Financial Planning is important in a divorce

When going through a divorce there are many areas that need to be addressed; they can include spousal support, child support and the division of assets. I’ve found, when working with clients who are divorcing, that when it comes to deciding who gets the house, car or other property the focus is solely on the value of the asset. You get this, I get that, and in the end we each have 50% of everything. But if you look a little deeper and consider the cost of holding an asset as well as the tax consequences, you might find that 50% isn’t always fair and equitable.

Tax implications are important. Some assets, like a house or antique car, have a cost basis that needs to be considered. Whoever keeps that asset needs to consider the eventual taxes to be paid when the item is sold. One good example is the family home. If the house has appreciated since it was purchased a married couple can realize $500,000 of gain before paying income tax. But if one spouse takes the house in a divorce and then sells it, as a single taxpayer they are entitled to exempt only $250,000. So if the house is going to be sold it might be a good idea to keep co-ownership. Another common example is low basis stock. That stock you bought 30 years ago will have big capital gains someday when it’s sold – do you really want to keep it?

The cost of holding an asset should also be weighed. The spouse that keeps the house will be responsible for not only the mortgage but the property taxes and maintenance. Taking the joint investment account also means paying tax on the interest, dividends and capital gains it generates, but tax-deferred accounts don't incur these costs until money is withdrawn. You may love your vacation condo in Kuala Lumpur, but are you prepared to pay the condo and maintenance fees? Each item you own should be considered in this light.

Consulting with a financial planner when divorcing can help you gain a better understanding of what you own and how to best divide assets to support your post-divorce life.

This article is downloaded from Money Magazine.