "Hey, you're going to both end up in the same position, but maybe we should split stuff in this manner instead of the way you propose."
It can be pretty quick for someone who looks at these things all the time to figure out what the best options are. So I might say for some people, and I tell people all the time, go sit down for an hour with someone or 30 minutes with someone just to get a second opinion just to make sure that everything is okay. It doesn't mean that what you've done is bad, but sometimes it can be helpful just to have that other set of eyes. Look, do it yourself divorce, if the issues at hand are not too complicated, I'm a big proponent of it. I mean, I think you should by all means save money in your divorce. It's not for everyone and it won't work in every situation, but if you are in a position where you think it can work for you, definitely start by pursuing that path.
It doesn't necessarily mean that you have to. There's options you can pursue the do it yourself divorce path and then, looks like things aren't working out the way you would have wanted them to and therefore you switch up and you do both get attorneys. But if you think you can start with the do it yourself divorce and resolve things that way, by all means, check it out because it could be a good solution for your situation.
Thank you for listening! Find a transcript of this episode below.
The most important decisions you can make, during the divorce process is, choosing a good attorney, and having a good attorney work for you and on behalf of you. One of the main questions I get with a lot of people is, is my attorney doing a good job? I have the fortune of working with attorneys, family law attorneys, seven days a week. I can tell you which attorneys are good and which are less good. Actually, even from time to time on the coaching calls, I will make a recommendation for an attorney if you happen to live in a city where I know an attorney, who is a good one. But that happens only on the coaching calls.
If you don't have a good attorney yet and you're looking for one, I'm going to record an episode on how to choose ... another episode on how to choose an attorney. I already have lots in the archives. But I can also help, sometimes, on coaching calls, help you figure out, hey, who are the best two or three attorneys near you that can help you through your divorce process.
But the subject of today's episode is for all of you who already have attorneys, are they doing a good job for you? What I want to go through is I want to give basically four characteristics that pretty much every great law firm, in general, but particularly during the divorce process, has when it comes to an attorney ... and providing a good service. I want to go through these four things that you should be looking out for, and asking yourself if they apply to your attorney and to your case. If they don't, you need to think hard about what the best way is to proceed for you.
So, here are the four things. The first is your attorney advocates on your behalf and creates a good game plan for your case. The second is that they provide responsive customer service. The third is that there are no surprise bills that come due for you. And the fourth is they help you through the case closing process. I'm going to jump in and discuss each one of these four things in a little bit more depth.
Let's start with part one, is that your attorney advocates for you and executes a clear game plan for your case. Well, what does that mean? Well, I think 100% of the people that are listening to this want ... if you have an attorney, you want your attorney to be in your corner. Simple as that. And a lot of times, you will say, "Hey, I don't think ... " and here's the phrase that I hear far more often than I should is they say, "I don't think that my attorney is fighting for me." And that's unacceptable. When you pick an attorney, you're hiring that person, you're paying them a lot of money, and you want them to feel like or that they're fighting for your best interest, and getting what you deserve as part of this process. You want your attorney to set you up in the best position possible for your future.
Sometimes ... you know, I say all the time, your state laws vary and what your attorney can and can't do, in certain situations, can be very different, depending upon your individual circumstances, what's going on in your case, what the law says, et cetera, the particular dynamics. But, one of the most frustrating things I hear is you'll say, "Hey, I brought this up to my attorney, and they ignored me." Or they said, "It won't work," but didn't explain why. Or they said, "Well, I should just do this." And you don't want your attorney ... it's okay if you suggest something that might be outside of the course of the law, or maybe incorrect, but you want your attorney to at least understand your position on certain items, and make sure that even if you are presenting something that might not be logical or might not be in your best interest, that your attorney sits down and explains, "Hey, John ... Hey, Jane, here's ... I understand your concern. I understand what you're getting at, but here's why the law says otherwise." Or, "This is what the judge says." Or, "Here's why I don't think that's the best example in your case and here's a better solution for you." You always want that person to be advocating for you and on your behalf.
The other thing that's very important as part of this advocate process, is you want your attorney to have a clear game plan for you. One question I ask ... or I encourage you to ask every attorney in every initial consultation, or even if you've already hired that person, you should say, "Hey," ... this is a very important question. You should write this down. "Given what you know about my case, what do you think are the range of outcomes that I could be looking at?" And what does that mean? I'll say it again.
I'll say the question again, then I'll get to what I'm getting at. "Given the circumstances, and the facts of my case that you know now, what do you think are the likely range of outcomes, based on your experience?" And here's what we are going for. The question is, is your attorney should be able to say, "Hey, based on the facts of the case, you'll probably get about ... between 40% and 60% of these assets. The exact split may be a little bit different. I think your child support will come in around this amount. Your spousal support will come in around this amount. Here's probably how the custody will work itself out. And ultimately, here's what the court will likely say, if we were to go in front of a judge. And so, the goal is, is given this information, I think this is how we should proceed through the case and negotiate and get what you deserve." I think this is the best option.
If your attorney doesn't explain something like that to you, then that's a real problem. You should have a very good sense of what your game plan is, at all times throughout your case. Now, the game plan doesn't have to be fixed, but you should know, from the very first appointment, what that overall strategy looks like. That strategy certainly changes as the dynamics on the ground change, and certain tactics pop up, and whatever else. But, if your attorney doesn't have a clear game plan for you, then that can be problematic. Sometimes, the game plan is we're just going to have to go to court to deal with some of these issues because the spouse is being unresponsive. Other times, the game plan is ... actually, sometimes the game plan is ... and I have this with a lot of people that I work with ... is, I don't know what the game plan is quite yet. Here's what I know, is we know that there's these assets thus far. We need to get more information. So, the game plan for now is we're going to subpoena, or request, a bunch of additional information, and once we have that information, we will have a much clearer picture of what we should be asking for, and I can update you with more then.
There could be other game plans in between, that are very specific, that say, "Hey, here's what the state laws are. This case is pretty clear cut. This is what we should get to, and ask for, and as long as everyone's reasonable, this is what you should probably end with at the end of this process." Your attorney should have some form of an answer for that question. They should be, at every step of the way, helping you get to that position. So, that's enough on number one, which is advocating and executing a clear game plan for your case.
The second thing is providing responsive customer service. What do I mean by that? Responsive customer service really just boils down to some very simple things that bad attorneys don't do. Very simple, is they should be returning your phone calls and messages within a timely fashion. I usually say within 24 hours. Even if it's to say, "Hey, I need some more time to look into this." But, I know ... and I hear from you ... attorneys that do not reply to you for a week or two at a time. That is unacceptable under any circumstance. For most of the people I work with closely ... and I try and practice what I preach ... you'll hear from me within the hour, or certainly within the day. If something's urgent that comes up, you call me immediately and I'll try and stop whatever I'm doing to help you, if I can.
