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Hi, everyone, and thank you so much for tuning in to the Divorce Field Guide. My name is Ani Mason and I’m a divorce lawyer and mediator, and I’m also the creator of this podcast.
Today, we’re in Episode 12, and we are going to be talking about gathering and sharing financial information.
I want to flag for you that gathering and sharing financial information is something that should start close to the beginning of your divorce process, but it likely will not be completed by the beginning. It would be continuing and likely ongoing throughout a good part of your divorce process, and you don’t have to have completed the collection and the sharing of every relevant piece of financial information for you to be able to proceed to the next step in the divorce process, i.e., discussing the different issues that are relevant in your case.
The other thing I’ll say is that my focus on the gathering and sharing of information is going to be financial information. That’s not to say that that is the only type of information that is shared in a divorce process, but it’s the most prominent type of information that’s shared in a divorce process. So, we’re going to focus there, and, specifically, we’re going to focus on sharing information around assets, debts, income, and expenses, and I’ll say a few words about insurance, as well.
What I do want to say about all of those things is that the law in your state will have a specific definition of what an asset, a debt, income, or expenses would be in the context of a divorce in your state and, further, how it would be treated in the context of a divorce in your state. That is something that I am not going to speak to in this episode.
I’m more going to be speaking from a general perspective of what common types of assets, and debts, and income, and expenses are, and then what are the basic points of information that you want to start to be gathering about each of those assets, debts, income and expenses, so that you can really set yourself up in the best possible position in your divorce process to be able to use your time effectively and to be able, most importantly, to be able to be working with a set of financial information and documents that’s relevant.
COMMON TYPES OF ASSETS IN DIVORCE
So, let’s start out with assets. What are common assets that come up in a divorce process? I’m not at all speaking, in listing these, to what will happen to the assets in your divorce process. I’m more speaking to what are common types of assets so that you can be aware that, “Oh, I didn’t realize that that copyright that I had during the marriage would be considered an asset.” Good thing to be aware of.
Okay, so starting with the very basic, the most basic: any cash, or checking, or savings accounts that you have are definitely assets, and those are very common to be brought up in a divorce.
Similarly, retirement assets – so different accounts like a 401k, an IRA, a Roth IRA, a SEP-IRA, and also pensions.
Real estate, and that would include real estate where you live, real estate that you own as a rental property, for instance, undeveloped real estate.
Securities (stocks, bonds, options).
Different types of deferred compensation are very common, as well. What I mean by that is that some employers will pay their employees not only a salary, but also a bonus. Then, some employers will pay that bonus not only in cash but in other types of assets.
Those assets might be, what are sometimes referred to as, stock options, or restricted stock units, or stock appreciation rights. What I want to flag for you is that deferred compensation is an asset, but it’s one that’s not immediately usable by the employee, in the same way that if you received a cash bonus you could do whatever you wanted with that right away. So, that’s deferred compensation.
Owning a business or a part of a business is also certainly an asset, so that’s something to think about. If you are self-employed, you own your own business, or, let’s say, you and a partner own a business, that is definitely an asset that you want to flag and get more information about as part of your divorce process.
Then, some other less common types of assets that I see in my practice: intellectual property. If you are in a creative profession and you, for instance, write music, or you create art, or you write books, or whatever, produce any kind of creative content, that is an asset.
Household furnishings, jewelry, and antiques. So, valuable personal items are also assets.
Any kinds of vehicles, like cars, are the most common type of vehicle that I see in my practice.
One thing that comes up sometimes when people are renting, they have security deposit that’s owed back to them when they leave, that’s technically an asset.
If you have a life insurance policy and there’s a cash surrender value to that policy, that’s also an asset. That’s a type of asset that people don’t often think about.
If you’ve loaned money to people and they owe you money, that’s also considered an asset.
If you have a legal judgment against somebody, and you are owed money, that’s also, technically, an asset, whether or not you may be able to recover on it.
