Divorce Explored – Truth, Timing & Taxes: When Shortcuts Backfire in Divorce

0:00

Welcome to WeChat Divorce, hosted by Karen Chellew, Legal Liaison and Catherine Shanahan, CDFA. Each episode we sit down with divorced professionals and industry experts to provide insights and frank discussions about real people, real situations, and real divorce to help you achieve your best life post divorce.

0:34

Welcome back to We Chat Divorce, the number one podcast for straight talk financial guidance before, during and after divorce. I’m Catherine Shanahan, certified divorce financial analyst.

And I’m Karen Chellew, legal liaison and Co founder of My Divorce Solution.

0:50

Around here, we believe clarity is power and we don’t sugarcoat the numbers or the facts.

In today’s Divorce Explored episode, we’d like to dig into 3 costly mistakes that we’ve seen lately. Cases where assumptions, shortcuts and lack of verification turned into a could have been a fair settlement into long term regrets.

1:12

Here’s the reality. Courts and attorneys, clients and mediators don’t always get it right, and well-intentioned advice can often times do more harm than good.

So today we’re unpacking how honesty policies, misunderstood income calculations, and cashing out retirement accounts can blow holes in your financial financial foundation.

1:37

OK, Karen, let’s start with what I just heard this week because I’m, I’m really still shocked about it. You know, among the client and the client and the attorney and another coach and the attorney referenced that their first mediation, they went to that mediation using the honesty policy.

1:57

And I was like, what? What? Never heard of an honesty policy? The honesty policy, I guess that’s like when when trust replaces the proof basically, you know, just as suggesting to adopt that is OK, I guess assuming everyone’s being honest.

2:17

But I don’t know what spouse thinks their spouse is being honest about finances when it comes to divorce. But I’m OK working with a spreadsheet as long as we have the supporting documentation. And it just surprises me that they don’t require a request documentation when it comes to mediation.

2:34

Well, the additional factor there is I could be honest from my specific knowledge about an asset that could be 100% wrong, right? That is so important.

2:50

That’s why it’s so important that documentation is provided because how many clients, I would say 99.9% of clients, even financial, you know, advisors, planners, whoever that come through our financial portrait process, they still don’t understand how that asset is interpreted in the court sector.

3:13

So you can be honest all day long and completely miss the mark.

It’s so true and and honesty doesn’t always equate to transparency.

And.

And really to your point, if we want to give everyone the benefit of doubt, which is is great to do, maybe they say they’re being honest, but they don’t really understand what transparency is or they don’t really understand it themselves.

3:41

So they think they’re being honest and they don’t. They think that’s transparency, but for us and our process, it always comes from verified documentation. That is your protection. It’s really not your punishment. Although it’s painful to get all the information together and it’s nerve racking to ask your spouse for documentations and it’s frustrating to get it through your attorney or through the court system, but you really want to verify any data with the documentation because you can’t go back.

4:13

You know, once you’re divorced, you’re divorced, you can’t go back. Yeah. And even if you negotiate what you believe is the facts and come to an agreement, a lot of times you can’t go back, even if it’s before the divorce. I think a lot of people think a mediated agreement can be revised.

4:30

Most of the time it can if it’s signed from our experience. So you know, valuation dates, you know, are there tax impacts that need to be true up? I think that’s how you refer to them. There’s a lot of variables into every asset and debt that analysis policy is just not going to cover.

4:51

I know. And on the other hand, though I will say in our process, I say it often to our clients, let’s give your spouse the opportunity to participate. Let’s give them the opportunity to give us the information even from their viewpoint. You know, like you said earlier, sometimes they don’t understand it some way and they think they’re being honest.

5:08

But at least when we’re with when we’re with them having that conversation one-on-one and we actually get all that information from them, it’s so worthwhile because then you actually know what documentation to ask for just in conversation.

5:24

So there is there is an opportunity to let the other side provide the information to their best ability, but then it also leads you to the comfort of asking for the documentation to support it without judging somebody’s honesty or not.

