If Divorce Is Imminent, Here Is Some Help
Jan L. Warner & Jan Collins
At the time of separation and divorce, support systems are important. But finding people who understand what you are going through and who, like you, want information and someone to talk to, someone with whom to share ideas and experiences -- confidentially -- is difficult.
When you add to the 2.3 million people who divorce each year the more than 35 million step-parent households and the remnants of six of ten failed second marriages, the need to exchange ideas and share information and problems with others similarly situated is ongoing.
Finding practical, easy-to-access information from others who "are going through it" or "have been through it" can mean greater control over your life. Life Management Divorce and Separation Information Service can help you beat the odds by becoming informed and taking charge of your life.
Sure divorce is fraught with emotions, but too often, many important decisions are influenced more by emotions than economic common sense. So before you make final decisions, you owe it to yourself to find out as much as possible about what the future may hold for you.
Knowing the questions to ask is much more important than knowing all of the answers. Practical, objective information can start you on the right foot and help you have a better quality of life after divorce. And that's what this is all about.
So, if you are separated, divorced, or just thinking about it, you must prepare yourself. This Information Service was designed as a roadmap, a practical way for you to learn to deal with the process in an informed way, to ask the right questions, and to gain control of your life. Since the legal aspects of custody, visitation, fault, division of property, alimony, and child support vary from state to state, these questions must be dealt with by your lawyer upon whom you should rely when you are unsure about anything. Here is a short list of what to look out for:
- Panic and emotions have no place in the decision-making process. Understand your options, channel your energies, and then make informed decisions.
- The advice of friends and family will confuse you. If those who have "been through it" want to help you, ask only them one question: "If you had it to do over again, what would you do differently?"
- Keep your goals in perspective. Your lawyer can't do it all for you. And if you lose control of your case, you lose control of your life and place yourself at the mercy of an unforgiving court system.
- The cost of divorce can be staggering. Litigated divorces may take years and cost tens of thousands of dollars. The more your have, the more you can lose. Sometimes you get so upset that you don't care what it costs ...that is until it's all over and you have to pay the bill.
- Try to keep the channels of communication open with your spouse. You don't need to back down, but you shouldn't escalate an already excitable situation by bringing in family or friends. Try to negotiate as many of the issues as you can after your are informed.
- A negotiated settlement lasts as long as those who make it want it to last, so keep your goals in perspective. Ninety-five percent of all divorce cases are settled -- many times at the last minute on the court house and to no one's satisfaction.
- But if the court decides your case, you lose control and may not like it either...and your only remedy may be a costly appeal that keeps your life in limbo.
- Fighting for principle...or just to fight is a bad business decision. Although a long-term war may have adverse economic and emotional consequences, that does not mean that you should give up important rights just to try to get the case over.
- Never sign an agreement without the advice of a lawyer. And never allow one lawyer to prepare an agreement for you and your spouse. You always need your own lawyer.
So where do you start?
Even the best economic result does not guarantee you security. For example, bankruptcy is being used more and more both during and after divorce to try to avoid matrimonial responsibilities and obligations. Bankruptcy during a divorce can mean that the divorce proceedings are put on hold until the bankruptcy is completed. Bankruptcy after divorce can destroy your settlement. Here's how to get started.....
- Begin to plan now. Leave nothing to chance because it's very difficult to try to change the economic details of a divorce after it is over.
- Separate your emotions from the practical issues you must face. Get a clear picture of your future needs. Get organized and focus on the important issues.
- Buy a notebook. Then put all of your questions and concerns in writing before you meet with your lawyer. Give your lawyer a clear understanding of your needs and goals so that an effective strategy can be planned and your lawyer can concentrate on what's important.
- Write a brief, frank history of your marriage with dates, employment histories, illnesses and disabilities, and other relevant information. Then objectively document the contributions and sacrifices both you and your spouse have made during the marriage.
- Begin preparing your budget. Review your checking records for the past two years. Then categorize and list the deposits and your monthly expenses. Note expenses which may be paid semi-annually or annually...like property taxes and insurance.
- List all benefits provided as a result of employment---yours and your spouse's---such as pensions, automobiles, health and life insurance plans, etc.
- List all assets you know of, including its cost and estimated current value. Use insurance policies covering your home and cars, newspaper ads, stock prices, etc. to get some ideas. Then itemize your debts.
- Just as you should inventory your home and videotape your belongings for insurance purposes, photocopy and photograph every financial record and piece of property. Then keep the photocopies and photographs in a safe place---like a bank safety deposit box.