Your attorneys should be doing the same thing. We're all busy, all trying to help you, but if you have a question, and you say, "Hey, here's my list of questions," they should be able to say, "Hey, let's schedule some time later this week to talk about it," or they should reply to that email, or they should have an assistant say, "Hey, these are the things that you should ... that we'll get back to you with some answers soon."
The other thing they should be doing is they need to be keeping you updated with deadlines. The legal process is filled with deadlines. Courts or documents that you need to submit to the court, or depositions, or requests for information, or any number of things that you should be thinking about, you need to be keeping track of those and keep updated with those items as things go along.
And the worst thing that can happen is ... actually is ... I hear this from time to time, is there's attorneys out there that won't tell their clients that there's a big deadline coming up. Or, they'll tell you the day before. So, I'll have a client say ... we'll be speaking on a Wednesday, and then on Thursday, they get an email that says, "Hey, on Friday, we have a big court date." And that is unacceptable. You need to know ... these things are scheduled, oftentimes, months in advance, and you should know months in advance, or weeks in advance, or as soon as possible, what deadlines you need to mark on your calendar and be prepared for.
And the other thing, when it comes to responsive customer service, is just keeping you informed on what's going on. Now, unfortunately, the divorce process isn't just a continual step-by-step thing, in most cases, and there's often gaps of weeks, sometimes even months, between things that happen. That's okay. But, you need to know what's going on. One of the best attorneys that I know in the country, that I work with, who's based in Florida, in Orlando, he does this cool thing. At the end of each month, he goes through every case that he has open, and he sends a short video, two minute video that he records at his computer screen, and says, "Hey, John, just want to send you a monthly wrap-up. Here's what's going on in your case. We did X, Y, and Z, this month. Next month, here's what you should expect. Just wanted to make sure that you keep updated." Two minutes. That's all he sends, even if nothing's going on, but if something's happening, or whatever, he can just say ... just do a quick check in, just to know that he's still thinking about you and your situation. If there's a lot more going on in your case, then he'll record a longer video, but you always know where you stand, and you're always informed on what's going on.
Now, speaking of staying informed, we're going to switch to point number three, is that you don't get a surprise bill. This one is one of those shockers. I know attorneys who will rack up ... if this has not happened to you, I guarantee all of you know someone who this has happened to ... is you pay your retainer, and the retainer gets exhausted, and the attorney keeps working for you for a while. Next thing you know is you get a bill for $17,000, or $24,000, and no explanation happens. You're looking there, and you're like, what ... you're just dumbfounded. It's like, where did this bill come from?
I know a lot of attorneys who might lure you in with a, "Oh, we'll just pay a $5,000 retainer and we'll get working," but that $5,000 lasts a week and a half, and then they start asking you for a lot more money. And then I also know attorneys who say, "Hey, you're going to pay me $25,000 up front." Guess what though, there's not going to be a surprise bill. We're going to get this done for $25,000. It might take a week. It might take two years, but you know, there's nothing that ... there's not going to be any surprises. If it only takes a week, you're going to be happy, 'cause you know that the exposure wasn't ... you know, you paid $25,000 for a fast week, but if it takes longer than that, you already know that things are good. But, in any case, they communicate very clearly the cost of what is going on, and you're never in shock when you receive a bill.
Doesn't mean that this process going to be cheap. I was having dinner with an attorney I work closely with, a few weeks ago. And she told me that she has a client that has a very complex custody battle, that was over a million dollars in legal fees. So, it's not necessarily going to be cheap, and hopefully you're not going to spend a million dollars in legal fees, but sometimes it is necessary. But, there were no surprises and believe it or not, this person who spent a million dollars in legal fees is one of the happiest clients that can exist because they were able to get what they needed out of the divorce process. It was a long and complicated battle. There were no surprises. It was going to be expensive. But, it was what it was.
And while I think about billing, as well as the other thing that you should make sure you really understand, is how your attorney charges for billing. You should try and get a sense ... and it's okay if you have to ask this question after you've hired the attorney but, try and get a sense. Do they bill by the quarter hour? Do they bill every six minutes. How do they bill you if you send a quick email? Is that a 15 minute bill minimum charge? Or is it something else? You should figure out what that billing is, so you're not surprised down the line. 'Cause even a 15 minute conversation, for an attorney, who is $600 an hour, can cost you $150 for 15 minutes, which can be a lot of money. And that adds up. And so you want to make sure you maximize the time and the interactions with your attorney.
And finally, the last thing you should be thinking about, and what a good attorney will do for you, is help you out through the case closing process. This is very important, which is just because you sign a divorce decree, doesn't mean the divorce is over. I talked about this on previous episodes, very recent previous episodes. It can be very tempting to just put on the brakes and ... I wish you could see my hand motion, but pretend like your hands are clean, and you can move on.
Unfortunately, it's not that simple. There's a lot of stuff that has to happen after the case is over, or at least after you've signed the divorce decree. And there's a lot of assets that have to move, custody schedules, support that has to be paid, et cetera, et cetera, that need to be documented and done. Every great attorney that I work with has a very specific case closing process, that is quite robust and substantial, and probably has 30 or 40 things on it. And they will help you still through that case closing process, and then make sure that all of the things that you were supposed to get as part of this process, actually happen. And if there is an issue ... and sometimes there are ... that you get those resolved, and so you're not stuck, years down the line, saying, "Hey, wait a minute. Wasn't I supposed to do this or that?" And I actually have some people that I do coaching sessions with, who will say, "Hey, three years ago, I signed this, but I never got this asset. What do I do?" And we have to walk through how to make sure we get those things done. But, the important part is, is all of these things can be resolved right after you sign the divorce decree, so you should be paying attention to that very closely.
So, four things for you to remember. That your attorney advocates and executes ... sorry, I should say advocates for you, and executes a clear game plan for your case. The second thing is that they provide responsive customer service. The third is there's no surprise bills that pop up as part of the divorce process. And fourth, is they help you when the case is closing.
Thank you for listening! Find a transcript of this episode below.