WHAT KIND OF INFO TO GATHER - ASSETS
With all these different types of assets, let me give you just a very general sense of the kinds of information that are useful to gather as part of a divorce process about each of these assets.
So, you want to start off by naming the asset. Usually, you just find some logical way to name it that describes what the asset is and what institution holds the asset or where it’s located.
If you have an account number, I think it’s good practice to just list the last four digits of the account number.
Then, typically, title is held either in one person’s name, or maybe in both people’s names. So, you want to clarify, if this is an asset that has an official title that’s held to it, how is title held to that asset?
Then, if it’s an asset for which it’s easy to ascertain the value – for instance, your checking account has a balance. You want to list that balance or that value.
And, it’s helpful to do that as of two dates. I would start off by listing whatever the current value or balance is, and, then, if the asset existed when you got married, and you know what the value or the balance was then, you want to list that as well.
In hearing this, you may be thinking, “Well, wait a minute. I have a piece of real estate, but I actually have no idea what it’s worth,” or “Yes, I run my own business, but I don’t know what it’s worth, or I don’t think it’s worth anything. I couldn’t really sell it to anybody.”
For assets where the value is not explicitly written out, where it’s not clear, you can just state that you don’t know it, that it’s unknown. That’s very common for the types of assets that I was mentioning. Like a business or a parcel of, land in the rural area, you may have no idea what the value of the property is, or at least not an exact one. So, you can just indicate that you don’t know.
Then, you want to indicate: What was the source of funds that created that asset? So, if it’s a bank account, the source of funds may well be your employment income, for instance.
If it’s a piece of real estate, where did the money come from to purchase it? Was that money that was earned during the marriage? Was it a gift from parents? Was it an inheritance?
It’s certainly good, to the extent that you have access to documentation on any of these things that I have mentioned, it’s great to start putting that together. You will likely have to do that as part of your divorce process, so getting the jump on it is a helpful thing to do.
But don’t worry if you don’t know where to get certain documentation, or you don’t have it yet. At the outset of your process, that’s totally normal. The divorce professional you’re working with, whether it’s an attorney or a mediator, will be able to help you figure out how to put together the documentation that you need.
COMMON TYPES OF DEBTS
Let me say a few words about debts, and I’ll just list some of the most common types of debts that I see in the divorce cases that I work on. Among them are: credit card debt, student loan debt, personal loans (like, for instance, a loan that your parents made to you to buy a new apartment), tax debt, debt on real estate (like a mortgage or a home equity line of credit), and then sometimes people will have taken loans against their retirement account (like a 401k) or they have taken a loan against their life insurance policy. So, those are also debts that you want to reflect as part of gathering and sharing financial information in your divorce.
WHAT KIND OF INFO TO GATHER - DEBTS
For the debts, you want some short description of what the debt actually is.
Then, you want to identify who are the creditors. What institution holds it, or who’s the person who loaned you the money?
If there is any loan number or account number associated with a particular debt, you just want to give the last four digits of that, to help identify it.
Critical is also to identify who’s obligated on the debt. Who’s the debtor? Is it just you? Is it just your spouse? Is it the two of you together? That’s important, both for assets and for debts, to reflect how title is held and who’s on the hook for the particular debt.
Then, you want to look at what’s the balance of this loan or debt? What’s the principal owed at this time? If this was a debt that existed when you got married, you can indicate what the balance was at that time.
You also want to indicate: why was this debt incurred? What does it come from? If it’s a home equity line of credit, why did we take out a line of credit? Or, a personal loan from family, what did the proceeds go towards?
Same with credit card debt and, often times, that’s just, you know, regular living expenses.
What I will say for both the assets and the debts is that you also want to flag where more expertise might be needed.
If it’s obvious to you in putting together the list of your different assets and debts that you are missing some critical information, like the value of one of them, because you just don’t know it, you want to flag that an expert might be needed. You want to ask your divorce professional: What do we do in this case? I don’t know the value of this, or I’m not sure where to get documentation for that. Do we need an expert to help us with it?
