6 Most Common Hidden Assets in Divorce

One of the most important aspects of my work is that of lifestyle analysis.  We prepare financial documents, compare income statements & balance sheets, analyze financial disclosures & determine need versus ability for spousal support.

During this discovery phase is when I most often determine if a spouse is trying to hide assets. Hiding assets during a divorce has major implications on both proper estate division & spousal maintenance. Additionally, if the assets are income-producing, the spouse receiving support may receive a lesser amount than what he(she) is entitled to.

 Some of the most common personal and business assets hidden during a divorce are:

- Cash

- Offshore bank accounts

- Real estate that doesn't produce income

- Collectables

- Rare livestock

- Assets transferred or sold to related parties & entities

Additionally, there are numerous ways someone may try to hide assets. Pay special attention to the following situations:

 Hiding Cash.

 Cash is really easy to hide and lacks a paper trail. Thus it is one of the most common methods someone might use. Cash could be hidden in a house, safe, safety deposit box or with trusted friends & family.

 Using cash to purchase assets. Pay attention to large cash distributions as these could be red flags for major purchases of valuable items which could be sold at a later date. Additionally, the cash could be used to open secret accounts or purchase income-producing assets.

 Purchasing overlooked or undervalued items

 Vehicles, real estate and other large obvious purchases could be significant red flags in your divorce. Other items could be art, expensive furnishings, jewelry or electronics. Quite often these items are overlooked in discovery. Pay special attention to your household items as this may pave the path towards an equitable division of your estate. 

 Paying down loans

 At first, it may not seem all that bad. But reduced cash in exchange for higher equity in certain assets, such as real estate, can easily be overlooked. 

 Business

 Does your spouse own a small business? Quite often money can be hidden in the form of business expenses & payroll liabilities. Money can be transferred in the form of shares, payroll, barter, and many other ways.

Where do I start?

 If you're facing divorce, make sure you properly identify and classify your assets which should include:

 - Bank accounts

= Investment & brokerage accounts

- real estate

- Vehicles

- Jewelry

- Boats

- Art

- Collections

- Personal possessions including household furnishings

- Tools and equipment

- Whole life (or Universal, Variable, Indexed) life insurance

- Mortgages

- Lines of Credit

- Credit Cards

 Also, you must review your tax returns. Tax returns, income statements & balance sheets tell a significant story about your income & assets. Last, make sure you have access to both yours & your spouse's credit reports. This will tell you about any recent credit activity.

 If you don't know where to start, consider hiring a professional who understands both taxation & divorce.

After Your Divorce

Going through a divorce is exhausting. So when it is final, it may be tempting to retreat and perhaps even shut down. Still, there are many tasks yet to be done to secure your future. And taking control can be therapeutic and help you move forward. 

 Here are some of the most important:

✓ Get certified copies of your divorce order from your attorney and:

▪ Change the deed if you’re keeping the house and transfer the title to your car if it is in both your names.

▪ Update your will and review any trust documents you may have. Change your beneficiary on any life insurance policy, pension plan, retirement account, securities account with a transfer-on-death beneficiary and payable-on-death bank account.

✓ Make sure your vehicle is properly insured and that you’re the only owner listed on the policy.

✓ If you were still married by the last day of the year, you may want to talk to a tax professional to determine whether it is more advantageous to file “married filing separately” or “married filing jointly” – provided it wouldn’t be difficult to work with your ex.

✓ If you claimed a withholding exemption for your spouse, update your W-4  within ten days of your divorce becoming final.

✓ Verify all credit cards, bank accounts and loans are separated. Change passwords.

✓ To avoid taxes or penalties if you are receiving funds from your spouse’s 401(k) or IRA, make sure the transfer is completed in a timely manner.

✓ If you were on your spouse’s health insurance policy, make sure you find individual coverage immediately. A divorce is considered a life event that qualifies you to sign up for insurance on the government health exchange or your employer’s insurance outside their open enrollment period. You can also extend your coverage on your ex-spouse’s policy through COBRA for up to 36 months, but it may be rather expensive.

✓ If you have children and don’t have a life insurance policy, get one.