5:43

And then you’re negotiating from fact, not Yeah, emotions. Probably a better worth.

Yeah. I mean, there is a reason people get divorced. Yeah, yeah. And usually trust is no longer there.

6:00

But let’s go into another scenario with net proceeds not actually equaling income. Or does it equal income? Yeah. I think you had a situation again this week or last week where the attorney wanted you or wanted the client to consider net proceeds of a home as an investment where passive income would be applied and then be used as income available for support calculations.

6:34

Yeah.

I mean, I just question that because it still doesn’t make sense as you say that, you know, if if one party is keeping the marital home and that’s where they’re living and they’re buying out the other party, how is that buyout considered income available for support, for a support calculation that’s an equitable distribution or a division of Community property, not a support calculation.

6:55

And so I asked the attorney, what if the client is going to buy a house, Will they have to buy the house before we go to negotiate because it would be speculative.

Well, how do they buy the house if they don’t get the net proceeds?

It just didn’t make sense.

And you have to qualify for a mortgage.

7:11

And then what about the spouse?

Is that applied to his or her income?

Available for support, right?

That is.

So convoluted.

Well, and again, it doesn’t make sense because you’re dividing an asset.

7:29

You know that if you’re getting passive income on an asset of a home, how is that?

How are you going to live in another home?

How?

So basically you’re spending your asset instead of getting a support payment.

So again, and I get passive income.

7:47

We do this all the time.

So if you have $1,000,000 in assets and that’s what you’re walking away with and you have your marital home, yes, the remaining $1,000,000 can generate A passive income for you.

Yes, totally get that.

But how do you?

But how do you buy it?

How do you apply the buyout to the marital home when you’re renting and you have to go buy another home but you can’t do it before your negotiations are over as that being income available to for support?

8:13

Yeah.

Doesn’t make sense.

I don’t know if any of you have had that told to you.

I would really like to hear it because you know, we’re in every state and when I hear this, it just doesn’t make sense to me.

And I don’t really hear this often.

So if you’ve been told that, let us know because it’s something we should really further explore and dig into.

8:33

Right.

Because, well, you just said it, you know, is it an asset or is it income?

And those things have to be considered for sure.

And, you know, this is where financially financial modelling matters because a lot of these things don’t get on a negotiation table until, you know, if you had not been on that call with the client and her attorney or that team there, they would have, you know, walked through that process without your clarification there.

9:11

And no, the client would have never known that that wasn’t appropriate for her specific situation, right?

It’s really hard ’cause I can’t give legal advice, right?

So I am meeting with her ahead of her mediation and I am going to role play with her how to advocate for yourself.

9:29

And sometimes that’s just giving really good questions to ask to make sure that everybody’s on the same page with that.

Yeah, 100%.

So, you know, the conclusion is what looks like available cash may leave you short tomorrow if it’s misclassified.

9:46

And we run into that pretty much every day.

Not only every day, but with so many different assets.

So let’s talk about the the next one, which is the cost of cash and out retirement accounts.

Again, this is something that’s so frustrating when cash is tight and not available.

10:04

I know tapping into that retirement plan can feel like the only way out.

And everyone thinks, oh, we’ll just save for our retirement later.

And your attorneys think, oh, it’s a great place ’cause they’ll get paid.

It’s rarely the smartest financial move that you can make, though.

It’s tough.

10:20

And you know, in in the one case that we’re specifically talking about, the advice from council was, well, the only place we can find cash and she referred to as cash is the four O 1K.

And so in trying to understand their perspective, which is very important for us to do here because we all want to be advising our clients from the same space.

10:43

They need their team working together.

So it helps us understand, you know, their projections there.

So, you know, I said, well, will they be truing up the financial impact if she needs to liquidate it for, you know, cash for cash flow or investment money pre retirement, things like that.

11:04

And you know, the attorney said, well, I don’t know, I guess that was the response.

And you know, she did say to her credit, you know, I’ve not worked for the financial before.

So if you want to put something together, we’ll certainly advocate for that.

