ONE OF THE many difficult aspects of divorce is the equitable division of finances. Discussing finances can be difficult for many couples, but for those going through the huge upheaval of divorce, it can be especially difficult.
Handling this element of a separation openly and honestly will minimize stress for both parties and help bring the process to a successful conclusion as quickly as possible.
The rule of thumb for any couple is for both to be completely transparent about their finances and to ensure that each clearly understands the financial situation of the household.
Although property and physical assets may be easy to track, there may also be savings, pensions, life insurance policies, or debts that are less apparent. It is the responsibility of both parties to ensure, to the extent possible, that they are aware of all aspects of their joint financial situation.
If you are not married, your financial rights are limited to what you jointly own. But children will have financial claims that can be made on their behalf, including child support, lump sum payments and property transfers.
Basically, there are three main assets to consider in a separation or divorce: property, alimony, and pensions.
Property is usually the most important asset in a divorce settlement and can be the most complex. The options are to sell it and split the proceeds, one partner buys out the other, or in difficult circumstances both parties continue to live in the property.
In cases where one spouse buys out another, a mortgage may be required. This is not always easy given the strict mortgage rules currently in place. Selling a property may also not be considered, as the shared equity may not be enough to cover two deposits for new properties.
If there are enough assets, one of the spouses can receive the family home, business or other assets making up the balance for the other spouse. Typically, this occurs to support and care for younger children.
Financial pressure of divorce
The cost of financing two houses is the main reason why many divorces, in my experience, tend to happen when the children are older and may even have finished school. It is simply too expensive to divorce when the children are young.
Pensions are often the second most important asset. Pension Adjustment Orders (PAO) are a court instruction on how to divide and share a pension fund. Once a PAO is in place, I recommend that the ex-spouse transfers their share of the benefits to a retirement bond that separates their share from the fund.
I have seen unfortunate cases where the pension was mismanaged after a divorce and the ex-spouse did not end up with the pension income they should have had. By using a retirement voucher, they take control of their share. They can also access benefits from the age of 50, which can be useful.
Alimony is generally an income paid by the spouse who earns the most to cover the living expenses of his ex-spouse and dependent children.
It is important to be forensic when working out household expenses; look at everything necessary to maintain family life – monthly expenses as well as irregular or one-time costs like motor costs, education costs, club fees. It’s important to be realistic too; the income will now have to support two households, so sacrifices may have to be made.
Children and financial plans
Payments for children are tax exempt. Voluntary agreements are preferred where possible as they are not taxable while court ordered alimony is subject to tax at the marginal rate. The spouse making the payment can claim tax relief, while the spouse receiving the payments must pay income tax.
When the assets are not large, they can be split 50:50, but this does not always apply to higher net worth settlements.
Once a maintenance agreement is in place, life insurance and/or income protection should be considered to secure these payments in the event of the death of a spouse or incapacity for work due to a illness or injury.
The key to all of this, as much as possible, is to leave the emotion at the door – this is by no means an easy task, but the less emotion the better the outcome for everyone involved. Getting legal, financial or mediation support can be helpful in guiding couples through the process and ensuring the outcome is fair for everyone.
“Divorce by hand”
If the separation is amicable and both parties are willing to “play it fair,” a DIY divorce without involving any legal or other counsel is an option. This can be a cost-effective and efficient way to agree on how your lives and assets will be shared and is most often the path chosen by a couple who do not have significant assets.
Another thing to consider in such circumstances is that the transfer of assets between spouses as a gift or inheritance is exempt from Capital Acquisitions Tax (CAT). The separation does not affect this exemption, but the divorce thus ensures the transmission of the assets before the judgment of divorce.
However, keep in mind that there is a risk associated with not seeking legal advice which may have future repercussions, for example, if an ex-spouse decides to remarry or if the assets are not fully disclosed or understood, resulting in unfair sharing.
Another consideration is a prenuptial agreement. Although ‘pre-nups’ are not yet legally recognized in Ireland, they can serve as a ‘document of intent’ as to what a couple would like to see happen to assets in the event of a breakup. Something to think about if significant assets are involved.
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Divorce can be a very difficult and traumatic experience and the financial repercussions can be significant. Starting the process with a fair and reasonable perspective will help bring closure faster and allow both people involved to move on to a new and better future.
David Quinn is Managing Director, Investwise financial management offering financial planning, retirement and investment advice to people who want to invest in their future.