The more information you take to your lawyer, the better you will understand the process and the better your chance of success. By following these simple steps, you will save yourself time in the lawyer's office and therefore money.
Now that you have begun to get it together, you must understand how to deal with your lawyer.
UNDERSTAND YOUR LAWYER'S ROLE...AND YOURS
You can not afford to misunderstand what your lawyer is supposed to do for you. Your lawyer is not a marriage counselor and should not be expected to make your personal decisions for you. When you hire a lawyer, remember that lawyer is working for you to...
- evaluate the facts of your case and the legal issues involved and then advise you about your rights and bligations.
- advocate your side in all aspects of the process.
- negotiate a fair settlement under the circumstances of your case.
- provide you with competent referrals concerning the many non-legal issues which may arise---such as taxes and appraisals.
Your job is to prepare yourself, to be totally honest with your lawyer, and to provide complete information. If you give incomplete or bad information, you can bet that you will have bad results.
How do you find a lawyer? First, you should look for a lawyer who is competent in the matrimonial field. You may want to interview more than one lawyer before you make a decision. Find out how much of the lawyer's practice is dedicated to matrimonial work. Make sure you are comfortable with your lawyer and the staff members who will be involved in your case. If, for any reason, you don't feel comfortable, find another one.
Your relationship with your lawyer is one of trust. Anything you tell your lawyer one on one is privileged...That means your lawyer is duty-bound not to repeat your confidences. The same holds true for the lawyer's support staff. To maintain this privilege, DON'T bring others with you when you meet with your lawyer and DON'T discuss your case with friends.
You should expect that your lawyer will rely upon experts in such fields as taxation and valuation so your case can be effectively prepared. If he or she doesn't, ask why not.
Financial and insurance arrangements, in particular, require careful attention. But it is unfair and unrealistic to expect your lawyer, or any one individual, to be an expert on every subject involved in achieving a successful result. So ask about experts who can help you get credit, make investment and insurance decisions, and meet your real estate needs.
Don't expect definite, precise answers to all of your questions. Lawyer's opinions are generally based upon ranges of probability which, in turn, are based upon the information you provide.
Anything not clearly covered in your divorce papers is probably lost forever. Plan now to try to avoid later misunderstandings because of ambiguities. Ask your lawyer to mail you copies of everything done in your case on a prompt basis. Keep a checklist and always be involved in the progress of your case.
Don't be impulsive and call your lawyer for everything you think of. Unless it's an emergency, talk to the secretary first. Always put your questions in writing before you meet with your lawyer. And take a pad and pencil with you to make notes. Don't waste time with small talk and jokes...jokes aren't funny when you are paying for them.
No lawyer should guarantee you a result. If your lawyer suggests that you can do better than what is offered, find out:
a) How long it will take to get a better result;
b) The range of what the "better result" can be;
and c) The cost of getting a better result.
Then look at the situation and see if it's worth the time, money, emotional strain, and the risk to try to do better.
The court system is simply one way in which disputes are decided. It has a language all its own and may seem complex, but there are rules and time limits. You need not be afraid of it, but you must respect it. Get a basic understanding of how the system operates so you will know what to expect and when.
You may be interested in mediation and arbitration as alternatives to court. Ask your lawyer to explain these options.
If, for any reason, you don't trust your lawyer, don't hold it in. Try to talk it out. If you still aren't satisfied, find another lawyer.
Your case means the rest of your life. If you want a second opinion, get one. So ask your lawyer where you stand. You're entitled to know. Although your lawyer can not guarantee you a result, you are entitled to know....
- The range of possible results.
- The strong and weak points of your case.
- The worst result you can anticipate based upon the information you have provided.
- The average length of time to complete a separation or divorce action in your locale a) If settled. b) If litigated in court. c) If appealed. And always ask about the cost.
You may be told that some of your goals are unrealistic, that you want too much, or you are not asking for enough. If your lawyer agrees with everything you say or you get no feedback, be concerned. Never waive important rights just because you want to get finished with the case.
But, at the same time, there is little economic sense in fighting for lost causes. Always compare the chances of achieving your most important goals with the cost in time and money. You should decide which ones you are willing to fight for, negotiate, or give up.
In each divorce, the end result will be the creation of two new households -- one with children and the other without children. Since there will be many areas of contention, you should understand all of your options. To continue and to find out about the family residence and other assets, press the pound sign to continue your charges at $1.29 per minute. Or hang up now to avoid charges.