INCOME: COMMON SOURCES
Let’s talk a little bit about income. This is not a comprehensive list of all potential sources of income that are relevant in a divorce process. It’s more a list of what are some of the most common sources of income that I see.
So, certainly, income from employment, and that includes salary, and bonus, including deferred compensation and employment perks.
For self-employed people, you definitely want to be working with your divorce professional on exactly how your self-employment income is defined in the law in your state, but, generally speaking, you’re looking at your gross business revenues reduced for your reasonable business expenses.
Then, there is a whole category of income that can come from assets. From investments, if you get interest or dividend payments. If you have a piece of real estate that’s an asset and you get rental income from it, that’s another source of income. Or, perhaps, you own some kind of intellectual property that you receive royalties for.
Another source of income that’s very common is from family, whether it be in the form of an annual gift or from a trust.
Retirement income comes up, so that could be from a pension, from an annuity, from social security.
Sometimes, people will sell a particular asset in a year that they’re getting divorced, or a year before, and their tax returns will reflect a massively large income, but it’s something that we would refer to as “non-recurring.” It was a one-time sale of an asset that is reflected as taxable income on your tax returns, but is not necessarily a recurring source of income for you. That’s something you definitely want to flag.
Another final area that can get a little bit complex in a divorce has to do with what we call “imputed income,” or income that is not actually earned, but you are expected to earn.
I’ll speak about that in two categories.
One is, that if you do have substantial assets, even if you are not earning income on them, you may be expected to earn income on them as part of the divorce process. You may be treated as if you are earning whatever the court deems, if you’re in court, or you, together, deem, if you’re in mediation or another settlement process, whatever is deemed reasonable for that asset level and the income that can be earned on it.
Then, for people who have been either out of the workforce or who are earning, for whatever reason, less than they could reasonably be earning, the concept of imputed income comes in again. So, you may, in fact, only be earning $20,000 a year, but if that is not a reasonable income number for you, you might be treated in the divorce process as if you are earning $60,000 or $160,000, or whatever is reasonable in your circumstances.
Those concepts are a little bit more advanced financial concepts for divorce – the idea of non-recurring income and the idea of imputed income – but I just want to flag them for you and make you aware of them as you go through the process of putting together the income and other financial information that’s relevant in your divorce.
INCOME: HELPFUL DOCUMENTATION
In terms of income information to put together, many people will put together three years of tax returns. You want to do that both for your personal returns (and that includes all, the entire return, including all the schedules and the different forms) and also certainly, if you’re self-employed, it includes your business returns, if you file separate business returns.
Also, income-related documents like W-2s, 1099s, K1s, all of those, would be shared as part of your divorce process. So it serves you to start putting them together so that you are ready and able to share them when that time comes in your divorce process.
Sometimes, it’s useful as well to ask for and share a letter from someone’s employer describing their compensation.
With larger employers, if somebody is compensated in part with a salary, in part with bonus, and deferred compensation, there’s usually an internal network that reflects an up-to-date listing of all their deferred compensation and of the value that the company itself gives to that deferred compensation.
You may also, where somebody receives income or has received income in the past from a trust, you may also have trust documents that you need to look at and need to share to understand what is someone’s right to receive income into the future. Do they have a right to receive income? Is it something that’s purely discretionary and left to the trustee? What’s the deal? If that’s played a big financial role in someone’s life, historically, you will likely want to get that information and share it as well.
Then, sometimes, where there is a disagreement about how much income there has been, historically, and, more importantly, how much income can be expected going forward between the two spouses who are divorcing, you will sometimes share historical bank account statements, credit card statements, to look at what credits are being made, what debits are being made, and what are we spending each year. If we just look at what the outflow was, you can get a sense for, “Okay, if we spent $200,000 last year and we have no debt,” then you can deduce, unless you were selling assets, that you had at least $200,000 in income.
And you can use whether you accrued any debt or sold any assets, or you accumulated assets, together with what your spending history was, to give you a sense of what level of income there is.