✓ If your ex-spouse is providing alimony or child support, you may want to consider taking out a life insurance policy on your ex to protect that income.

✓ Because you no longer have a spouse to rely on if misfortune hits, start setting aside funds for an emergency fund if you don’t have one. Similarly, consider disability and long-term care insurance if you don’t have them. 

You may also want to set up a health care proxy and a power of attorney in the event you can’t make your own decisions.

✓ Get a corrected Social Security card, new driver’s license, vehicle title and registration if you changed your name. You’ll also need to update your state tax records, voter record, passport, retirement accounts, insurance policies, mail and utilities.

✓ Work with a fee-only Financial Planner  and Certified Divorce Financial Analyst to determine how much you need for a comfortable retirement and what you need to do to get there. They can help create a budget, set up an automated program that directs funds from your bank into investment accounts and create strategies designed to balance growth potential with the need for secure, liquid investments during retirement years. 

Tackling Your Taxes When You've Been in the Dark

Too often when I’m interviewing a new client, she says, “My husband took care of everything, including the taxes. I don’t even know where to start!”

 I understand that most families find taxes confusing and somewhat overwhelming. Additionally, too many individuals rely on their spouse to handle everything. Divorce creates a challenging landscape which creates significant stress. The good news is that you don’t have to go it alone! You can build your confidence & knowledge by surrounding yourself with competent financial & legal experts.

As an Enrolled Agent & Certified Divorce Financial Analyst, I’ve helped numerous individuals tackle their tax returns in the early years of their divorce. There are specific rules to follow which can become complex depending on your individual situation. On top of all of this, the Tax Cuts & Jobs Act, TCJA, has created the most sweeping changes to the tax code since 1986. The following are some general guidelines that should help you navigate your tax situation this coming year.

Filing Status & Deductions

If you are still married on December 31 then you typically will either file married filing jointly or married filing separately.  You may file separately if you and your spouse cannot agree on your taxes or if you have other legal reasons to file separately.  Filing separately will typically result in higher taxes than filing jointly. Additionally, there are a variety of tax credits and deductions that are either eliminated or significantly reduced. Last, if you file separately, you can only itemize if your spouse itemizes.  The advantage is that you will not be responsible for your spouse’s tax liabilities.

 For 2018, the standard deduction for married filing jointly is $24,000. The standard deduction for married filing separate & for individuals is $12,000. Last, the Head of Household standard deduction is $18,000.

 I Got Divorced Before December 31st. Now What?

If you are divorced before the end of the year, the you may file either Single or as Head of Household (HOH). It’s important to know if you qualify to file HOH as this filing status is more favorable than single. In order to file HOH, you must be unmarried for the tax year, have a qualifying child or dependents & provide for more than half of the household expenses.

 Who Claims the Kids?

 The tax benefits of claiming your children on your tax return has been watered down due to the TCJA. As personal exemptions have disappeared, the tax benefits for claiming your children are now limited to certain tax credits like the Child Tax Credit. This credit has doubled to $2,000 per child for 2018. 

 Your divorce decree typically specifies the terms of joint & legal custody for your children. Using the appropriate filing guidelines, the custodial parent typically will file HOH while the non-custodial parent files Single (unless either of you re-marry). We generally see an alternating pattern which provides guidance on how to claim which child in each year. It’s important to note that you cannot file HOH if you do not meet the IRS guidelines even if you are claiming your children for tax reasons. In Utah, if there is a joint physical custody of the children with a 50-50 split, one parent will have the children for 183 days and the other parent will have the children for 182 days. Therefore, the custodial parent will file HOH and the non-custodial parent files single.

 In order to properly file, the custodial parent needs to fill out, sign IRS form 8832 & provide a copy to the non-custodial parent. This form releases the child/dependent claim to the non-custodial parent. You can fill this form out for one year or for multiple years. This form will be given to the noncustodial parent so that they can prove to the IRS that they have legal claim to that dependent child. It’s important to note that again even if you are the noncustodial Parent, you can claim the child on your taxes but you cannot file head of household.