In this episode, we're talking about a major tax change to alimony coming in December. And I wanna go through what's happening, what you need to know, and how you need to plan for it. And why this could apply to your divorce if you are thinking about getting divorced this year. So at the end of 2017, the Tax Cuts and Job Act passed. This was right at the very end of last year. And there were a lot of different tax changes that occurred to many people. This was one of the biggest tax bills that passed. But, there was a small provision in there that affects alimony. And this small provision can affect many of you in a big way. And so what happens is that certain tax benefits in divorce are being eliminated effective December 31st, 2018. And this is the biggest change in alimony in about 75 years or so. And many people have forgotten about it.
As it is today ... Or actually, I'm gonna tell you what's happening. What is going to happen is from a tax perspective, alimony is going to be treated exactly the same way that child support is. What does that mean? It means a person who pays alimony will not get any tax benefits for paying alimony. And the person who receives alimony will not have to claim that alimony as income starting next year. Now, that is what happens on January 1 of 2019. What happens today? Well, if you get divorced during 2018, there are some important things that happen from a tax perspective. If you are the person paying alimony, and I know many of my listeners are the ones who are going to be paying, then you get to deduct that money from your taxes each year. So, if your income ... And I'm gonna give you an example in just a moment. And conversely, if you are the person receiving alimony, you have to when you file your taxes each year say, "I've got X amount in alimony." And you have to pay taxes on that amount just like it is income.
Now, here's why this is a big deal. And I wish more people were talking about this. The big effect of this is that there is less incentive for someone to pay alimony. And I'm going to give you some examples so we can work with some easy to understand numbers. Let's say someone is going to be paying $10,000 or a little under $10,000 a month. But, we're gonna say $100,000 a year in alimony over a 12 month period. So over one year, they're going to be paying over $8,000 and some a month in alimony. I'm using $100,000 total just to make the numbers very simple. So, someone's paying $100,000 in alimony. That means that person can deduct from their taxes $100,000 in income. Which means they have a substantial tax savings on their income each year. 'Cause they don't have to pay taxes on $100,000 of their income. It's a simplified explanation. And the reason that's beneficial for them is when they are in a divorce situation, that gives them an incentive to pay some of that alimony instead of purpose structuring a settlement in a different way.
But, here's what happens starting January 1 of 2019. That same person who was paying $100,000 in alimony will not get that tax benefit anymore. And so, if they were going to think about what their divorce settlement looks like, that person does not get any tax benefit for paying that $100,000 a year. And now this is only if ... And I should bring up a very important caveat. It depends on when your divorce decree is signed. If you sign your divorce decree this year, then you will still get the tax benefits if you are the person paying alimony.
And if you sign the divorce decree starting January 1 of 2019 or anytime beyond that is when the law changes. And the tax rules change. And so that same person who was paying $100,000, or who was willing to pay $100,000 a year in alimony, may no longer be willing to make that same commitment. Because they don't get any tax benefits for paying that alimony amount. Now, it could be depending upon who's listening. Some of you, we could be talking about $10,000 a year. Others of you, we could be talking about $100,000 a year or a million dollars a year. I have a wide range of listeners in terms of the incomes that you all have. But, regardless of your income, it will affect most of you in one way or another.
Now, here's the reason this is extra important. So, basically what happens is the person who would be paying alimony will at least try to pay less alimony in the future. The reason that's unfortunate is according to the census, 97 percent of the people receiving alimony are women. And so, that will disproportionately affect many of the people listening who are facing or who would in theory be getting alimony. Now, it doesn't mean you should panic. It doesn't mean that you're screwed, or you should get upset and worry, or whatever else. There are many ways around this issue and ways to still get to a good position. And I'll get into some of those. But, you should be aware that things are changing. And things are changing in a big way. And you need to be cognizant of the change.
And one of the things that's very important about this is timing. And this is why we're putting this episode now in August. Because there's only a few months left in the year. And so, if you are facing divorce and you're in a place where ... Maybe you're in the middle of divorce. Or you're in a position where you think you can get this wrapped up before the end of the year. Then this is something that you should consider, because it can help with the negotiating process. If you're already in the middle of the process, great. Now, if you haven't filed for divorce yet ... I'm never one to even endorse divorce, but this is one of those times where you need to decide and think hard. Is now the time to file divorce and get this process going? Because I think I may be better off given what's happening with the alimony rules.
And I'm gonna look at this from both side's perspective in a little bit greater detail so you really understand the consequences and what we're getting to. And the reason when you hear this episode this is particularly important is we're in August as I record this. Some of you maybe listening to this later down the line. But, many states have some version of a cooling off period when it comes to divorce. And what that means is is from the moment you file divorce to the soonest your divorce can be over, depending upon where you live, can be two or three months in some cases. Because that's what the state requires. So, some states will say, "All right. Well even if you agree to 100 percent of the issues in your divorce, it'll take you 90 days before we'll sign off on a divorce. Because that's what the law says." Or some states, it might be 60 days. Or other states, it may be 30 days. I actually have a blog post if you type in quickie divorce. There's only a handful of states where it actually can happen reasonably fast.
But, given that we're in August, some of you August, September, will be the last chance you have if you are in the position to take advantage of these issues. Now, if your divorce process is already commencing. Some of you, it's been going on for many months. Some of you many years. Well, you're actually okay. The real goal would be in your perspective, in most cases, will be to wrap it up before the end of the year to benefit from these ... before the tax law changes.
And why all of a sudden this big tax change? Why did this happen? Well, the simple answer is actually a lot of people were cheating on their taxes. Not saying a lot of you were. But, what happened was there was a multi billion dollar gap every year according to the IRS records of people who were paying for divorce ... Or I'm sorry. So, there was a multi billion dollar gap. So, billions of dollars people were reporting that they were paying in alimony. But, a lot of people weren't saying they were receiving alimony. And therefore, could hide or not have to pay taxes on that money. So the IRS said, as part of the tax bill, that we're gonna change the law. And so, no one's going to get a tax break. And therefore, no one can cheat on alimony.
And so, what I wanna do in this episode .... It's gonna be a little bit longer than the normal ones. But, I wanna go through the scenarios depending upon who you are. And just some things to think about. All of this is complicated. It just is. And it depends on your individual circumstances which decision is best for you. There's no universal right or wrong. Ultimately you should be consulting with maybe an accountant, maybe your attorney, maybe with me. And we can think through what makes the most sense for you if you have these options on the table.
So, I'm gonna start with the person who is paying alimony. If you were the person paying alimony, or will be paying alimony as part of the divorce process, or spousal support or maintenance. It just depending on what state you live in what they call it. It is in your best interest from a tax perspective to wrap up the divorce before the end of the year. Because every dollar you pay in alimony for now and forever in the future, barring some sort of major unexpected tax change, you get a tax benefit for paying alimony. Simple as that. You'll pay less in taxes at the end of each year if you pay alimony. I'll give you a very simple example. If you're paying $1,000 a month in alimony, you get at the end of the year $12,000 deduction in your taxes. Now, if you don't finalize your divorce until sometime in 2019 or beyond, you no longer get that benefit. So for most of the people who are paying alimony, this might be a good reason to start that process.