The Family Home
In many instances, the family home may be one of the most significant assets acquired during the marriage because of the extraordinary rise in the value of residential real estate. Unless an agreement is made to the contrary, a court may deem it unfair to let one of you use the residence and tie up the other's equity for a long period of time. But, on the other hand, it may be less expensive for the spouse who has custody of the children to remain there. In either case, both of you need to prepare for the contingencies -- not to mention possible tax consequences. Here are some of the questions you should ask about the family home:
- What is the likelihood that the family home will be sold. Begin to look into alternative housing for you and any children who are dependent upon you. Compare the cost and understand the potential tax consequences.
- Get an estimate of how long it will take to sell the house for close to what it's worth. Check on the real estate market in your locale by calling realtors and brokers. Get information, but don't sign anything.
- If there is a move, someone will have to pay for the packing and moving expenses. Get estimates from moving companies and add this expense to your checklist. Then make sure that your settlement covers it.
- Find the best way to deal with school changes for children if that becomes necessary.
- If there is a sale, find out how the insurance and tax rebates will be divided.
- If you want to try to keep the house, you may want to look into a total refinancing, a second mortgage, an equity line, a home equity loan, or another means by which one of you can buy out the other's share. If you don't have credit or the financial means yourself, consider asking parents and relatives who may be willing to help you buy out your spouse.
- Disputes over furniture and personal property can be expensive. Think about how to fairly evaluate and divide personal property. Be reasonable. In many cases, people get carried away with emotions and pay lawyers more to fight over personal property than it would cost to replace the property.
- Find out about taxes and deferring taxable gains. If you over 55 years of age, there are other questions. REMEMBER: Tax consequences are very important, so check them out before you finalize anything. If there is a sale and the equity is not reinvested within two years, you may have significant tax consequences. But there are rules that, if complied with, can allow you to defer these tax consequences. FIND OUT NOW how you may be affected and PLAN NOW so these consequences can be avoided. The last thing you want is to find yourself borrowing money to pay taxes you didn't plan for.
- REMEMBER: There are special tax rules if one or both of you are over 55 years of age. Make sure that you fully understand these rules which may not affect just you, but also a future spouse and your children.
- If you are planning to buy another home, shop for mortgages. Remember that in addition to the downpayment, you will need enough moneuy to pay fees, insurance, property taxes, title insurance, and various closing costs. And make sure to find out what price home you need to buy to defer tax consequences.
You Need to Know About Auto and Homeowners Insurance
The last thing you want to do is cancel any insurance. All parties and all assets should remain covered for everyone's protection. Otherwise a liability claim or casualty loss could wipe out the assets you have accumulated. Both of you need to explore liability and casualty coverage options for the present and future.
- If you or your spouse is planning to leave home, or one of you has already left, find out if the current automobile insurance covers you. It may be necessary to purchase another policy to protect your assets, so check it out.
- Whoever leaves needs to buy a tenant's insurance policy to cover personal property taken to another residence or apartment. The current homeowners's policy will probably not cover that property.
- If there is a move, the homeowners policy will not cover perils which may occur during the move. Moving insurance coverage is available and should be considered. And make sure a policy is in place when the property arrives at its destination.
- Make sure that the limits of coverage and deductibles currently in place will best protect your assets. And that there is lapse in coverage. When new coverage is purchased, the same questions must be asked and answered.
- Rules of thumb: 1) Keep an amount in a savings account equal to your deductibles; and 2) Make sure the limits of coverage are sufficient to protect your assets and replace your assets at today's values.
- Valuables (such as furs, jewelry, etc.) must be listed and appraised. You will need a separate policy because these items are not covered by the standard homeowners policy.
Health Coverage Is Very Important To Everyone
Without quality health coverage, the cost of a catastrophic illness or injury to a parent or child can take everything you have worked for. So don't take health insurance coverage for granted. The cost of health care and health insurance are rising, but it's hard to find good coverage. So everyone involved has a vested interest in finding out what you've got and how to keep it. And make sure it's provided for in your settlement.
- Under certain circumstances, the working spouse's health insurance will provide coverage for the non-working, non-insured spouse for 36 months at group rates under a federal law known as COBRA. After 36 months, there can be a conversion at higher individual rates.
- Ask the benefits administrator about compliance with important options and elections. Get estimates of the increased costs after three years so you can plan future budgets. Check out all elections that are necessary to continue coverages and make sure they are made on time. Make sure coverage for the children continues.
- Plan for the rising costs of health care and health coverage in your settlement. If you plan now, you should be able to avoid disputes and expense later. If you are paying support, you should be interested because not to have health coverage on dependents may cost you later. If you are receiving support, your budget must include enough to keep up coverage as the rates and deductibles increase.
