DIVORCE PLANNING

Thinking about the end of things is often not what people do when starting a new chapter in life. Thus, it is understandable when clients come in feeling overwhelmed when starting the process of separating from a spouse. Without a prenuptial agreement, they may have to navigate a complex division of assets, alimony, child support and business or real estate valuations while dealing with the changing dynamics of family and social circles.

It is common to seek out a mediator, collaborative divorce team, or attorney to help guide the process of what is customary and legal in your state. What they are less likely to talk about is the short and long-term impact of the different proposals in front of you.

We often see initial proposals where clients have added up the value of the house, retirement accounts, investments and cash then divided by two. The question is can you split assets that are taxed differently as though they are equal?

Let’s consider a few examples knowing that there may be many variations.

  • A million-dollar house: Not usually an accessible, or liquid, asset so it is important to consider what other sources will be available to live on if the house is a piece of the assets you want to keep. Find out how much gain there is in the house. Will that fall under the tax exemption if you have to sell it or will a portion of the gains be subject to tax? If you are splitting the house proceeds at some point in the future will that be before or after taxes?

  • A million-dollar 401k: Your age will determine how accessible a retirement account is. There may be IRS restrictions and penalties on withdrawals plus taxes to access retirement accounts. Be mindful of when you need access and what the net value is estimated to be.

  • A million dollars in savings & non-retirement investments: Has the benefit of being liquid and potentially a lower tax rate for capital gains, but the downside is the loss of tax deferral benefits. The tax question here is determined by what is held in these accounts, how they are taxed and your long-term goals. Do you need to use this asset to meet expenses, or do you plan to hold it as long-term investment?

As you go through the process of dividing assets, we would encourage you to determine if each asset is going to meet a short- or long-term need for you. Contemplating liquidity and the tax implications of assets can help you determine whether one dollar or another is a better fit for both of you.

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If you are in need of expert wealth management services, we would be honored to assist you in helping you and your family reach your goals. With deep, unmatched investment, risk management and retirement planning expertise, we can help you and your loved ones plan for the future, just as we have for thousands of clients.