But that you know, that could be substantial because that retirement account and I think it was essentially maybe the one asset on our clients side, you know it was probably 8-9 hundred thousand.

11:30

So you know, what do you do with that?

That would be a significant tax impact.

Yeah.

You know, again, you know, what looks fair is not always equitable.

So it might look fair that that 800,000 went on wife’s column and husband got 800,000 from, let’s just say the house.

11:47

But is that really equitable?

And the answer is no, because they’re not.

You’re not comparing apples to apples.

That’s an orange and an apple.

And they have really different tax implications and you could be short, you know, $160,000 or more from being on your side because of the taxes that you had to pay.

12:08

So you really need to understand and be clear on what the impact is and what are the considerations for your retirement monies when you get it.

And believe me, I understand that, you know, if you need to use those monies, you need to use those monies, but you need to balance them out differently when you’re negotiating.

12:26

Man, exactly.

Because $100,000 in an account is not the same as $100,000 in cash.

We say that over and over because once you factor in taxes, penalties, loss, compounding, the real value can drop 20 to 30% or more, and that needs to be a part of the negotiation.

12:45

I want to throw, I want to throw another scenario in there caring about that because this was also a call, you know, the attorney was talking about, oh, you can Quadro that account and that’ll cost you $1000 or more.

And you know, your spouse probably won’t want to do that.

13:01

And I’m listening and I’m listening.

And meanwhile, I know it’s an IRA, a Traditional IRA, or actually it was a maybe it was a Roth IRA.

It doesn’t matter.

It was not an ERISA run plan.

So I say to the attorney, well, that the plan that they own, the parties own, unless you know, one that I’m not aware of, does not require a Quadro.

13:21

So she wouldn’t need to pay that.

It’s a letter of instruction.

You have to make sure the agreement is written up properly for a financial planner to transfer those proceeds.

She’s like, Oh my gosh, you’re so smart.

I never knew that.

Yeah.

13:37

I have no, I have no words.

You know, well, you know, when I worked in the law office, the attorneys would put that clause in there because they were just so unsure that, you know, the, you know, the parties will split the Quadro cost even if it wasn’t applicable just to cover, you know, themselves.

13:59

And so people pick it up and think they need a Quadro because attorneys aren’t sure.

So, you know, it’s important that that people understand that all the languaging they see in the documents isn’t necessarily relevant to their marital estate, and people don’t know that.

14:22

Yeah, yeah.

Again, I think that’s a whole nother podcast because you know, it’s so frustrating and you know, we get frustrated and we’re professionals, so we just see this happening so often in every state that it’s frustrating all.

14:39

Right.

So let’s talk about valuation dates, tax true UPS, which we already covered and getting on the same page with your team because the valuation dates is something from a financial that is very frustrating, right?

14:55

So when you say, you know, we’re going to divide everything, a date of divorce.

So what’s happening from the date that they actually separate or decide to get divorced or file and every state’s different.

So this is going to be just a bird’s eye view of some of the things that we encounter, but you know, taking one date from the past to a date in the future and then keeping track of everything that happens with those assets between those two dates.

15:25

And one team thinks it’s 11 team, meaning your spouse and his attorney thinks it’s going to be 1 date and you and your attorney think it’s going to be another date.

And then you’re living together.

You’re not living together and you’re spending money on credit cards and who’s going to pay that?

15:42

And yes, you hear of an advance to equitable distribution and you also hear about reimbursement claims.

But really, if you’re going through the process, how are you keeping that all in your head?

You know what, how are you factoring what you’re doing every day, especially if you don’t even have temporary support?

15:59

How are we keeping track of all that?

Yeah, it was so true because balance sheets probably are first originated, maybe before, I don’t know, a mediation date.

Typically documentation is incomplete at that time or an initial hearing and you know, temporary hearing.

16:19

And so that’s where things can start to come off the rails because in my experience, many times a lot of statements aren’t updated if they haven’t been provided and they can have significant impact if a year later you’re actually looking at negotiating the settlement of your marital estate or Community property.