- If there is a pre-existing condition which might make it difficult for the non-working spouse or children to secure health coverage, find out all options now. New policies often have extended periods of time when pre-existing conditions are not covered. So never cancel any insurance policy until you know what is going to replace it. And never buy a policy until you know what`s covered and when it's covered. Read the policy and do not rely on a brochure or the representations of an agent.
- If either spouse or one or more children is disabled, there are options from public education to governmental benefits that do not require reimbursement. Scout for these options before you sign any agreement or go to court. A little research may save you both time and money.
- In some employee health plans, term life and disability insurance are included as benefits. If so, check into the beneficiary designation.
- If one spouse was or is in the military, there may be medical benefits for dependents. Call the judge advocate's office nearest you. Or call your United States Congressman or Senator for information. But do it before your case is over.
You Should Understand The Basics of Alimony and Child Support
There are all kinds of alimony: permanent, periodic, lump sum, temporary, rehabilitative, reimbursement. Child support is generally governed by formula. Each state has laws that govern the application of alimony and support in its court system, so you should always check these things out with your lawyer. But there are some general things you need to know.
- Find out how long each type of payment can last in your state. Remember: Planning for employment options and children's education must begin now.
- Always check out the tax consequences of what you are going to pay or receive. It is too late to plan after the agreement or court order is signed. Make sure your lawyer or CPA explains the tax consequences of all payments to your satisfaction.
- "Alimony" as defined by the state may not be "Alimony" as defined by the IRS. It may or may not be taxable to the receiving spouse or deductible to the paying spouse, dependent upon how the agreement or court order is worded.
- Child support is not taxable to the receiving spouse and is not deductible to the paying spouse. But there are questions about dependency exemptions and medical expenses that may affect your tax situation. Get informed now so there are no misunderstandings later.
- If the dependent spouse or a child is disabled, then there must be planning for not only education, but also the length of the support obligations. Find which public benefits may be available. Then structure a settlement around these benefits and be sure that the settlement avoids reimbursement.
- If the paying spouse becomes disabled or dies, there should be security so that support payments can be continued. Although Social Security benefits may be available, they may not be sufficient or may not extend for a sufficient length of time. For example, Social Security for a surviving child continues only until the child reaches age 18. This means that you cannot plan to pay for college with Social Security benefits.
- Check into disability insurance and life insurance options. Remember: If you have an insurable interest in the life of the person on whom coverage is sought, you can buy the policy. In this way, Social Security can be supplemented.
- Try to plan for cost of living increases. See if your payments can be tied to the Consumer Price Index from the U.S. Department of Labor or other statistical data which can be used to automatically increase (or decrease) payments. Such a provision may save later court appearances.
- Find out if anticipated interest income from the division of assets you get will affect the amounts of support or alimony you pay or are to be paid. If so, you need to know 1) When you will get the money and 2) How to plan to invest the money in a safe fashion to get you that return. And remember: If you spend the money, your return will be reduced.
Plan For Education Now
If it's not included it in the agreement or the court order the first time, it's very difficult to put it in later. This is especially true with educational obligations. Unfortunately, children are now suing their parents...often both of them...to help them get through college or technical school. This is avoidable with planning.
- Find out which parent is responsible for post-high school education for deserving children in your state. Generally, both parents are responsible depending on their income and assets.
- Determine if a fund should be established to assure the payment for educational obligations. If so, in what form, how should it work, and how can it be best funded?
- Find out what financial aid by way of grants or loans may be available and from where. Find out how a family can qualify. All forms of aid should be considered in structuring an agreement. What if the planned for aid is not later available when the time comes? Plan for this too.
- Check into special programs for disabled children. They need special types of planning available in the public sector. Build the agreement around these benefits.
- Ask all of the same questions to plan for the education of a dependent spouse who needs to become trained to enter or re-enter the work force.
Security For Payments and Obligations Is Essential
Think about it! The court order requires the father to pay alimony and child support, and then to provide a four year education for each child. He remarries. When the children are 13 and 15, he dies unexpectedly. His will leaves everything to his new wife. His new wife is also the beneficiary of his insurance. Without more, no more alimony and support. Social Security for the children ends when each reaches age 18. Without more, no college education.
- Plan for ways to protect support and alimony awards so if the supporting spouse dies or becomes disabled, benefits can continue. Use disability and life insurance. Or an annuity. Or a contract to make a will. Make sure that any obligation is funded with life insurance and disability insurance because Social Security for children whose parents die terminates at age 18...well before college. Consider, and try to agree who will pay for this protection.
