How to Prepare Your Financial Paperwork For Divorce
Divorce is traumatic. Your entire life—both the present and the future—are changing dramatically as you separate from the person you thought would be your partner for life. There’s a lot of heartbreak. There’s a lot of mourning. There’s a lot of stress over finances.
All the whirling emotions, the turbulent ups and downs, can make you feel like the best way to proceed is quickly. You want to get through to the other side so you can find some sense of normalcy again. But according to Certified Divorce Financial Analyst ® Lori Lustberg, that’s one of the worst things you could do.
“Who wants to stay in the middle of this trauma?” she asks rhetorically. “Everyone wants to rush through it, but it’s really important to slow it down and take the time to get organized, aware and educated.”
The number one thing you’ll want to get organized is your financial paperwork. The more paperwork you have, the stronger of a case you’ll have in court or mediation. Lustberg, who is also a mediator and lawyer, walks us through the documentation you’ll need to fully understand and plan your finances, both today and into the future.
“The first thing you’re really going to need to know about and have tangible documentation to back up is your income,” says Lustberg.
This means gathering up your pay stubs and tax returns—both federal and state. You’ll also want to be sure to have copies of any additional schedules you filled out as a part of your return. If you’re self-employed, you’ll want to make sure you have profits/loss statements and a delineated itinerary of your business expenses on top of your tax paperwork.
Documentation of Your Expenses
Just like you need to know how much money you have coming in, you’re going to need to know how much money is going out. You can obtain this information through bank or credit card statements, being sure to take marked note of recurring monthly expenses along with once-per-year expenses, like vehicle inspections or insurance premium payments.
While you can sift through each line item on your statement, Lustberg has a hack for tracking your day-to-day spending habits.
“Often your credit card statements will be organized into categories,” she says. “That way you can easily see what you paid for gas, groceries and other expenses over the past year.”
Documentation of Your Assets
Lustberg says being familiar with your assets is essential, as they will likely be split in mediation or court. As you’re gathering up paperwork in this important category, be sure to include:
- Mortgage statements.
- Legal documentation regarding ownership of any real estate.
- Property tax bills.
- Bank account statements showing your balances.
- Brokerage account statements.
- Retirement account statements.
- Car notes.
- Assessment of the value of any vehicles.
Documentation of Your Debts
Equally important as your assets are your debts. Lustberg notes that you need this information for both parties: You and your soon-to-be-ex.
You may need more than one statement to document your debt. Be sure you have tangible proof of:
- When the debt was incurred.
- How much was borrowed total.
- Current interest rates.
- Any remaining outstanding balances.
When the debt was taken out is extremely important. In some but not all states, debt and assets accrued after your marriage will be split, while anything taken on before your marriage generally belongs to you only. State laws vary greatly, and can sometimes even change from jurisdiction to jurisdiction. But having written proof of the timing is a good rule of thumb regardless of your state’s laws.
Lustberg includes insurance paperwork in the list of important financial documentation. You will want to know how much coverage and premiums are for life insurance, health insurance, home insurance, etc.
Wills & Trusts
As you head into a divorce, you definitely want copies of any wills or trusts either of your have. To illustrate why this step is so important, Lustberg invokes some familiar household names.
She points out that Whitney Houston was wise with the trust fund she left to her daughter. Ten percent was to be disbursed when her daughter turned 21, 25% when she turned 25, and the rest at age 30. Her daughter died when she was only twenty-two, leaving 90% to the next person in line. Had Houston not designated her mother and siblings as residuary beneficiaries, naming them next in line to inherit her money if her daughter died before age 30, her ex—Bobby Brown—would have been the next person in line as he was their daughter’s closest living relative.
By thinking things through in the midst of the divorce, Houston was able to leave her money to people who had not emotionally abused her over the course of decades.
Another important thing to consider regarding last will and testaments, and trusts is if any are left to you or your soon-to-be ex. Lustberg says that revocable trusts typically don’t show up in the court room as they can still be changed before the person who plans to leave you the money dies. Essentially, you’re hoping you’ll get an inheritance, but you can’t bank on it. Therefore, the judge won’t typically split it.
However, if you are listed on an irrevocable trust—one which cannot be altered—it’s likely to be considered an asset. It may be subject to division in court during your divorce, making it extremely important to be aware if you or your spouse is listed as a beneficiary on any such trust.
Read the guide to estate planning in a divorce.
We all know divorce is expensive, and it’s something that very few people want to spend money on. However, Lustberg urges those going through divorce to build a team of knowledgeable professionals that have your back.
“A lot of people freak out when they think about hiring different professional or team members, but the best way to ensure your financial security in the future is to spend some money and invest in yourself now,” she advises. “Once it’s done, it’s really, really hard to get the terms of divorce changed. You can’t go back to a judge and say, ‘I didn’t know what investments were in that account!’ Take your time and spend the money to do it right.”
She also points out that a good lawyer is essential in your divorce proceedings—especially if it’s not ending amicably—lawyers are not financial professionals. For that reason, it’s wise to sit down with a financial planner you trust. They can go over your financial situation today, evaluate what you’re going to need to get by or meet your goals tomorrow, and point out any holes in your strategy. It’s also a good idea to connect them with your lawyer directly so they can each advise each other on their own areas of expertise.
Sifting through financial paperwork is a daunting task no matter when you do it, but it can seem even more overwhelming when you’re emotionally taxed as you are when you are going through a divorce. Keep Lustberg’s words in mind, though: Take it slow and do it right the first time. Investing the time now can save you a lot of potential economic turmoil further down the road.