16:41

So it’s really important that that date is clarified and, and sometimes the date can be different for different assets as we all know.

But whatever it is, we need to know what that date is and it needs to align across the board.

16:58

I was working on one yesterday and the difference between the dates, because it had been about six months, it was a higher net worth estate, I think because the account statements and all of the assets and debts had not been brought up to date consistently.

17:16

Some had, some of them haven’t.

The net net was like, I don’t know, like $620,000.

So that’s a lot.

And people don’t realize mortgages are paid down, you know, Rs US or executive compensation become more valuable.

17:34

That’s what was happening in this and you know, we all had to reset and get clear on what the valuation, what dates we were using so we could get a clear valuation.

You know, and just to affirm that, is it affirm the right word?

17:50

I don’t.

Even know.

OK, good to and circle back and bring the taxes back into that.

You know, that’s always another interesting aspect because if a spouse did cash out on their Rs US or they got granted Rs US, you know that’s taxable in that year, right?

18:12

And so if you’re filing married filing jointly, because you’re still married on 12/31, you’re, you’re paying those taxes too.

So you want to argue that they’re marital assets if you’re paying the taxes, I’m I’m assuming right.

So you know, that’s something to consider.

And also when we talked a little earlier about truing up retirement, if a spouse is giving you a retirement account that you’re using for to buy a home or what have you, you can have them liquidate the retirement accounts.

18:40

So it’s taxable to them.

If you’re married filing separately or if you’re going to be divorced by 1231, let the let the spouse do the liquidation.

So they’re responsible for the taxes.

If you cannot true up that amount beforehand, if there’s no other monies to true it up with.

So there are little things that you can do to protect yourself.

19:02

For sure.

So here’s your divorce explored red flag checklist.

If any professional suggests honesty policy instead of verification, that’s a red flag.

If someone calls sales proceeds and come a red flag.

19:18

Retirement withdrawals are happening before a Quadro is in place.

Consider carefully.

Valuation dates or appraisals are months old or no tax analysis accompanies major financial moves.

All red flags.

19:35

Yeah.

So if you see even one of those stop.

Every time I say stop, I think of the fire commercial.

That.

Stop, drop and verify, I’ll say.

I like that.

Divorce moves fast, in some cases very slowly.

19:54

But mistakes here can cost more than the marriage ever did.

So let’s let’s give you some action steps to take #1.

Insist on verified documentations.

Don’t rely on self reporting #2 Confirm whether proceeds are actually income or asset division #3 Include tax estimates for every proposed withdrawal or sale, because that’s a negotiation right there #4 Agree on valuation dates in writing.

20:27

Get a confirmation from everyone so that we’re all on the same page and #5 use your financial portrait to model cash flow before agreeing to any terms.

Investment is worth it.

So financial truth isn’t about who you trust, it’s about what you can verify.

20:45

Numbers tell the story when everyone uses the same data.

So true. So that’s it for truth and timing and taxes when shortcuts backfire. If you’ve been told something that doesn’t feel financially sound, it’s OK to pause and question it.

21:03

Actually, let me say not question it, but ask questions. I love that and I’m going to layer something in here. It doesn’t mean it’s an emergency, it just means you need to answer question and take the time it takes to be clear.

21:18

Your future deserves verified facts, not verbal promises. Don’t sign anything until you understand the tax timing and true cash flow impact. And if this episode helped you see through some of the noise you’re hearing, hit follow so you don’t miss our next Divorce Explored and share this episode with anyone making big financial decisions under pressure or not pressured.

21:44

They’ll thank you later. And I guess, I guess don’t forget to leave some comments for us or give us some topics or situation that you’ve been going through and we can discuss it. Until then, here’s the financial clarity today for confidence tomorrow. Thanks for joining us on another episode of WeChat Divorce.

22:06

We hope this episode was informative and supportive on your divorce journey. If you're looking for more support for navigating divorce with confidence and clarity, head over to azure-emu-499854.hostingersite.com/ for more podcast episodes, divorce events, and resources for your divorce.

22:24

We’ll see you back here for our next episode.