- Find out if the obligated spouse can be required to get life insurance or long-term disability coverage in case of death or an unexpected inability to work. Then check into cost and who will be required to pay. If you are the receiving spouse, it may be a wise decision for you to agree to pay the premiums for policies to protect what you receive. Or ask your parents to help you.
- Determine if an existing disability or life policy can be used or whether a new policy is needed. This question is often answered based upon the cost of the policy and the amounts of benefit available. Check into anticipated coverages and cost. BUT REMEMBER: Governmental and some employee policies should be avoided because of complex rules about beneficiary designations.
- If someone other than you is making the premium payment, always make sure that you get regular proof of premium payment and beneficiary designation. If possible, it's always best that you own the policy and pay the premium...because then you don't have to worry about non-performance or going back to court to get information.
- Find out who will own the cash values of existing policies and how can they be used. If you are going to make the premium payments on an existing policy that builds cash value, you need to make sure that the cash is not taken out of the policy.
- There may be tax consequences in connection with the transfer of ownership of policies and collection of insurance proceeds. Find out what they are and plan for them now.
- If one spouse is uninsurable, check into alternatives which may be available. Make sure that existing policies are continued for everyone's protection.
- Always check into the beneficiaries of all policies to make sure that the appropriate persons are designated. Remember: Only the owner of a policy can change the beneficiary.
- Beneficiary designations must be considered closely. Remember that governmental insurance programs preempt state court orders. This means that if the court order requires a beneficiary designation on a federal insurance program, and it is not accomplished, there is nothing you can do. So consider using separate policies and make sure you get proof of premium payment and beneficiary regularly.
- Ask about a contract to make a will. Find out what it is and how to enforce it.
- Whatever it turns out to be, make sure it is clearly spelled out in your settlement.
Don't Overlook Credit and Division of Debt
The importance of credit and debts are often overlooked. But the long-range effects of any settlement must include liability management and planning. And there are a number of pitfalls.
- Always plan using net figures. For example, if a piece of property is to be sold for $50,000 and you are to receive one-half, remember that your net share will not be $25,000, but $25,000 reduced by the costs of sale, the payment of any mortgage, the payment of taxes, and the payment of lawyer's fees.
- Before the divorce, look into the status of your credit. If you are authorized to use a credit card but are not obligated on the account (which is often the case), you may have no credit history and therefore no credit. If an account is used by both of you during the marriage, that does not that mean that both of you have credit ratings and credit histories.
- There are ways in which credit can be established for someone who has never had credit: For example, you can go to a bank and take out a small loan (get a relative to endorse your note, if necessary); put the proceeds in a savings account; and repay the loan with interest. Then use this credit source to get other accounts. Don't use expensive services to accomplish this
- Make sure to obtain your own credit history before you divorce. One spouse may be penalized because the other has not paid debts incurred during the marriage. If there have been credit problems in the family in the past, there are ways in which to reestablish credit. Check into them.
- If there is a joint account, as far as the creditor is concerned, each of you is fully responsible, regardless of what the court order says. This means that if your spouse is obligated to pay a joint debt--or a debt that you have incurred-- and doesn't do so, the creditor can sue you for payment. Sure, you can bring a court action to enforce the order, but what if your ex has left the state? And what about the expense involved?
- Look into how the debts created during the marriage will be divided and paid. And remember, if the other party is required to pay for a car in your name and the other party refuses to do so or leaves the state, you are responsible. The court order has nothing to do with the bank. Look to alternatives to avoid these situations.
- So when it comes to dividing up debt, you may want to consider: 1) Getting security from the spouse who is obligated to pay the debt---like a savings account or stock---that will be returned when the obligation is paid but that is available if the obligation is not paid; 2) Purchasing a small life/disability insurance policy to secure the obligation; 3) Getting the obligated spouse to refinance the account so it's not in your name or so your car is not security for the debt.
- REMEMBER: The filing of bankruptcy either during or after the divorce may affect your credit and disrupt everything you planned...and paid for. Make sure you talk to your lawyer about this very important area of concern.
What You Need To Know About Pensions, IRA's, Social Security
With your home, the pension and retirement fund that has been built up during the marriage can make up the bulk of the marital estate. In most states, retirement plans are divisible on divorce. But there are many different kinds of retirement plans and many complex rules. Be sure to discuss with your lawyer the type of plan involved in your situation.
- Find out how pensions and IRA's are valued and divided in your state. Remember, each plan is different and you must be sure that an appropriate court order (called a QDRO---Qualified Domestic Relations Order) is issued. Make sure to find out the tax consequences of pension distributions and if you will be affected. And look into roll-over possibilities if the pension is to be divided.
