After so many millions of couples have divorced, you'd think that the process would have become simpler. But unfortunately, it remains a nasty, brutish and all-too-common experience. Half of all couples who marry this year will divorce and, by the time their proceedings are complete, they will spend, on average, $30,000 on legal fees alone. Divorce is second only to the death of a spouse on the psychic pain meter, according to the experts who rate such things, and has been known to trigger panic attacks and major depressive episodes.
The good news is that there are more alternative methods to reach a settlement than ever. It used to be that most divorces were handled exclusively by lawyers who haggled over only one or two assets. Now more couples are handling their own divorces or using mediators to hammer out settlements for far less money. But that doesn't make divorce today any simpler.
Our divorce planner will help you navigate these stressful waters. This article will give you the basics. For more specific financial advice, see the other articles in this section like "Avoiding the Tax Traps," "Splitting the Retirement Accounts" and "Who Gets the Homes?" And, before you sign anything, run your numbers through our Property Settlement Calculator and Deductible Alimony Calculator.
There are a few ground rules to consider before we get started. How your assets will be divided in a divorce depends largely on where you live. In the nine community-property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), marital assets will be divvied up evenly between the spouses. In Mississippi, the lone title state, you keep only the property that is in your name, and the court divides the rest. The remaining 40 states use the principle of "equitable distribution," which allows a judge to split up the assets as he deems fair. One thing to remember: These state laws set the framework for your divorce, but they are open to interpretation. About 95% of divorces are settled out of court, which leaves plenty of room for negotiation.
The Easy Way Out
Thanks to the Internet, there are more easy ways to get a divorce than ever before. If your divorce is simple — no shared debts or custody fights — you may want to handle it yourself. With information he found on www.divorceonline.com, Russ Grigsby, a project manager for Boeing in Seattle, wrote his own divorce plan, covering such details as visitation schedules for his two daughters. Then he downloaded free legal documents from the Washington state government Web site and filed for divorce. Three months later, he and his former wife went to court for a hearing, and within a half hour, their 18-year marriage was dissolved. The entire divorce cost just $125.
Couples who want a simple parting often use a mediator to work out the settlement. Divorce experts agree that more couples are using mediation now than ever before. The cost advantages can be staggering. An ordinary divorce agreement that might drag on for months and cost each spouse $30,000 can sometimes be worked out with a mediator in three sessions, often for as little as $750. To find a mediator in your area, contact the Academy of Family Mediators.
While it is cost-effective to try mediation, it won't work for a lot of couples. If you and your spouse are openly hostile, a judge may be your best bet, since he doesn't require your cooperation. Couples with large estates should also avoid mediation. Going back and forth on every asset can be tedious and could spark hostilities that weren't there before. Divorce experts also say that couples with disparate incomes should avoid mediation, as well as people who suspect their spouses are not disclosing everything they own.
OK. You tried, but mediation and handling the divorce yourself are simply out of the question. You and your spouse are headed for a lengthy standoff with lawyers, which could get nasty and expensive. That's enough to make anyone nervous. Your best defense is to arm yourself with information about you and your spouse's assets and to understand the tax implications of whatever you do.
Dealing with stock options can be tricky. Approximately 10 million workers now have option plans, according to the National Center for Employee Ownership, but experts still waffle on the best way to divide them, especially when their precise value cannot be determined.
One common method, especially involving cases with nontransferable options, calls for the spouse who owns the shares to give his ex a percentage of the proceeds when they are sold. If the couple wants no future contact, the options' owner could write his ex a check for the amount the shares are worth now. But that's not always the wisest choice.
It's best to wait for the options to be sold. "That way both parties share in the investment risk," says Daniel Jaffe, a Beverly Hills, Calif., divorce attorney. Whether the options are exercised now or later, be ready for the tax consequences. The proceeds — including the amount you gave your spouse — will appear on your tax form as income. And Uncle Sam will come after only you. But there is one line of defense: Persuade your company to issue your spouse a separate W-4 form for the stock proceeds and you'll both bear a share of the tax burden.
Splitting up unvested options is one of the biggest areas of contention these days, lawyers say. It's common for the spouse who owns the options to claim that they are worthless, but that argument rarely works. "In reality, the ability to buy a stock in five years at today's prices is a very valuable right," says Jaffe. If you have unvested options, the court will probably divvy them up like this: Let's say that your company has just granted you options that vest in three years. One year from now, your spouse decides to walk. Guess what? The court will consider at least one-third of those options — for the year you were married after the shares were granted — as marital property. Your ex can pocket half of those.
An additional warning: With a little persuading from your spouse, a judge could force you to give up options that he decided years ago were yours. It's becoming common for the courts to consider unexercised shares as income to pay spousal and child support. And don't even think about hiding the proceeds from a sale of a company from your ex or his spiteful lawyer. Divorce attorneys, such as Raoul Felder in New York, are increasingly inking clauses in settlements that require spouses who make more than, say, $200,000 in any one year from a stock or business deal to dole out a percentage to their ex. We never said this was fair. For more on the tax treatment of stock options in divorce, see "Who Gets the Stock Options?"