Now, if you're the person receiving alimony, or will be receiving alimony. I know that one of my most popular videos with many, many thousands of views is on stay-at-home moms and divorce advice for stay-at-home moms. Which is one of the most common populations that I work with and people I get to help. And now some of you, I know from talk to you, might be panicked at this point. But as I said before, don't panic. The situation's actually more complicated if you're the person receiving alimony. I'm going to go through a few scenarios. A few things and notes for you to think about.
Now, if you're negotiating ... Let's just give you an example. Let's say you're negotiating or thinking about getting about $2,000 a month in spousal support as part of the divorce settlement. And you think you're gonna get this down in 2018. But for whatever reason, your divorce isn't finalized this year. And you're gonna be looking at 2019. Well actually if you still get $2,000 a month in 2019, you're in a better position. Because you don't have to pay income tax on that $2,000 a month you would have received. You're better off than you were before. If you get that same amount in pure dollar terms. Hope that makes sense. So, if you get divorced in 2018 and you get $2,000 a month, what happens is you're gonna be paying on income tax on what's going to be $24,000 a year. But, if you were in theory to get the same $2,000 next year in 2019 or beyond, you don't have to pay income tax on that. And therefore, you get to keep all of it. That's a plus.
But, there's a downside. Let's say if you were thinking about or you were probably gonna get $2,000 a month in spousal support this year. Well if your spouse is savvy or your spouse has a decent attorney, they'll say, "Well, hey. I don't get that tax break anymore for it. And you're actually gonna get less. So, we're gonna make some adjustments in terms of what we pay. And maybe we're only going to pay you $1,500 a month instead of $2,000 a month." That could be substantial. Or whatever the equivalent is for them. But, that is something that will certainly happen in the divorce scenario for some people who understand the way that this calculation works.
Now as I always said, there is a way around it. There are always clever ways to structure your divorce settlement. And I speak with you almost everyday about certain avenues you might not have thought about. But, one of them is a lump sum distribution. I've talked about this on the podcast before. If you haven't gotten the archives, you should definitely check that out. There is the ability to get as much money up front. And therefore, you won't have the tax consequences at all. Or they'll be substantially reduced. And you can ultimately, now it's a tricky calculation, but you can ultimately get to the same place you would've gotten all at once instead of doing it over months and over years. Now, you have to go back and listen to the lump sum distribution podcast episode, which is in the store, to understand all the mechanics of that. But is a very good solution, one of several, that could work for you.
So tax law or not, depending on your situation, you could still end up in the exact same place you would have if you structure things the right way. Ultimately, this is a complicated issue. I just wanna bring it up and make you aware of it. There's state laws you have to deal with. There's tax laws you're gonna have to deal with. There's just the divorce process you're gonna have to deal with. Certain states are considering different measures to counteract these changes.
And ultimately, if I were to say anything, you need to bring these up with your attorney. Bring these up with me. Bring these up with your accountant. If you don't have an accountant, this would be a good time to pay for a one off consultation with an accountant. It's interesting. Definitely bring it up with whoever you are working with. I know some very expensive and otherwise very good attorneys who have not said a word about this. Or who were less informed. Or have not brought it up with their clients. It's not because they are bad attorneys. They just have other things going on. One of the things you need to do is bring it up and take charge yourself.
I also know some great attorneys who have called all their clients and are saying, "Hey, here's what we're doing. Here's what we're thinking about. Here's the tax law change. Here's how it could affect you. Here's how I recommend we proceed to either get this done or delay it." It really just depends on your individual case. But, one way or another if you have not had this conversation with your attorney, I strongly suggest that you have it. And also, feel free to reach out to me. Book a coaching call and we can walk through your scenario in a half hour or so. And get the important details with you.
Just some last messages. I wanna reiterate multiple times during this episode, is it's not the end of the world if you don't wrap things up this year. And for some of you, it's just not going to be feasible to wrap up your divorce this year. You might not have started in the process. Maybe you're still gathering information. Or any number. It's not right for your family, or for your life, or for any number of things. And you're still doing your research. It's okay. You will come out through the other side. I'll still be here next year. And we'll still be coming up with good solutions to help you. And interesting and useful information.
But, if you think there's a benefit for you and your scenario to get things done this year, this is a ... We're kind of at crunch time. And this is a good time to really start getting the ball rolling. And making the important solutions and decisions that you need to be making. So, you end up in the best place possible for the long term.
In this episode, I want to discuss what happens after you sign a divorce settlement. The past month has been one of the busiest I've had in a while and the end of the year is looking to continue down that path. You know, as I've mentioned on a previous episode, the tax laws regarding alimony in divorce change in six months, and so that's creating a lot of pressure for people to get their divorces wrapped up before the end of the year, because there's often tax benefits to both sides, for wrapping up this year instead of delaying a year when the law changes in a big way.
If you don't know what I'm talking about, be sure to listen to episode 170 for some of the details and I'll be discussing it more in future episodes. But one of the things that's happened over the past month or so is that a lot of cases I've been working on are wrapping up, which is a bittersweet feeling for me.
I'm of course always happy that people are finishing their divorce and they get to move on with their life. But also, I feel a little bit of sadness because I get to work closely, closely with you during the process, during a tough time and then, many cases, we part ways and we don't have to speak with each other any more, which is also fine, but I do very much enjoy working with you. It is the nature of what I do.
And one of the things that a couple people have mentioned as their cases have wrapped up and they said, "Shawn, you don't really speak much about what to expect after the settlement's assigned. What should I be doing?" And I want to provide you some guidance to that effect. Now, of course, it varies for everyone, but I do want to outline some of the details of the divorce process once you have that settlement signed.
Most of you are going to go through the process where you negotiate a settlement and you sign the settlement, versus where a judge makes the final decree in terms of who gets what. Now, some of you do have to go that way, particularly in the tough divorces, but I expect most of you will be negotiating and signing some form of settlement.
And so what does that look like? And then what do you do afterwards? What kind of things should you be thinking about after divorce? One other thing I want to bring up is I have a, I think it's a seven or eight part series on choosing a financial advisor and financial topics you should know after divorce in the quick start guide. It's in the store. It's part of the full archive of the podcast. That might be something for you to check out because that is some critical information.
