How To Protect Finances In A Divorce

Many men and women who divorce their spouses are sent scrambling to secure their share of the assets.

Why? "Everyone has heard stories about the husband who lost everything or the wife who got nothing," said Darlene Murphy, president of Sudbury Wealth Management, in Sudbury, Mass. "What many people fear is being on the losing end of an extreme outcome."

Many of the steps the divorce-bound should take make financial sense for anyone -- and would be best done at a more leisurely pace.

"Many things you should do boil down to having information," said Murphy, who is a planner, CPA and registered investment adviser.

"Having certain information in advance can alert you to the fact that your spouse is preparing for divorce," she added.

If divorce is knocking on your door, or you're just curious about what those in the throes need to think about, here are points some divorce experts suggest:

Follow the money. "It's common for one spouse to handle family finances," Murphy said. "But when divorce approaches or starts, being in the dark can hurt you."

To avoid that, take precautions. Make a list of family assets, their values and where they are. Review your latest tax returns. Familiarize yourself with assets such as securities and real estate. And get a handle on family income.

"You'd be surprised how many people don't know how much their spouse earns," Murphy said.

Also, get to know your family's financial advisers.

"You don't have to attend every meeting or say a lot," Murphy said. "But the more you know, the better."

This makes sense even if you're not headed for splitsville. But getting up to speed is crucial when you're preparing to break the knot.

Avoid hidden assets. If your spouse starts to funnel joint assets to separate accounts, beware. That can be a warning sign that your spouse is readying for a divorce. "If your spouse's financial habits change, ask questions," Murphy said.

Violet Woodhouse, a financial adviser and family law attorney based in Newport Beach, Calif., says spouses sometimes hide cash, which can be hard to discover. More often, assets are in an account that likely shows up on a tax return.

But some assets do not. Raw land that is not depreciated, for instance, may not show up on your individual return. "And if your spouse transfers title to, say, a limited liability company, it can be harder to track down," Woodhouse said.

Advance knowledge is your first line of defense. If assets of sufficient value are at stake, consider hiring a forensic accountant.

Your attorney or regular accountant may be able to recommend one. In major metro areas they typically cost at least $300 an hour, Woodhouse says.

Don't wear your heart on your sleeve. The more obvious your love for a given asset, the more you might have to give up to hold on to it.

"Especially a house," Murphy said. "Don't give up too much to keep something you may not really need."

Consider tax consequences. "Before you agree to sell assets, ask an expert how much it will cost in taxes," Murphy said. "Always base your decision on net after-tax amounts." This applies to cashing out of insurance policies and selling assets from brokerage or retirement accounts.

Have key assets assessed. Publicly traded assets such as securities usually have market values that are easy to pin down. For assets such as a private business, art, jewelry and real estate, have an independent professional provide an appraisal.

Look into insurance.

"Let's say your spouse agrees to pay for your children's educations," Murphy said. "That may not do you any good if your spouse dies before fulfilling that obligation."

Consider a life insurance that covers the specific term until, say, your children are due to finish college. Who pays for it may be part of your overall financial negotiations.

What if your spouse balks? Maybe he or she can't stand the idea of your collecting a payoff in the event of his or her death.

Set up a trust fund to hold the insurance, Murphy says. Proceeds could be earmarked for the children's education. That keeps the money from going to a hated ex.

It also avoids naming them direct beneficiaries, which could let them waste the money.

Consider arbitration and mediation. Going to court can be messy and costly. Alternative processes can protect your privacy and wallet and take less time.

An arbitrator is, basically, a private judge who will rule on key factors. A mediator's role is to help the parties negotiate a deal.

In the end, results of either process must be formalized by a court judgment. You may still need a lawyer for that.

Generally, more details of arbitration end up in the public record.

"If the situation is relatively amicable, think about using these methods," Woodhouse said.