- Generally, the sums which make up a pension fund cannot be used immediately without taxes and penalties...unless you are of the age designated by the plan. But if you decide you need the money, you should first find out what the penalty is and then decide if the penalty is worth taking out the money.
- There are different types of rules for different types of pensions. There are alternatives available regarding taking a lump sum or a distribution by the month after retirement. You must find out which rules apply in your case as far as distributions and roll-overs. These are complex questions that your lawyer should answer for you.
- You need to research into the best place to invest (roll over) these sums safely pending withdrawal. But be careful. You are best advised to remain conservative and not look to take risk.
- Social Security entitlement must be researched and considered before divorce. Generally, if a marriage has lasted for 10 years or more, a 62 year old non-wage earning spouse has the right to draw on the wage-earner's benefits, even if the wage-earner has not begun drawing benefits. A trip to your local Social Security office will answer many of these questions, including the amounts and taxation effects of these payments.
- Military and civil service pensions are handled differently. You may want to check with the local Judge Advocate's office or civil service office for the latest survivor beneficiary rules. Or call your congressman or senator.
Once You Get It, You Need To Keep It
The breakup of a marriage is like the breakup of a business partnership. The assets...and the liabilities...are going to be divided. The method by which the property is divided varies from state to state and may be called community property, equitable distribution, or equitable division. But regardless of what it is called, whenever you get your share, you must be prepared to "reinvest it wisely" because in many cases, this is all you are going to get. 90% of those who get a lump sum today will not have it within five years.
- Since you will be changing your life status and either handling money for the first time or modifying your life-style, you need to know about what is best for you. But you will find that there are complex and confusing options out there...And many, many salesmen, each of whom has all of the "right answers". REMEMBER: Never be suckered into a high return deal because high return means high risk....and you can't afford it.
- REMEMBER: Consumers lost more than $500 million last year to unscrupulous planners and salesmen. So make sure the person in whom you are about to put your trust--and your money--can deliver to suit your needs. Before you write the check to put your financial future in the hands of a financial planner or anyone else, check out the situation THOROUGHLY.
- If your life-style is based on not only alimony and support but also interest derived from investments, you must look for the best way to attempt to assure that this interest income continues to be paid while, at the same time, protecting your principal.
- Your plan must be arranged for a particular need without the risks of high fees, commissions, and high-risk financial products. Always ask about commissions and keep track of what is being done with your money.
- REMEMBER: Look carefully because there are all types of investments...and some don't look like investments. For example, you may be approached with insurance products that are really investments. Understand what you're getting before you write that check.
- Get everything in writing before you decide where to put your money. These tips are also true when it comes to dealing with insurance salesmen, brokers, or financial planners. In fact, more insurance salesmen have securities licenses today than do brokers...And they sell both insurance and investments.
- Mutual funds are securities that are sold by insurance salesmen, financial planners, and brokers alike...But all of mutual funds are not safe investments. Before you invest, make sure you find out about the amount of sales commissions and how much you will be penalized if you decide to remove your money in the first four years.
- You must avoid high-risk investments and "churning" of accounts ("churning" is a practice whereby trades are made in an account not for the benefit of the holder of the assets but to earn commissions).
- Salesmen may try to sell you annuities, telling you that you need a steady flow of revenue. Check them out and understand them before you invest because if you need the money you invest, you will be penalized substantially if you take it out. And always check out the financial stability of the company behind the annuity...Many insurance companies today are thinly capitalized, which means that you may lose your investment if the company goes under.
- You may have more education than your adviser. The average client has more education than the planner: 6% of planners do not have high school diplomas compared to only 1% of clients.
- A Certified Financial Planner (CFP) or a Chartered Financial Consultant (ChFC) means the planner passed a series of tests given by trade associations...little more. Almost anyone can use the title "Financial Planner", and between 150,000 and 500,000 people do. A Registered Investment Advisor (RIA) with the SEC means little more than completing a questionnaire and paying a $150 registration fee.
- Many "planners" have less than 10 years' experience, so find out how long and where they have been in business. Be sure to get bank references, client references, and references from professionals such as lawyers and accountants who have used the planner. And check them out.
- Find out if the planner has ever been sued and if he or she has errors and omissions insurance just in case there is a problem. Ask where his or her money is invested....And find out how his investments are doing. If he won't answer you or hedges, look elsewhere.
- Stay away from those who hedge on how they are compensated. Some may derive most of his or her income from commissions on products that are suggested to you. Although 85% of planners sell financial products, only 47% of this number tell the client this is the source of the planner's income.