I mean, it's hours of information just of like basic financial concepts, how you choose a financial advisor, how do you know what to look for, how do you make sure you make the right option? But anyways, one of the things I want to talk about is, so how does the settlement process wrap up and then what do you do afterwards?
Now, for some of you, your settlement process actually might occur in two phases before you get to the settlement agreement. There's the part of the settlement that I might call the term sheet, which is ... in this part of the settlement, you outline basically everything that you want and your spouse wants on a sheet of paper or a few sheets of paper, without really legal terminology in there.
The way to think about the term sheet in a way is like, if you ... and I've had some clients do this, if you and your spouse, were to negotiate by email and you say, "I want this house," or "I want the house, you can keep this car, I want this car, we're going to split custody in this way," but you just go back and forth by email.
And then you say, alright, here's the final email with everything that we want. And you say, okay, good. That's the kind of the term sheet part of it. And what you do with that term sheet, I call it, because that's what you use, that's what you call it in the investing world. You say, all right, we have a term sheet, let's make it legal.
And so the term sheet is here's all the details that we've agreed to, and then you take it to your attorney and say, "Can you please draw this up in the appropriate legal framework so the court can sign off on it?" And so, for some of you, that's the first phase. Now, not everyone goes through that step of negotiating a term sheet first. Some of you go straight to the actual legal settlement document.
In which, you're going to get to this document in one way or the other, but sometimes it's just depending upon your process, you go through the term sheet phase first. But when you get to the legal documentation, this is when the attorney drafts up exactly what each of you is getting.
And the legal documentation, you're going to really want to pour over every word, every phrase, every sentence in this document to make sure that it not only matches what you agreed to, but also is what you want. I've seen cases where people sign settlements and they don't read it closely and you go back a few months later and you look at it and you're like, "What did that paragraph mean?" Or, "That's not what I wanted it to say. I thought it was supposed to be this," and that can easily be avoided by studying your settlement in the first place.
And let's just say you've gotten through those two phases. So you've got your term sheet, you've gotten a settlement and everything is wrapped up and you submit the paper to the court. That's an important step three, remember, just because you signed the settlement agreement ... This is an interesting topic that I actually will get into now; I didn't anticipate talking about it now.
So depending upon what's going on, you can sign and agree to the settlement agreement and sign it, have everything done, but not submit it to the court. And if you don't submit it to the court, you will never be divorced. But there are reasons sometimes that you might not want to submit that settlement agreement to the court and you might want to delay. Now, there's many moving parts when it comes to delaying, particularly with the tax law changes and other things.
But, if you wanted to delay, you can, and I'll give you reasons that people delay that come up pretty regularly. One is for tax purposes for filing jointly. So let's just say, you know, we're getting to the end of 2018 as I record this and, you know for tax purposes or you think for tax purposes, you want to file just one more time as a married couple because it makes sense for you. I know plenty of people who will negotiate their full settlement, sign the paperwork and not submit it to the court and just say, "Hey, we'll submit it to the court in 2019," the next year. Because for tax purposes, it'll save them many thousands or tens of thousands of dollars.
I've had some lesser common reasons, so one of my favorite reasons, I had a client who I'll just say lives in a town with one golf course and in order to keep their membership active at the only golf course in town, they wanted to stay one more year on the married membership because as soon as they became a divorced couple, they would be doubling their membership dues.
And if you know anything about golf courses, those dues can be in the tens of thousands of dollars. So to save one more year playing golf, they decided to save some expense. They decided to keep their membership, or themselves divorced, or excuse me, I should say, let me restart. They kept themselves married until they renewed their membership as a married couple for one more year, so they could save up the extra money for the golf course and the increased golf dues they were facing.
There could be any number of reasons that you may want to delay your divorce. And so, some people may do that, but you also need to keep in mind that if you have not submitted the paperwork to the court, you cannot get divorced and you should not be making other major financial decisions until you know exactly what is planned. And I'll give you an example of why that's a big deal.
I have a client who needs to ... I actually have several people in this category, who need to refinance their home. And as part of the refinancing process, the first thing the mortgage lender says is, "Hey, where's the paperwork that says you are divorced?" And so, they will ask for, that court signed, judge signed, county signed document that says I am officially divorced before they can make any major financial moves.
But let's say you submit the paperwork and you have everything in the court and everything is good to go. What do you do? Well, you wait. Unfortunately, just because you've signed the paperwork, just because you submit the paperwork, still doesn't mean you're divorced. And depending upon where you live, it could still be many, many months before you are divorced in the eyes of the law. I'm going to give you an example.
I spend a lot of time in New York, in New York City, and have several clients there. Some cases, this is crazy, even as I think about explaining it, you can file for divorce and submit the paperwork in August, so the eighth month of the year, and I'll tell you why this is relevant in just a second. We can file the paperwork then. You can get through the end of the year and not have official divorce paperwork.
I've had cases where someone files paperwork and August and they don't get the divorce paperwork until February or March of the next year. And because the New York court is so backed up and there's so many cases and not enough judges and not enough resources, unfortunately, in many cases, that it takes the court six months or can take the court six months to officially recognize the divorce.
Now, of course, they know that they'd be causing a lot of trouble for people if the divorce didn't go through until February. What happens is the New York court is so busy and they understand how much turmoil that could cause is they will backdate the divorce papers oftentimes. So if you file for divorce in August and they don't get to it until February, they'll say, "Hey, sorry, we just got to it. But because you filed it an August, we're going to consider you legally divorced as of December 31st of the previous year."
But the point is to bring up is that just because you filed the paperwork still means you need to wait. And from a practical perspective, you've just gone through a very intense process. And even though it's not over yet, one of the first things I recommend you do is you wait.
No need to rush into major decisions. Right after you file the divorce paperwork and you submit it to the court. First thing I say is breathe. Relax. Take a week or two. Focus on yourself, focus on your kids, your family, your work, whatever you've been neglecting during this process. Now that you've gotten this major step involved, take some time to get back to normal or to prepare for the future and don't make any major decisions unless you absolutely have to. If you take some time to breathe, you will get into a position where you can think clearly about the next steps of your life and the next phases of your life and get organized and prepare for the things that we need to do and that you will need to do as you go forward.
Once you've taken some time to breathe, decompress, relax a little bit. I want to cover two main areas that you're going to need to focus on going forward. I'm going to cover these in the next episode. The first thing you're going to need to do is you're going to make sure that you get and give up everything that you agree agreed to as part of the divorce process. And the second thing you should do is update all of your accounts to make sure they reflect your new reality.
Stay tuned for the next episode. I'm going to get into those very soon and get into some of the nitty gritty details of what those two things mean.
