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.
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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.
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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.