- Fee-only planners may be more objective than those charging commissions, but their up-front charges may be more. Be sure to find out how many times per year the fee will be charged---and make sure they are "fee only".
- Others may charge a combination of fees and commissions. In any case, make sure you get the entire cost up front--in writing and compare the cost.
- Steer clear of high risk products, promises of "guaranteed returns", and "risk-free investments". Watch out for those who want a power of attorney and discretion over your assets....Never do this. Stay away from limited partnerships and other assets that are hard to value and cannot be readily sold if you need the cash. There are thousands of financial products out there, so BE CAREFUL.
- If you don't understand, don't do it. Don't be forced into anything. Don't be intimidated. Get it in writing. Know with whom you are dealing and the strategy that suits you before you deal.
Estate Planning Is Part of Divorce
Of all adults in the United States, 70% have never written a will. You can't afford to be one of the majority.
- You should change your will after divorce or remarriage. And you should consider an interim will immediately upon separation to insure that the estate will not pass to an estranged spouse. And make sure to change the beneficiaries on your life and accident policies...whether at work or individually owned. Don't put it off.
- Your estate can be structured to provide for minor children by use of trusts, springing powers of attorney, and guardianships. Check into this because it is an important part of your transition...and if you don't do it now, you probably never will.
- Always spell out guardianship provisions in your will. If you don't specify how you want your children raised, a court will do it for you...without you being there to object.
- There are many kinds of trusts available and insurance policies can have trusts as beneficiaries. Choose custodians and trustees carefully...And talk to them before you name them. Consider a friend or relative in close proximity to avoid changing schools.
- If a disabled child is involved, special concerns must be faced in estate planning. Find a lawyer who is an expert because he can save you time, money, and aggravation. Ask about a discretionary spendthrift trust to supplement government assistance.
- Look into living wills (that take care of such things as taking you off respirators when you can't make the decisions for yourself) and make sure that you have a power of attorney in place so someone can make these and other decisions if you become disabled. This will save time, money, and trouble later.
- Inquire about what happens if you or a loved one are put into a nursing home because this type of care is more often than not covered by traditional health insurance. Obviously, if something is not done, the assets you fought so hard to acquire may go up in smoke.
- Find out about: Contracts to make wills. Workers compensation coverage beneficiaries. Key man coverage beneficiaries. Contracts to make wills.
- DON'T FORGET to ask about the tax consequences of the way your estate is planned.
The Final Decree Isn't Final...
The decree is signed, and everyone goes in separate directions. Finally, the case is over. Not quite. Both of you must continue to have contact through economic transactions, support payments, child custody and visitation. And things change after the divorce: One or both of you remarry, interjecting new personalities into the situation. One or both of you move. One needs more money. The other can't afford the payments. One makes more money and is asked to increase the payments. The other becomes ill and can't make payments at all. One of you files bankruptcy. And it goes on. Statistics tell us that one or both of you will want changes made in the agreement or court order. To solve an ambiguity in your papers. Something comes up that no one expected. Then what happens? Generally, the whole process starts over again: Accusations are made. Expenses are inspected. Assets are reappraised. A new spouse's income and assets are looked into. You are thrown back into the judicial system. There are depositions, court proceedings, lawyers, fees, and expenses all over again. And lives are disrupted again.
- EXPECT AND BEGIN TO PLAN NOW FOR CHANGES IN WHAT YOU BOTH THOUGHT WAS SUPPOSED TO BE A "FINAL SETTLEMENT".
- No lawyer can prepare or negotiate the perfect agreement that will never be modified or will not be subject to two interpretations. As long as people change and circumstances change, there will be the necessity of modifying your documents.
- Child support payments are always subject to being changed---either increased or decreased---if there are significant changes in the financial circumstances of either parent. Alimony payments may or may not be modified, dependent on how the agreement or court order is worded. Custody and visitation are always open to change if the best interests of the children would be served by change. Property settlements are generally not subject to change...but can be discharged in bankruptcy.
- You can't stop change. So you might want to discuss with your lawyer alternatives that may help when modification arises:
- Penalty clauses: If one of you brings an action that is determined by the court to be frivolous or results in less than what is asked for, the party who causes the litigation will be required to pay all expenses and attorneys' fees.
- Incentive clauses: Rather than litigate each time a financial change occurs, set up a disclosure system whereby, for example, if a non-working spouse begins working, rather than litigate how much alimony should be reduced, alimony by a fixed sum based upon each dollar earned, for example, 25 cents. An example, if alimony is set at $500 per month for an unemployed spouse and that person begins working and earns $1000 per month, then alimony would be reduced by $250 per month.
