Breaking up the family finances: how to survive a divorce with your fair share of marital property

Kiplinger's Personal Finance Magazine, Feb, 1998 by Stephanie Gallagher

Sometimes it takes a high-profile divorce case to shed light on tough issues that divorcing couples routinely face -- such as how much of a couple's accumulated assets should be attributed to the breadwinner and how much to the intangible efforts of a non-income-earning spouse.

In the Connecticut case that recently made headlines, Lorna Wendt contended that during 31 years of marriage to Gary Wendt, chief executive of GE Capital, she was part of a 50-50 partnership and should be entitled to half their accumulated assets. Gary Wendt argued that he would have been just as successful without his wife's support. Apparently agreeing with Lorna Wendt, the judge's award exceeded Gary Wendt's settlement offer and included the value of some of his as-yet-unrealized compensation, such as unvested stock options.

Perhaps the clearest moral to the story is that those who fare best in a divorce are those who can separate the breakup of the family financial unit from the breakup of the marriage. "Think, 'If we had a business together, how would we go about dividing it?'" says Victoria Collins, co-author with Violet Woodhouse of Divorce and Money (Nolo Press, $26.95). The authors give this advice for putting that reasoning into practice -- without running up monstrous legal fees:

DON'T OVERLOOK ASSETS. Your investments and the furniture are among the obvious things to account for. But such assets as stock options or an upcoming tax refund are often overlooked, say Woodhouse and Collins.

What constitutes assets; Anything acquired during marriage -- including savings in a retirement plan and other employee benefits -- is considered marital property to be divided according to state law. In the community-property states -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin -- marital property is divided 50-50. But in other states, property is divided "equitably" rather than equally, taking into account the duration of the marriage, the earning capacity of each spouse, and each spouse's contribution to the accumulation and preservation of assets, whether by paid work or work in the home. Generally, you're not expected to share inheritances, property owned before marriage or gifts directed to only one spouse.

Other easy-to-forget marital assets include prepaid life insurance, frequent-flier miles and season tickets to sporting events. Lorna Wendt made sure to lay claim to the couple's Macy's credit card, which comes with a lifetime 45% discount because at one time Gary Wendt was on Macy's board of directors.

ALWAYS GO FOR CASH. Gary Wendt is sure to be keenly interested in the price of GE shares for years to come. But because Lorna Wendt was awarded the value of her share of the stock options in cash ($1.1 million), she won't have to worry about whether the share price rises or falls. Faced with a similar choice, or a choice between a lump sum now and ongoing alimony payments, go for the lump sum even if it doesn't quite equal the anticipated future value of the income or assets, Woodhouse and Collins advise. That frees you from the risk that an annuity, pension or shares of stock might be worth less than you expect later on, or that you'll face unforeseen taxes or transaction costs.

"I have a case in which my client got $500,000 cash and the husband got $800,000 of equity in a business and commercial real estate. My client won," Woodhouse contends. "She has total liquidity; it's taxfree; and she has no market risk."

If you're the one in the position to pay alimony, it may be to your advantage to make ongoing payments rather than a lump-sum payment because alimony payments are tax-deductible while cash settlements generally are not. But many people decide to forgo the tax savings in favor of a clean break with their former spouse, Woodhouse says.

YOUR SPOUSE'S DEBTS ARE YOUR DEBTS. If your spouse runs up big credit card balances, you may be looking forward to relief from the Visa and Master-Card bills. That won't come easily. "Generally, if you acquire debt during the marriage, you're both responsible for it," says Woodhouse. The husband of one of her clients filed for bankruptcy after running up massive credit card bills. Since bankruptcy discharges only the debtor -- not the spouse -- his ex-wife ended up having to pay his debts.

To protect yourself, try to incorporate a complete payoff of all credit cards and other lines of credit in your divorce settlement, and make every effort to close all joint accounts. (You may even want to assume responsibility for payment yourself and claim a share of assets to offset the debt.) Since charges sometimes go through on recently closed accounts, notify creditors that you're getting divorced and that you won't be responsible for anything your spouse charges. The last assertion may not hold up in court, says Woodhouse, but at least it gives you a shot at curbing new charges.

AVOID TRIVIAL SKIRMISHES. Finding a shark with a legal degree to sink his or her teeth into your soon-to-be ex may be a satisfying thought. But nothing's worse than a divorce in which the legal bills consume half your assets, and an antagonistic relationship means more time and money spent battling over the little things. "Attorney's fees should be part of the cost-benefit analysis" of what to pursue, says Woodhouse, who is a financial planner and an attorney. Plus, winning an aggressive settlement in a hostile divorce can sometimes be a Pyrrhic victory, making it more difficult to collect child support or enforce custody arrangements later on.