If there is one recurring theme in our business, it’s the number of clients that enter and exit the divorce process without a sense for financial matters. To delve into this topic, I had a conversation with our Divorce Care Network member, Caridad Vasallo, a CPA and partner in VMBG Accounting.
TBK: Prior to filing a divorce, what financial actions are a must?
VASALLO: There is approximately one divorce filed in the U.S. every 36 seconds. However, what this statistic fails to address are the parties’ lack of inclination to understand financial matters. That is why I recommend that the first step taken is to understand what they own and owe. It is recommended that you obtain a minimum of one year’s worth of information. Next, understand your monthly expenses. This will not only help you with completing the financial affidavit required during the divorce proceedings, but it will also aid in setting funds aside for necessary daily expenses and anticipated divorce costs. Protecting your credit during the divorce process is also critical. Start by obtaining a credit report for yourself and your spouse. Identify what joint liabilities are held, and work to lower the balance on the debt in order to maximize your availability to credit in the future. Also, begin to build your credit by opening individual accounts, and close accounts held jointly.
TBK: What are some of the big mistakes you see made going into the divorce process?
VASALLO: Since divorce is such an emotional time, people tend to want to hurry through the process in order to reach the next phase in their life. However, this creates unrealistic expectations by the parties and can become a big mistake in the long run. Most parties think they will reach a settlement within the first few weeks or months of filing their petition for divorce. This is not always the case. On average, a divorce will take approximately 10.7 months to finalize.
TBK: Once the divorce is finalized, what are the major financial actions to take?
VASALLO: A divorce decree does not preclude you from updating your last will and testament. You must notify your estate planning attorney of the divorce, and request that they update the last will and testament to reflect your new desires after your passing. Additionally, you must notify financial institutions and third parties of the divorce. This means updating your health insurance, changing the title on the deed to your home, updating beneficiaries, and don’t forget your social media accounts. The marital settlement agreement will state terms that must be executed within a certain time frame. Take the time to re-read the agreement, and outline what items you are responsible for executing and the items that belong to you ex-spouse. The divorce can also require you to find a new group of professionals. Sometimes one spouse’s relationship with a specific financial planner, attorney, or accountant was stronger than the other spouse’s relationship with them. After the divorce, assess whether you continue with the pre-existing professional team you utilized during the marriage, or if it’s time for you to seek new professionals. Lastly, meet with your accountant to determine the tax implication of the marital settlement agreement. For example, if you are receiving alimony, consult with your accountant in order to estimate your quarterly tax payment obligations.