Thank you for listening! Find a transcript of this episode below.
In the previous episode I gave you a high level overview of a balance sheet and if you haven't listened to that episode, be sure to go back and hear it because the balance sheet is one of the most important documents that exists in divorce, so I want to make sure that you get it and you understand the key details of the balance sheet. It's so important as I said in the previous episode that it's something that I update every month and have for many years and probably will continue to until, for the rest of my life. It's that important of a financial document to keep track of.
In this episode I want to discuss a little bit about specifically how you prepare a balance sheet and how you go about it. If you were going to prepare a balance sheet from scratch, how would you do that process? What do you need to know to prepare your balance sheet? Well, one thing I'll say is a balance sheet easier to produce when you ... it's easier to produce when you a computer specifically if you use Microsoft Excel. You don't need to be super fancy at Microsoft Excel, but if you know the basics of adding and summarizing columns, over the long term it's a much easier method to do. That said, you can do your balance sheet by hand on a couple of sheets of paper. If you have good handwriting and a calculator and you can keep things organized. That is a very legitimate method and people ... I'm a firm believer in doing things by hand.
I still have a lot of old schoolness in me, even though I run basically an online business, but some things like a balance sheet I still do by hand all the time. Particularly if I don't feel like updating every number, but just want to get a sensor if I'm in a meeting with a new person, I can just pull out a sheet of paper and say "Hey, let's just go through the balance sheet and we can put it together on a slider of paper just like that", but in even case you're going to want to have a calculator and what you should do if I were going to create a balance sheet from scratch is I would think about all of your most valuable things.
What are you most valuable things? Oh, I forgot to mention something important. One thing about a balance sheet is that a balance sheet is a snapshot in time, so the numbers on a balance sheet, you know I said I update it all the time, well whenever I update a balance sheet it's as of that particular day. In divorce situations usually you prepare your balance sheet as of the date of separation, but you can always update the time periods related to the balance sheet, so you have to pick a day. So that day might be June 1st. That day might by October 22nd of the previous year. That day might be today. Whatever day you pick is the day that you're going to value all of your accounts and all of your assets, that's what account balance you're going to use and when that's really important is if you have an investment account for example.
Let's just say you're listening to this towards the end of the year and let's just say at the beginning of the year the investment account had $100 in it, but later in the year that investment account made some money and now it's got $120 in it. Well if you got separated earlier in the year, you might have to use on the balance sheet the $100 number even though it's worth a $120. Depending upon your divorce situation, you have make the call as to whether you want to change that separation date. If that's even possible, like that's a big statement I just kind of slid in there, but you have to determine what day is most advantageous for you in terms of valuing assets like that, so you got to pick a day. For me I just pick you know whatever day of the month I decided to open and update my balance sheet, but something that you need to keep in mind.
Now when you're preparing a balance sheet, I was saying you need to think about all the stuff that you own. All of your assets, so if you own a house that's an easy one. Almost everyone has a bank account, so you put your bank accounts on there. If you have retirement accounts, you go through each one of your retirement accounts and list the total value of the retirement accounts and if you have a 41K, I usually write down on the line John Smith 41K, so I know what type of account it is and I'll say value, $237,556 and I will make a note as to what date I did it, so if it's June 1st, I'll just put the June 1st date on there and hopefully I said when you do it you keep every account on the same date, but you start with ... if I were to start with the assets.
Start with the house because everyone's going to have, most everyone's going to have a house. If you rent then you're not going to list it as an asset, but if you own a home of some kind, then you will put the home value and if you have a mortgage the home is a little bit tricky because you all have debt attached to it, but you have a mortgage also put the mortgage value on there and put if you have a second mortgage or something else, put that value on there as well and that way you can get a total home value minus mortgage and any other debt, so you can start there.
Then I say all right, well here's all my bank accounts, so I go through each one of my bank statements. I put in the amount of money that's in there, easy enough and I just list out each account, who's name is on it, so if you're doing it for you and your spouse, you should make a note as to who owns said account. So you do bank accounts. You do your house. You do any investment or retirement accounts, list every one of those.
Then you go to vehicles. You put all your vehicles. You can put ... oh other real estates, so I forgot, if you have a second home or you have a rental property or whatever else, don't forget to include that and then think about all of your other stuff. Could be furniture, collectibles, intellectual property, who knows what, but whatever that thing may be, you add it on and go from there and you add them all up. You put them nice and neat into a column. You group them by category and that way you know all of your assets. You take the sum total of all your assets. Maybe it's $100,000. Maybe it's $100 million, who knows. Likely somewhere in between there and you know the total value of your assets and who owns them.
Second thing you do is now you got to think about your debts. As I said some of you have debts. Some of you don't. It really just depends on your situation, but on the next side of the page, so if I split it down the middle. I have the left side with all my assets, the right side of the page with all my debts and so you list out every credit card you have or if you have a student loan, you list out a student loan. Or, if you have a personal loan that you have, you write that in there and you would go from that point and start working on your debts and you list them all out and you summarize your debts. I'm just going to use some basic examples.
Let's just say on the left side of the page, I like using $100 because everyone hopefully can follow $100 math. Let's say you have $100 of assets in between your houses and cars and retirement accounts and everything else. Let's say you have $20 of debt, what does that make your net worth on your balance sheet? Well your net worth on your balance sheet is $80. You're going to take all of your assets subtract out your debts and you're going to end up with a net worth of $80 and then you're going to have your balance sheet.
Now one of the things that's very important is making sure you attach the right value to the different assets and debts that you have. What do I mean? Well one thing I ask everyone. I will ask 100% of you when we prepare a balance sheet, how did you come with the value for your home? If you went to Zillow and said "Hey I typed in my address and Zillow said it was worth $357,000", I will say "Okay, thanks" and we may use that value for now, but I will say we need to get an appraisal to figure out how much this house is actually worth or I'll say you need to talk to a real estate agent to determine a much better value for this house because Zillow is not the most accurate place to go.
If you have a car and you have a 1997 Mercedes E300, I don't know if they may an E300 in 1997, but if you had bought that car in 1997 that would have been a $60,000 car. If you list that asset as $60,000 in 2018 when I'm recording this, I will say "Hey, you know that car was worth $60,000 something then. It may sadly only be worth $3,500 now", so we need to make an adjustment there and so you need to be cognizant of the actual values for certain accounts. Bank accounts are easy. You'll align again, you'll get the number on your bank account and you're good to go.
Same with investment accounts, but for any assets that don't have a clear value like homes and cars and jewelry, we will need specific appraisals for those types of assets, so just something to think about in that regard and then as I said, once you prepare your balance sheet what happens next?