Let me shift to expenses, since we’ve just been talking about them. The process of going through and identifying what your monthly or annual expenses are, both as a one-household family and as a two-household family, is one of the areas of divorce that I think many people find the most tedious and the most difficult.
For that reason, I would say, in approaching figuring out what your expenses are, what your budget is, and what you’re spending history looks like, do it in whatever way makes the most sense for you. If that’s to write it out on a piece of paper, great. If you’re an Excel person, perfect. Maybe you have Mint.com, and you can very easily see what your spending has been over the years or over a given period of time. Whatever works for you.
The gist is that you are trying to capture what you have spent on yourself and on your kids (if you have kids), both historically – in one household – and then, what you will be spending when you move to two separate households.
I think it’s very helpful to try to distinguish and break out children’s expenses from more your household and living expenses. Some expense items, like groceries, are just not going to be easy to divide. Don’t waste your time figuring that out.
If there are specific kid-related expenses that have nothing to do with you, break those out. So, the cost of their health insurance, the cost of their schooling, the cost of childcare for them, the cost of the different activities that they do. Then, look at what is the rest of your shared household expenditure.
And, as I said, if you’re not clear on what your spending is, but you are clear on your income, and you are clear on what happened to your own personal balance sheet during a given year; in light of those two things you can back your way into, annually, what is your rough expenditure, or what was your rough expenditure, as a family?
Let me say a quick word about insurance because this is another area – both health insurance and life insurance – another important area to have information about.
You want to clarify, with regard to health insurance, who carries the health insurance and for whom is it provided. Does one spouse carry it? Do both spouses have health insurance?
Who has health insurance available to them? So, you may not be carrying your spouse on your health insurance, you may be on theirs, but do you have health insurance available to you through an employer or otherwise?
Try to understand, from your employer, what are the rules around keeping your spouse on your health insurance past a point of legal separation, past a point of legal divorce? Usually, you have to take a spouse off your insurance at your legal divorce. Every employer can handle that differently, and so that’s something that you want to confirm.
You also want to confirm, if you do have children, how long can your children remain on your health insurance plan? That’s something that may come up as part divorce negotiations, so you want to clarify that factually at the outset.
Another data point that can often be relevant is, where one spouse has been on the other spouse’s insurance plan, and they want to stay on the plan for some time, COBRA is available to them. You just want to clarify, what would the cost of that be, and for how long is it available.
With regard to life insurance, you want to gather information around: What life insurance policies does each of you hold, if any?
What is the face value or the death benefit of those policies?
Who’s the beneficiary or who are the beneficiaries?
And if there’s a cash surrender value to any of these policies, what is that value?
Again, I just want to come back to something that I said at the outset, which is to double emphasize that you do not have to have this together at the outset of a divorce process. I don’t think that I’ve, literally, ever worked with a couple or a client who has had all of this information ready at the outset of their process.
A big part of the process is working on gathering and sharing that information. So, if you don’t have any of this information at this time, great. Don’t worry about it at all.
The most important thing is that you are in a divorce process in which you feel, number one, confident that both spouses are going to be committed to full disclosure and full sharing of all relevant financial information, and, number two, that you will have adequate support for doing that.
So, you may be a 100% willing to share whatever is relevant about your business, for instance, but you really don’t pay attention to the tax filings or the accounting, and you need some help from a divorce professional or, perhaps, from your own business accountant, in understanding what are the documents that you need to share, and what documents does your spouse need to see to understand what he or she needs to understand about your business.
So, you both want a process in which you feel confident that there’s a commitment to a full and honest sharing of all this financial information, and also that there is the support that each of you needs to be able to both gather and share, but then also to understand, the financial information.
So, that is it for Episode 12 on the gathering and sharing of financial information. In Episode 13, we’re going to turn our attention to talking about kids and the different issues that come up related to children as you go through a divorce process. In the meantime, thank you so much for joining me, and I will look forward to talking to you then.
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