Think of your financial life in 3 parts – Former, Current, and Future. The Former is the money you have saved or assets you have amassed. Current is income that you and/or your spouse are generating. The Future is the potential for the value and or tax implications of the assets.
When considering assets or investment accounts you have accumulated during marriage it is important to understand how they will be classified and distributed. The two ways to classify investments are liquid or non-liquid — and also qualified or non-qualified.
The easy understanding of what is a liquid versus a non-quid asset is what money you could access in a day or a week versus what will take a period of time to sell. For example, most real estate is considered a non-liquid asset. Cash, stocks, bonds, mutual funds, etc. are liquid assets. Consider how much money you may need to be able to access after your divorce when taking separation of asset under consideration.
Current income by one or both spouses will be considered when determining alimony and child support amounts. It is important to remember that alimony is taxable as income to the recipient and tax deductible to the payor. Child support is not taxable to the recipient or deductible for the payor. Also, many former spouses elect to take alimony over a period of time instead of a lump sum amount at divorce. However, if the alimony ends up being paid monthly, in event of a quick remarriage, it could end up being substantially less money. During a divorce it can be hard to imagine starting over in a marriage, but once time passes you may find a new spouse and lose that financial benefit. There is also the concern of the death of the spouse providing alimony. It is important to be sure there is life insurance in place and structured correctly to satisfy that income replacement need.
All assets have future value and different tax implications. A stock or mutual fund purchased in a taxable account and held for less than a year and then sold would have any gains taxed at the same rate as your ordinary income. If it has been held for longer than 12 months, the taxes on any gains are at the long-term capital gains rate. Any qualified accounts that would need to be accessed in the event of a cash need would be taxed as ordinary income. The distributions could also incur a 10% IRS penalty if taken out before 59 ½ years of age.
There are many things to consider when going through the separation of assets in the event of a divorce. Be sure to consult an experienced financial advisor with expertise in this area of finance. It is best to consult with a new financial advisor that can be a representative just for you, just as you would an attorney as soon as you decide to separate. Good, unemotional financial decisions are critical for the long-term financial health of yourself and your family.