Well you have to understand the information. Look at it. Make sure it all makes sense. Ensure that it meets your expectations or maybe there are some surprising things in there, which happen. The second thing is you have to really internalize your balance sheet, particularly when you're going through divorce and you have to think and what assets are most valuable for me to keep, or what do I want to keep? What assets do I not want to keep? What do I want to give away? How do we handle the debt situation?
So I've worked on many a client who had debt and we had to write in the divorce agreement we're going to sell you know if I were just going to toss out an example. Let's just say "Hey we're going to sell the house, the proceeds are going first to pay off the outstanding credit card debt" and then second whatever remains after we're going to split between us 50/50. That something that we start thinking about, but we got to start thinking about "Hey, what's the best settlement that we can get for you in that situation?" I'll give you a case that I've been working on lately where there were a lot of real estate properties, but in this situation the person who was determining their settlement wanted all the real estate, but they were going to be left with zero dollars in cash, which is not a good position to be in and I said "Hey, I understand that you're going to have all this real assets, it's great, but you're going to need to have some cash in a bank account" and so, while you might want to keep all these real estate assets, maybe left's find a way for you to get either from a retirement account or something else, some day to day funds that you have so that you can live your life normally and plan for some expenses that you're going to have after the divorce process is over.
You don't want to be real estate rich and cash poor. That's not always the best position to be in depending upon your life goals and what your immediate needs are and this person had some tuition payments coming up and so they were going to need the cash one way or the other. Trying live off the cash from the rental income plus save up enough for tuition, it just didn't make financial sense and so, that's one of the listings that we can look at. If you remember the previous episode I mention that we split up the assets and we said there's $100 in assets total and one spouse is getting $80 in assets, the other is getting $20 in assets. Well if you look at the balance sheet you can start to figure out, well maybe that actually makes sense given their situation or maybe that's a terrible deal and we need to make some adjustments, but when you prepare your balance sheet correctly you can quickly and easily identify all of the things that you need to know in a very usable format.
The balance sheet is meant to be a very simple asset and simple analysis I should say for you to review and have a clear picture of how your finances will look and so you use it all the time to understand hey, if this scenario happens and we adjust the balance sheet, does that leave me in a good position? That's a lot. The balance sheet I could talk about for a lot of time and the ins and the outs and it's actually one of those things that differs so much between each individual person. It's hard to sometimes cover all the different nuances of a balance sheet, but you know if you Google balance sheet you'll find some details on it yourself, but I want to give you just an overview of kind of what it is and how to start thinking about it and how you can prepare yourself on a sheet of paper and it's something that should be at the forefront of taking control of your life both during the divorce process and afterwards as you go through this time and as I said, it's something that we work with with 100% of the clients that I get to work with as we prepare that balance sheet so you always know where you will stand financially during and after the divorce process.
Thank you for listening! Find a transcript of this episode below.
We're almost 200 episodes into the Divorce and Your Money show. There's a lot that I've covered, but there's still a handful of topics that I haven't gotten a lot of depth on. Sometimes you might notice that there's a little bit of a gap between recordings, and that's actually just simply because I'm working with you. So sometimes, particularly on busy weeks or sometimes busy months, I don't always get to record a ton of helpful episodes. But in this one, we're covering one of the most important topics that I can't believe I waited so long to cover.
This is something that ... This topic is something that we do with 100% of the clients that I work with on the ongoing coaching packages. Now, in a coaching call we can't do this topic, but anyone I work with longer term throughout their divorce process, we start by what we're going to cover in this episode. And, I realized I haven't really explained it in depth to you and why it is so important. Actually, what we're going to talk about is a financial document that is so important that I do it myself and check mine every month. For you, we'll do it every time something happen in the divorce process. For some of my clients who I work with after divorce is over, we do it for the foreseeable future every quarter or every half a year to make sure that everything is on track.
This is to me perhaps the most important financial document that exists, particularly when you're thinking about the divorce process or even the rest of your life. And what is that? It is a document that we call the balance sheet. A balance sheet, if you work in the corporate world, has to do with .... Every one of your companies, if you work for a company or if your spouse works for a company, prepares a balance sheet or at least they should be. Basically what's on that balance sheet is all of that company's assets and their debts at a certain period of time.
What we do is we take that same concept. So if a company owns a building, for example, an office building, well, that office building gets recorded as an asset on their balance sheet. Well, let's say that company has a loan from a bank. Well, that gets reported as a debt on that balance sheet. Basically, what a balance sheet does is it tracks the value of a business over time over specific periods.
Well, one of the things that we do in the divorce context is take the explanation or the utility of a balance sheet in the corporate world and apply that to your personal finances. So, we do a personal balance sheet. That personal balance sheet summarizes all of your, either individually or as a married couple, all of your assets and your debts and puts it into one handy page. Basically we take all of the stuff that you own, could be houses, could be cars, could be furniture, it could be jewelry, could be other valuables, and we put ... It could be retirement accounts. We put all of that on a page, and then we take a list of all the things that you owe. It could be a mortgage, could be credit card debt, could be a personal loan, could be a student loan, could be some other ... could be tax payments that you have that are outstanding. We put those on the other side of the page.
Basically, what we're trying to figure out is two things. One is what does your total financial picture look like? Just very simply is if we put everything on one page, what does it look like? Then, second is as we're going through the divorce process, how do we make that as people are negotiating different settlement options and different settlement proposals, well, how does that adjust your personal summary and does that leave you in a position in the future where your personal assets and debts are in a good spot? And I'm going to get into those questions a little bit more later, but I want to talk a little bit more broadly about the balance sheet.
As I said, basically it's just all the stuff that you own and all the stuff you owe. Some people I work with don't owe much. So actually, you might have nothing on your owe side of the balance sheet. But what you do know is if you have everything you own and you add it up and every ... minus, everything that you owe, you have your total net worth. It is basically like ... Now, be very ... I'm gonna have to clarify my language with my next sentence. A balance sheet is basically like your statement of net worth with a big but. The statement of net worth or the financial affidavit that you complete is usually directed in the form of a court document or a particular format that your attorney uses.
Unfortunately, while that document is useful to start gathering the information, if you ever look at a financial affidavit or statement of net worth, they're not very usable on an ongoing basis. They are a legal document. So what we do with a balance sheet, and why it takes a lot of time to custom create these for each one of you when we work together, is we take all of that information and put it onto one or two pages so that you can easily see a quick and clean snapshots of your assets and your debts on one page. That way we can see your net worth in an immediate snapshot.