 Simple Yet Complex

 If you’re just getting started, it’s easy to get overwhelmed. Seek a qualified tax & financial professional who understand the complex divorce landscape. Contact our office for a free consult.

 About the Author:

 Joseph A. Davis, EA, CDFA® has over 14 years in the financial services industry. Joe is the managing partner for Davis Financial LLC, Fit Divorce Planning and Tax Smart Pros. He is a Certified Divorce Financial Analyst & an Enrolled Agent. As an EA, Joe has unlimited rights to represent taxpayers before the IRS in all 50 states regarding any tax issue. He also holds FINRA licenses 7, 66 & 24. When Joe isn't obsessing over his work - you can find him at home, playing with his children & probably mowing his lawn. You can contact him at info@fitdivorce.com.

To Keep or Not to Keep the House

While many counselors advise widowed individuals to wait a year before making major decisions like selling a house, a divorce often requires quick choices in the midst of turbulence. One of the more difficult decisions you may face is what to do with your home. Despite potentially strong emotional ties toward it, you need to weigh the financial considerations of different options as objectively as you can.

If you and your spouse agree to sell the house immediately, you will have to work together to choose a real estate agent, assign an asking price and get the home ready to show. As a couple, you will be able to make up to $500,000 in profit without having to pay capital gains taxes, provided you both lived in the home two of the five years before the sale. Selling the home produces a clean break and the freedom to decide whether you’d like to downsize, rent or move to a different locale.

 A second possibility is to stay in the home and buy out your spouse or trade other assets, which may be more liquid or have different growth potential. Because you won’t need a real estate agent in this situation, you’ll have to agree on a price. You might hire an appraiser or go online to a site like Zillow.com or EAppraisal.com, which will estimate your home’s value based on your address. To evaluate the costs of keeping your home, factor in mortgage payments if it isn’t paid off, insurance, property taxes, utilities, regular upkeep and major repairs. Becoming the home’s sole owner also means you’ll only be eligible for a $250,000 tax exclusion on profits when you sell. It’s simplest to refinance a mortgage in your name, but that can be costly if you don’t remain in the home for some time.

Should you plan to sell in a few years after a child graduates or as soon as depressed housing prices come back, you and your spouse may choose to continue to co-own the home. Sharing the mortgage, repairs and expenses can get complicated, and both individuals’ credit report will show the amount of mortgage, which can limit a spouse’s ability to purchase another home.

If your spouse wants to keep the home and take over the existing mortgage, remember the mortgage holder can look to you for payment if they default. So consider asking your banker if they will approve a release of liability provision to the agreement.

A Certified Divorce Financial Analyst can work with your attorney to ensure you have the information you need to make decisions that make the most sense for your financial situation. 

Avoid these 10 mistakes during your divorce

Since most people going through a divorce are not experienced with the process and are battling difficult emotions at the time, financial mistakes are common. Here are some of the pitfalls frequently encountered.

 Not having enough cash on hand.

 With legal fees, court costs, a potential move and no longer sharing living expenses, divorce is costly. So it’s important to have reserves to avoid incurring debt.

 Not securing an income.

 If you’re currently not working, try to get a job (ideally one with health insurance) – unless you expect to walk away with sufficient resources to support yourself the rest of your life. If you are working, look for ways to advance in your career or increase your income since many divorcing individuals find they need at least a 30 percent increase in income to maintain their present standard of living.

Not separating financially.

You can’t control your financial destiny as long as you share a bank account, credit card, car loan or mortgage with your spouse. But if you don’t already have an individual credit card, make sure you can get one before closing your joint accounts. And update your will and change your beneficiary information on your insurance policies and retirement accounts.

Overlooking debts.

If you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), you’re liable for half of your spouse’s debt even if it’s not in your name. In the remaining 41 states, joint account holders on credit cards or loans are usually equally liable. So it’s important to close joint accounts and get a full credit report for you and your spouse.

Overlooking assets.

Insist your spouse provide documents for their financial assets. Have your home and valuable possessions appraised. If you don’t know how much a spouse’s business makes, consider hiring a forensic accountant. If your spouse has a pension, it may be wise to have it valued as well.

Expecting an attorney to know and do everything.

