Tracy, Author at Tracy Stewart, CPA

Cash & Bank Accounts During Divorce

June 17, 2009 by Tracy Leave a Comment

Unless one chooses a collaborative divorce, a divorce can last for several months or even years. During that time, a couple should work out how to cover the living expenses of each party and of the family.

In my experience, living expenses are easier and more pleasantly dealt with in collaborative cases, than in traditional litigated cases. In collaborative cases, the cash flow needs are a potential agenda item at every team meeting. This ensures that both parties are addressing their cash flow needs to the extent that the family finances can handle the dual households.

There are a number of ways to handle cash flow needs during a divorce.

Divide the cash up front. This process works well when both parties have similar income levels. Each deposits their paychecks into their own bank accounts (established during the divorce if necessary) and uses that cash to fund their living expenses. When one party has a greater income than the other, funds are allocated to the less monied party on a periodic basis. In collaborative cases, the two attorneys, the neutral financial professional and the couple will discuss and conclude the appropriate amount to allocate.

Allowance. This process arises when one party makes the majority or all of the income while the couple has two households. I have seen this method work and I have seen it have problems. The problems arise when the earner spouse wants to control the non-earner spouse’s spending habits. While, I understand why one party might want to control the other’s activities (although I do not condone it), this usually results in frustration and unpleasant feelings for both parties. In my experience, the allowance method works best when both parties are realistic about their cash flow needs and neither party wishes to alter the existing spending patterns of the other.

Vehicles

June 13, 2009 by Tracy Leave a Comment

The usual way couples handle the division of vehicles in a divorce is that each takes their own vehicle and the debt that is attached to that vehicle.

Start with getting the fair market value of the vehicles. You can find that on the internet at a site such as Kelley Blue Book (www.kbbcom) or NADA (www.NADAGuides.com). Be sure to value all vehicles in the same manner. Either both at trade-in or both at private sale prices. I prefer the latter.

There can be some minor complications with vehicles.

Vehicle driven by a minor. In this case, one of the parents will need to keep this vehicle titled in their name. Hopefully, the couple can come to an agreement about this. Be sure to consider that the titled owner will need to have auto insurance on the vehicle.

Vintage vehicle in the garage. Sometimes one cannot find a fair market value of a vintage vehicle because it is not truly vintage. In this case, the couple is wise to come to an arbitrary agreed upon value, allocate the vehicle to one party and move on with other decisions.

Vehicles with interesting debt. Once in a while, a couple will finance an vehicle through a second mortgage on the home. This can get sticky when one party intends to keep the vehicle and the other party intends to keep the home. In this situation, the couple needs to look for an offsetting asset. The party keeping the home (and the vehicle debt) would get an asset to offset the amount of the debt. Presumably, that party could cash out the asset and pay of the vehicle portion of the second mortgage.

Allocating Cash to Pay Expenses

March 5, 2009 by Tracy Leave a Comment

During divorce proceedings, bills still have to be paid, but the lines become blurred over which bank accounts are going to absorb those expenses.
There are a few options here:
1. Retain a joint bank account into which the paychecks are deposited and the bills are shared.
2. Have separate bank accounts with some amount of money being deposited to each account every month and pay bills separately.
3. Cash out savings accounts or investment accounts to fund each spouse’s checking account. This division is taken into account in the overall property division.

I have seen each method work depending upon the spouses’ relationship and personalities. I have also seen each method cause problems. Sometimes one spouse wants to maintain control of the money and the spending. This is prevalent when that spouse has historically played this role. However, doing this may evolve into the situation where the non-money spouse treats the source of funds as a deep pocket without limits. Again, results depend upon personalities and communication.

List Your Bank Accounts

February 26, 2009 by Tracy Leave a Comment

Your net worth statement (also called an inventory) will include cash balances. These are checking accounts, savings accounts, travelers cheques and money market accounts. Gather up all the statements – either paper or online. Try to get all the statements as of the same date. But, a few days different one way or the other will be okay.

On your net worth statement, be sure to note the description of the account. For example, “Chase Checking 2345 Mary” would describe Mary’s Chase Bank checking account with an account number ending in 2345. Note the date of the statement. For example: “Balance as of January 14, 2009”.

You are going to want to periodically update these balances throughout your divorce process. However, don’t feel that you need to constantly update them. In a collaborative case, I will usually update the account balances prior to every or every other collaborative team meeting and whenever there has been a material deposit or payment, such as a deposited annual bonus or the payment of income tax.