- You also might want to discuss alternatives to litigation. Both of you can agree to take many of your disputes out of the court system. This doesn't mean that you don't need lawyers. It simply means that you can agree on the methods and procedures by which disputes can be resolved in less time and in private.
- A mediation clause in your agreement can provide both of you with a non-adversarial atmosphere where you are in charge of what is happening to you. You and your ex may be able to construct your own agreement, one you both can live with. If not, since mediation is not binding, you can always choose to go to court.
- An arbitration clause in your agreement can provide a binding way in which to avoid the court system when disputes arise that cannot be resolved through agreements.
- In any case, before you agree to anything, discuss the pro's and con's with your lawyer.
Don't Forget About Uncle Sam...
As you see, "DIVORCE" means much more than terminating a marriage, agreeing on the amount of child support, setting a visitation schedule, and going your own way.
- Divorce means transfers and sales of property. Payments of money. Changes in economic conditions and positions. Estate and retirement planning. Wills, Gifts, and Trusts. And much more. And any time there is a transfer or a payment, either now or in the future, you must be made aware of and consider Income, Gift, and Estate tax consequences.
- Sometimes, people don't know that a gift has been made and a tax is due until it's too late. People don't know that the way property is titled and who has the control over the property can make the difference between tax and no tax.
- You don't need to know all of the rules that apply in each of these complex areas. But you do need make sure that before you begin paying or receiving funds, transferring or receiving property, paying debts, or signing wills and trusts, all of your taxation questions are identified and answered. We've already talked about some of the possible tax situations (sale of a home, alimony, pensions, etc.,), but there are a couple of others you should ask about.
- Audits of tax returns filed during the marriage that occur after the divorce is over must be addressed in your divorce. These audits generally involve both the husband and the wife and can be expensive. Since husbands and wives are generally jointly and individually liable for the entire tax due on a joint return, regardless of who earned the income and provided the information, either can being required to pay past-due taxes and penalties. If you were not the primary wage-earner but signed the returns, you should try to protect yourself by including in your divorce settlement an agreement that if there is an audit, you will be indemnified from all expense and tax liability by your spouse. Although not binding on the IRS, this can give you some degree of protection on a reimbursement basis.
- If you borrow substantial funds from relatives and you don't make repayment, the loan may be considered to be a gift to you and your relatives might be required to pay a gift tax. If you don't pay interest or the interest is forgiven, your relatives may be taxed as if they received from you what the interest should have been and then gave it back to you as a gift.
- Legal expenses for a divorce are not deductible from income for tax purposes, but if you pay fees for tax advice, you can deduct that portion of fees. Ask your lawyer to maintain separate records concerning the tax aspects of your case. If you hire a separate tax lawyer or CPA to advise you on the tax consequences, and you pay the fees, you should be able to qualify for a deduction.
Thinking About A Second Marriage....
Who says we learn by experience? One of two marriages end in divorce. Six of ten second marriages end the same way. And most of us still don't know our rights...even if we've been divorced once. Sadder, but not much wiser. Second marriage mortality rates are higher than first marriages because the issues are much more complex: People marry later with more assets. Married women work outside the home after children are born, and women are beginning to manage their personal assets. Couples are bringing children from first marriages into second marriages: There are more than 35 million step-parent households in the United States, and by the time children reach 7th grade, one half no longer live with both natural parents. In 1987, in 1/3 of all couples getting married, at least one party had been married before...and in 20% of all marriages, both had been married before. Many divorces are caused by lack of planning, perceived selfishness, insecurity, and distrust. Many of these pitfalls can be avoided by open, frank discussions before marriage. And if you can't talk before you marry, what makes you think you will be able to talk later? All of this makes marriage more complex. That's why couples need to protect themselves. Stories about why the property was put into joint names have ways of changing once we reach divorce court. And without more, the laws of the state where you live provide for methods of distributing property and setting support. If two people can't agree that their relationship should be based on predictability and honesty, maybe marriage is not the answer.
- A reasonable couple, not the courts, can decide how their property is to be divided through planning. This brings predictability to the relationship. Those with wealth plan before marriage...but all of us should know and protect our rights because if you or I lose half of what we have, it will hurt us far more.
- Never get married the second time without a better understanding of your legal rights and duties than you had the first time. Don't marry the second time without planning for the contingencies. And you need information to help make intelligent choices.
- Many marry the second time marry without considering that by court order, the first obligation is to their children by the prior marriage... and to Spouse #1 who receives support.
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