Many attorneys do not possess advanced financial training and expertise. An experienced financial divorce planner can provide a unique educated outlook toward the future that examines all the angles. What may seem equitable today may not look that way in years to come in light of inflation, cost of living adjustments, tax implications or other issues.

Not considering all the implications of proposed settlements.

t’s easy to choose to keep the home without thoroughly evaluating whether you can afford all of the expenses that go along with it. Some assets have greater tax consequences than others. For example, stocks may incur capital gains taxes when sold, while profit from the sale of a primary residence is exempt up to $250,000 for a single individual.

Not dividing retirement accounts wisely.

 With different types of plans and various rules and options that apply to each, this is a complex area where a lot can be at stake. A qualified domestic relations order (QDRO) is required to transfer funds from a qualified plan such as a 401(k), profit sharing or defined benefit plan. If it’s possible, a buy-out or trade may work better for an annuity or nonqualified plan. For more information on this topic, see “Splitting Retirement Nest Eggs During Divorce” and “Divorce and Annuities.”

 Not having a post-divorce plan.

 By the time we’ve hit middle age, many of us have developed spending habits and grown accustomed to a standard of living. But a late-life divorce not only divides existing assets, it reduces income – even if one spouse’s primary income is Social Security benefits. A financial advisor can help you determine what you need to retire comfortably and create strategies designed to help you get where you need to be.

 Investing too conservatively or aggressively.

 Once the reality of having less assets while footing all of your living expenses sinks in, it may be tempting to either put too much money in high-risk investments for their growth potential or to choose overly safe investments with low returns.

 An experienced financial advisor can help you make practical, objective decisions during a turbulent time, consider long-term implications of various settlement proposals and reduce the possibility of future financial regrets.

Dividing Assets in Divorce

Few times of crisis require immediate, clear-headed financial thinking like a divorce. From the time of the split to the signing of the settlement, both parties will face making those decisions in a whole new context – alone and with a potential adversary. Even in the most amicable split, the decisions about who gets what come with a mountain of emotional baggage.

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Knowledge, as Sir Francis Bacon wrote in the 16th century, is power, so arm yourself by gathering every scrap of information on your finances. Request your credit report – you are entitled to one free copy a year from the three major reporting agencies – to check what you and your spouse owe. Open individual bank, credit card and brokerage accounts. Close all joint accounts – a sometimes tricky task if those accounts are sizable. Your attorney can help make sure you get your share of liquid assets.

At some point, one or both of you will leave the family home. This can be the most agonizing split because of the emotional bonds the home represents. Women often want to keep the house, perhaps to spare children from a disruptive move or because they perceive it to be the most valuable asset the couple owns. But that also means keeping the mortgage payment, home owner’s insurance, property taxes, utilities and upkeep – all on one salary instead of two.

During a time of turbulent emotions, it’s essential to rely on your personal team of professional advisors and get first-hand information. Along with your divorce attorney, your team may include an accountant, financial professional and possibly an insurance agent. This team will review your financial situation and make recommendations on possible courses of action. If you’re paying by the hour, don’t use these people for emotional support – call a friend instead.

A new budget can help head off the “splurge to purge” temptation. You need extra TLC, but find ways that don’t cost money. Get used to your new reality of running a household on one salary, and avoid the pitfall of using credit now thinking you can pay it off with your settlement money.

  If your assets as a couple include investments, a business or items like antiques or collectibles, you’ll need a clear view of their value as well as any hidden costs. For example, you may pay taxes on capital gains when you sell stocks, and those gains can vary depending on the purchase price, or cost basis. You may need the help of an investment professional, appraiser or forensic accountant to ensure that what equitable on paper will be fair when the settlement is finalized and later when assets are liquidated.

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There’s no single best way to split assets during a divorce. Your best defense is to be informed about your assets and liabilities and to select a team of professionals to help you weigh the pros and cons of different options for splitting those assets and liabilities. Take a long-term view of self preservation, not a short-term view of punishment or least conflict. Once the divorce has been settled, you won’t get a chance to ask the judge to reconsider if you find you’ve made the wrong choices.