That's very important because when you look at a ... I'm going to take the New York form because I have a lot of clients in New York and one of the ... If you ever look at the New York financial affidavit, the New York statement of net worth form ... I did a calculation one day. I went and added it up because I was curious myself. There's something like, if I remember the number correctly, somewhere around 170 different individual line items that you have to go through on your New York financial affidavit.
Well, most people, even those with a super complex financial lives do not have 170 different line items that they need to keep track of. Really, the most that most people have is about 20 to 30 things in terms of accounts, and assets, and debts that we need to keep track of. If I had to just guess on average, somewhere between 20 to 30 things. Some people have a few more, some people have a few less.
But what we do is we take the 20 to 30 most important things. Sometimes if they're smaller items on there, we just lumped them into another category. But we just take those key items, put them on one sheet of paper that's easy to read, group them by asset type. What do I mean? So if you have five bank accounts, we put them into the cash grouping. If you have three retirement accounts, we put them into the retirement account category. If you have a house we might put it on its own, particularly if you have a mortgage or two. We might put just a house or a real estate category.
Ultimately, you're going to have one sheet of printer paper that says here is all of your assets and your debts. It's very clean, very easy to understand. 100% of people find it useful. And as I said, it's something that is so important that I do my own balance sheet myself every month just to make sure that I am on track and to see how things are changing. And in the divorce process, it's exceptionally important because you get to see on one clear page where all of your assets and your debts are, how much they're worth.
And what ultimately happens is, as I was alluding to earlier, as you get to start to evaluate different settlement proposals, you get to see. So what we'll do is we'll do, you know, assuming you're a heterosexual couple, which is most people that listen to this, but not all, you will have a husband side and a wife side. On the husband side, there'll be a settlement proposal on the table. I don't know if you're the husband or the wife, depends on who's listening at the moment. But we'll put here's what's proposed for the husband on one side, here's what's proposed for the wife on the other side and we'll look.
I'm going to use some simple numbers for the sake of discussion of the balance sheet, but let's just say there's a total pot of $100 on assets. Well, if the husband is getting $80 in assets and the wife is getting $20 in assets, we might say, "That doesn't look so fair." But, actually, maybe it does. Because what if, you know, the ... But or maybe we'd say, "Actually, that is fair," and there could be a reason for that because the wife in this situation, even though she's getting $20 an asset, or an in assets, and the husband's getting 80, maybe the husband's unable to work and so he needs extra assets to live on, whereas the wife is going to have a bunch of income down the line. Or maybe this is the way that they structured a lump sum payment instead of paying ongoing support.
But, you can see that immediately when you have a balance sheet. It gives you an instant ability to understand, "All right. Here's my financial picture and here's what it's going to look like after the divorce, assuming we go through this proposal. Looking at this proposal, I think it's fair or I think it's not fair, and we need to make some adjustments or whatever." Then, after the divorce is over, you can keep updating your balance sheet every few months and you can say, "Hey, am I adding to my savings or subtracting from my savings? Are my investment accounts going up or are they going down? Is my house worth approximately what I thought it was?" You can keep refining these things to know how you're doing financially. That is the short, short introduction to the balance sheet.
So what I want to talk about in the next episode is some of the mechanics of the balance sheet, and really how do you make your own balance sheet. It's something that I do with all of you all of the time, but one of the questions is also always, you know, how do you do it yourself. I do have a handful of clients who've actually already prepared their balance sheet before I work with them, and I want to teach you the important stuff and the important elements of the balance sheet because it's going to be very useful for you going forward.
And you know, even if you don't do it yourself, you say, "Hey, Shawn. I want you to do my balance sheet," or, "Hey, other local certified divorce financial analyst. I want you to do my balance sheet," or if you find a financial advisor you like just in general that you want to work with after the divorce process over, say, "Hey, can you prepare a balance sheet for me?" even if you don't ultimately do it, you need to understand what's going on behind the scenes, or at least I would like you to understand what's going on behind the scenes so you understand why this is so important to me and why it's something that can be useful for you for literally the rest of your life. So, make sure you listen to the next episode coming out in a couple of weeks and stay tuned.
This episode will explain why most of you will want to finalize your divorce in 2018, if possible. After 2018, divorce will be even more complicated than it already is. You probably already want an efficient divorce process, but the recent changes to tax law will provide some additional incentive to move things along.
The change in tax law primarily concerns spousal support. Taxes are not a fun topic, but they are critically important to understand so you can make the best decisions for your situation. How you structure your divorce settlement can ultimately get you 20% to 50% more money and assets. For more about taxes and divorce, visit our archive.
To understand what is changing this year, we first need to understand how spousal support has worked for the past 75 years. Currently, if you receive alimony, you claim it as income and pay taxes on it. The person who pays alimony receives a tax deduction for the amount of the alimony.
For divorces that are finalized after December 31, 2018, the person who receives alimony will not count it as income. The person who pays the alimony will not receive a tax deduction. Why is this such a big deal? If you are the person paying spousal support, you get no tax benefit for paying the support, so you have an incentive to pay less. People who will receive support will probably be getting less.
These changes came from the tax bill that was passed at the end of 2017. If you can wrap up your divorce in 2018, you will not have to worry about it. However, if your divorce is not finalized until 2019, you will be affected by this change. If you are paying support, finalizing in 2018 will give you tax benefits. If you are receiving spousal support, you are highly likely to get more support if you finalize this year.
Who receives spousal support today? In a recent census, it was found that about 97% of people receiving spousal support are women. Most of them were stay-at-home parents during the marriage, or they worked fewer hours than their husbands. Although there are many female breadwinners, women are going to be affected greatly by this law.
What are your options if you find yourself in this situation? You can often come up with clever, creative solutions that will work for everyone. Here is a simple example. If you know that you will probably receive less spousal support for the foreseeable future, you can structure your settlement so that you get more money up front as a lump sum. This can help make up for the tax benefits that you will not be receiving. Look for ways to structure your settlement that will benefit you in the long term.
Many people wonder why this law is changing. There is a good reason for it. In 2017, about 350,000 people claimed they were paying spousal support, and received a tax break. However, only about 180,000 people said they were receiving spousal support (and paid taxes on that spousal support). This means there are 170,000 people who received spousal support who did not report it to the IRS. That adds up to billions of dollars of lost tax revenue.
In future episodes, we will discuss more details about taxes and how to structure your settlement. There is no need to panic, but it’s important to understand how this change will affect you in the broader context of your divorce negotiations. If you understand that you will be losing money because of the change in tax law, you can look for ways to make up for it.