Net Worth Statement Series

February 23, 2009 by Tracy Leave a Comment

Now that I have talked about creating your net worth statement, I am going to do a series of explanations and discussions on the detailed items in a net worth statement. By the way, in a divorce, the net worth statement is known as an inventory.

Some items will take more than one blog entry and others will be quite short.

Generally, every item on your net worth statement should have a corresponding statement that has the name of the account holder, the name of the institution, the account number, the type of account, the date of the statement, and the dollar amount. For example with a bank account:

1. John Doe
2. First National Bank of Your Town
3. Account number 1234456
4. Checking account or Savings account
5. Statement Date: 12/23/08 to 01/22/09 (the date of this statement is 1/22/09)
6. $12,223.44 balance as of 1/22/09 (list this amount on the net worth statement)

Be sure to have a file folder with these statements. If you use online information, print the online statement.

Ideally, all net worth items are as of the same date. This is not always possible, but it is something to strive for. Get the dates as close to each other as possible. If you have an account for which you only get quarterly statements, then you might be stuck with an “old” balance.

Stay tuned for the details……

How to Compile a Net Worth Statement

February 4, 2009 by Tracy Leave a Comment

A net worth statement is simply a complete list of what you own and what you owe. During the divorce process, it is called an inventory. Start with determining what categories you will want to include. For example: real estate, bank accounts, investments (non-retirement), limited partnerships, retirement accounts (401k, 403b, IRA, pension plan), vehicles (includes boats, motorcycles, airplanes), other assets (think collections, artwork, tools), credit card balances, mortgage balance, vehicle loan balances. Assemble all the statements (online or paper) from which you have obtained the values/balances for these items. Make an extra copy of those statements and store them in the file with your net worth statement. That way, you will save time and money when you give your attorney or financial advisor a copy of your net worth statement. Think of it as a paper trail or a pile of source documents.

Bring a currently updated file to your attorney interviews and to your first appointment with your divorce financial advisor.

Rest in Peace

January 29, 2009 by Tracy 1 Comment

This week the Supreme Court ruled that companies are bound by what is written on beneficiary designation forms. This means that once your divorce is final, you need to review your beneficiary designations to be sure you are leaving your retirement benefits and life insurance proceeds to your intended heirs and not to your ex-spouse, if that is your desire.

In the Supreme Court case, William Kennedy’s wife waived her rights to William’s retirement money in their divorce decree. She was William’s beneficiary during their marriage. He did not change his beneficiary designation after the divorce. When he died in 2001, the company apparently sent William’s wife the balance in his account, $402,000. She had moved to Norway and then died in 2007. William’s daughter, Kari, claimed that her father wanted to leave his retirement money to her instead of to his ex-wife.

Since he never updated the beneficiary on this account, his daughter is not entitled to that money.

Regardless of whether you are divorcing, divorced, single or happily married, periodically check the beneficiaries on your retirement accounts and life insurance policies. I recommend everyone do that once a year. Then, someday, may you rest in peace.

What To Do Second

January 26, 2009 by Tracy Leave a Comment

When you are considering divorce, the second financial task is to decide which legal model to use – the preferred dispute resolution model of collaborative law or the litigation model.

The collaborative law process is a way for a couple to work together with their attorneys toward resolving conflict using cooperative strategies rather than adversarial techniques and litigation. The attorneys and clients sign an agreement that they will not go to court. If the process breaks down, the collaborative law attorneys must withdraw and the clients must retain new “litigation” attorneys. In this process, the attorneys get to use their best skills – namely the use of analysis and reasoning to solve problems, generate options and create a positive context for settlement.
You might think this is not a financial decision. You would be wrong. Your choice of divorce model is very much a financial decision. Based on my experience, couples that chose the collaborative model are those who preserved a greater percentage of their pre-divorce wealth.

What to Do First

January 15, 2009 by Tracy Leave a Comment

When you are considering divorce, the first financial task is to compile your net worth statement. This is true whether you believe you are going to have a friendly or acrimonious divorce. You should really be compiling and reviewing your net worth statement quarterly even when you are happily married.

I have found that many couples do not understand their financial situation until they are in a divorce. Those who have chosen the preferred dispute resolution of collaborative divorce learn about their assets and liabilities at the beginning of the divorce. In collaborative divorces, a neutral financial professional (that would be my role) compiles the net worth statement and reviews it with the couple and their attorneys. We don’t play hide the ball in collaborative divorce cases.

If you are not going to use the preferred divorce method, but instead are going to have a litigated divorce and you are not the spouse who keeps track of your financial details, you are more likely to going to have a difficult time getting your arms around the true financial situation.

It is crucial to truly understand your financial situation during a divorce because it drives your short-term and long-term financial decisions.