That Monthly Check
Traditional alimony has gradually been replaced by "rehabilitative maintenance," temporary payments designed to help the lower-earning spouse get back on his or her feet. In this case, divorce lawyers often insist that a lump-sum payment is better for both parties. The recipient gets a healthy nest egg and reduces the risk of default, which is currently hovering at around 50%. The payer can take the support amount as a tax deduction. But that tax deduction is often worth much less than it first appears. That's because alimony recapture rules come into play. On a $100,000 lump-sum alimony payment in 2005, a payer in the 33% tax bracket will save $33,000 in taxes in the year of payment (2005). But in the third year (2007), he would have $85,000 of taxable alimony recapture, resulting in a $28,050 tax bill (at the 2007 tax rate of 33%). For details, see our Deductible Alimony Calculator.
Gray Is Golden
Lawyers say that their divorce business has recently boomed — in part because so many spouses are returning to court after the settlement has been finalized to up their take of the retirement benefits.
This dilemma can easily be averted if spouses understand how retirement plans are set up. The most common types of retirement benefits are defined-contribution plans, which include 401(k)s, ESOPs and Keoghs. They pay out what you and your employer have contributed, plus any income accumulation, and are fairly easy to value.
|Divorce: A National Barometer|
|Median age of divorce
men: 35.6 women: 33.2
|Combined age of the world's oldest couple to get a divorce: 188|
|Median duration of a marriage: 7.2 years||Largest divorce settlement: $874 million|
|Percentage of first marriages that end in divorce: 50||Percentage of remarriages that end in divorce: 60|
|Number of women who are stalked by a husband or ex-husband every year: 380,000||Number of men who are stalked by a wife or ex-wife every year: 52,000|
|Estimated average cost of divorce: $15,000||Estimated average length of divorce proceedings: 1 year|
|Number of cohabiting couples in 1960: 439,000||Number of cohabiting couples in 1998: 4.2 million|
|Source: National Center for Health Statistics; divorce lawyers; Guiness Book of World Records; Step Family Association of America; Tjaden & Thonnes; National Violence Against Women Survey|
Unless you divide these plans just the right way, you can get hit with all kinds of unnecessary fees. Best move? Use a qualified domestic relations order (QDRO) to transfer money from the 401(k) to the nonemployee spouse's IRA. If you roll this money into an IRA, you can withdraw money at any age through set periodic payments, known as SEPPs, without incurring the 10% penalty. For more, see "Splitting the Retirement Accounts."
One word of caution about pension plans. Since the plans are becoming less common, some divorce lawyers may be unfamiliar with how to value them. When a couple sits down to plot out a divorce, a spouse in his 40s may accurately claim that the current payout on his pension is $2,000 a month. The other spouse naturally believes she is entitled to $1,000 and agrees prematurely to accept that amount. But during the next 20 years, the income of the working spouse could easily double. Since the value of his pension will be calculated largely on his compensation during his last five years on the job, the payout will be far more than $2,000.
Home, Broken Home
Selling the house and splitting the proceeds is often the cleanest way to go. And the 1997 changes in the tax laws have made this option even more attractive. Couples can exclude up to $500,000 of capital gains from the tax man when they sell a primary residence, even after they have divorced. For more, see "Who Gets the Homes?"
If you decide to keep your home, be prepared for a few surprises. All too often a sentimental spouse will hold on to the house only to discover he lacks the capital to maintain it. And then there are those unexpected miseries. Jessica Levin claims she asked her husband, Ray, to remove her name from their mortgage when she divorced him two years ago. According to Levin, he agreed, only to call her months later to say that the house was in foreclosure, could she write a check? Levin, a 27-year-old retail manager, was aghast. "I hadn't got my name off the mortgage," she says. "There was nothing I could do until we either sold the house or he qualified for a mortgage."
The Kids' Educations
Since the government required states to set guidelines for basic child support in 1988, which set monetary amounts for food and clothing, the battle over who's paying for the kids' necessities has become less contentious. But there are still plenty of battles over who is going to pick up that bill from Harvard.
If you and your spouse are amicable, the burden of footing the tuition bill can be divided equally between you. One option is for both of you to put money aside in a joint account or set up a minor's trust, preferably one that's irrevocable to shelter the booty from estate taxes if one parent should die. If drafted properly, an irrevocable trust can also shield money from creditors, in case you or your spouse should lapse on your mortgages. If your spouse is unwilling to spring for half of a college education, you may be able to trade off the cost of tuition for some other asset.
Don't let trust get in the way of your good sense. It's wise to take an inventory of your spouse's holdings to see what you can't get your hands on. Like frequent-flier miles, for instance. Even though they are worth only two cents each, some people will go to any length to keep them. One woman recently received an extra $25,000 from her husband's pension — provided she agreed to leave the miles alone.