How to Best Pay for Divorce Expenses
Posted on: March 19, 2023
Procedural
Funding Divorce Expenses
Sometimes a dollar is not worth a dollar. In other words, if a financial asset will be split in settlement, every dollar in that asset is worth to each respective spouse whatever fraction would be awarded to each respective spouse. If a financial asset will not be split in settlement, every dollar in that asset is worth a dollar to whichever spouse would be awarded the asset. This concept should govern how income is saved and expenses are paid, with some notable caveats and legal consultation.
Classification of Equity
Assets, liabilities, income and expenses may be categorized as either marital, separate, or hybrid (co-mingled). By default (but not necessarily true) in settlement, each spouse may retain the entirety of their separate property and split marital property equitably (perhaps evenly). Hybrid property potentially gets split into its separate and marital segments, so each segment can be settled accordingly as part of the separate or marital estates.
Key takeaway: Drawing from marital or hybrid assets effectively would be forcing a spouse to contribute to payment of expenses, and vice versa.
Optimizing Funding for Divorce Expenses
Whenever a spouse pays divorce expenses with marital assets, that spouse effectively could be sharing that expense evenly. For expenses paid with separate assets, the separate asset owner effectively would be paying all the expense themselves. Using hybrid assets would vary the effective burden of an expense depending on the proportion of separate to hybrid value of the asset. As a result, a person should limit the use of separate assets for for marital (including divorce) expenses and maximize the use of marital assets. An individual may have an opportunity to use this approach to reduce their effective costs in half without similarly reducing their goods and services acquired. Note that either spouses’ attorney could file a motion to limit these actions, so always consult with your attorney to plan or validate intended use of accounts.
Key takeaway: When possible, draw from marital assets as a first option and hybrid assets as a second.
Prioritizing Funding from Hybrid Assets
A divorce financial analyst can be used to help determine which financial assets would be most appropriate for what types of expenses and help prioritize which to use first, second, etc. (See Baron Analytics Services, Co-Mingling of Property) Not all hybrid assets reflect the same proportions of marital and separate property, so the analyst can conduct a forensic trace of the asset to figure out respective equities for each spouse. Priority for which asset to draw-down to pay expenses can be determined based on an assessment of both spouses’ respective separate shares and the remaining marital share in each asset. The calculation can be more complicated when an asset includes all three ownership stakes: separate property for the individual, separate property for the spouse, and marital property.
Key takeaway: For each asset, rank the effective percent that the spouse would be contributing for a given expense.
Caveat for Use of Marital and Hybrid Assets
Sometimes a person is barred from using marital or hybrid assets, such as through a pendente lite (pre-settlement) non-dissipation of marital asset order. Sometimes, a lawyer may feel that use of marital or hybrid assets could be more provocatively harmful than valuable to achieve overall settlement goals. A person should consult with their family attorney to review any plan before enacting. Ideally, the client, the divorce financial analyst, and the attorney should be working and planning together. In some cases, the attorney can take legal action to enable a plan. In other cases, the attorney may better support the client by freezing all marital assets to keep the spouse from doing similar to the client’s separate and marital equities. In the latter case, both spouses would have to use only separate assets to pay for expenses.
Key takeaway: A lawyer should review and shape any plan and may need to take legal actions to enable a plan.
When No Marital or Hybrid Assets Are Available to Fund Divorce Expenses
For example if a non-dissipation order is filed, a person may not have access to marital or hybrid assets… only separate assets. If their separate assets are not sufficient to pay expenses, they could consult with their lawyer to gain a pendente lite agreement to divide one or more marital asset at least partially and in advance of settlement. In either case, every dollar the person is spending for their divorce would be coming out of their own (separate) equity.
Key takeaway: Sometimes only separate assets are available, and the spouse would not be contributing to the individual’s divorce expense, in this case.
Alternative Approach when Marital and Hybrid Assets Are not Available
Sometimes an individual does not have separate assets available, and a marital or hybrid asset cannot be split in advance of settlement. In other cases, even if separate assets are available, an attorney may want a means to argue that divorce expenses are marital expenses and use these expenses as a basis to establish a “marital” debt. Marital debt could be judged as a shared responsibility between spouses. If so, the individual would earn a partial reimbursem*nt by the spouse at settlement (ideally half the debt). If an attorney recommends building a marital debt rather than spending from separate assets, a divorce financial analyst should review and quantify the strategy. Normally, debt will incur interest, and if the strategy fails, the person would be responsible for all the principle as well as the interest of the debt. Considering how costly debt interest could be for credit cards (which likely would be the only resource available for this type of situation), the analyst should use sound financial and mathematical principles to help the individual and attorney understand the tradeoff. A trained divorce financial analyst, like Baron Analytics, is an ideal resource for this.
Key takeaway: Before using debt to pay for a divorce, a divorce financial analyst should quantify the tradeoff of getting a spouse to reimburse a portion of the debt versus having to pay all of the debt and interest.
Minimizing Contributions to Marital Rather than Separate Assets
To add to the complexity of paying for divorce, the value of marital, hybrid and separate proportions of assets vary throughout the settlement process. This happens as assets incur credits, debits, and appreciation/depreciation. Each of these occurrences could be attributed to the marriage or to either of the spouses’ separate equities. Appreciation / depreciation could even be a hybrid attribute.
To minimize the proportion of an individual’s separate equity in assets used to pay for divorce, the individual should avoid contributing separate income into marital or hybrid assets. Attorneys commonly will assert that income earned after the date of separation should be accounted as the separate property of the individual that earned the income. This also normally includes any income received in the form of pendente lite spousal support or child support. Being the person’s separate equity, this post-separation income should not be deposited into marital or hybrid accounts for fear of losing or diluting the individual’s equity.
Key takeaway: After separation, do not deposit any more income into marital or hybrid accounts.
Protecting Separate Income
Baron Analytics typically recommends that clients open new banking (and possibly credit card) accounts after their date of separation. At that point, the client immediately should direct all income deposits to the new banking account(s). The client should not use any marital or hybrid funds to open any new separate accounts, because the account could be considered hybrid thereafter if they do. In most cases, do not use pre-separation savings to open a -post-separation bank account.
If a bank requires an initial deposit at the time of creation, the client should have a source of cash that cannot be argued as marital or hybrid. For example, the client can ask a friend or family member to write a check to use as the initial deposit and then pay that person back with assets from that account after separate income gets deposited. This whole process should be reviewed by their attorney.
Key takeaway: Cleanly open a new bank account to save separate income earned after the date of separation.
Bifurcating Marital and Separate Expenses
At this point, an individual may or may not have access to marital or hybrid assets but they now have an established separate banking account. Unless an until an individual’s attorney advises the client to stop use of marital and hybrid assets, the client should pay for all expenses from these assets. In some cases, a client may be advised to avoid using marital and hybrid assets to pay for separate (personal) expenses.
If that is the case, the client should open a new separate credit card account for their separate expenses, such as their own clothing, activities, and health care. The client still would retain their prior credit card, which still would draw from marital or hybrid assets. This marital credit card preferably would be used to pay for marital expenses, such as legal expenses, childcare, and home maintenance. Again, this all should be strategized with the participation of their attorney.
Sometime the attorney may want separate credit card accounts regardless of whether both cards need to draw from the same separately designated bank account. Doing so provides the attorney and divorce financial analyst a means to track and distinguish marital expenses. The marital credit card would provide clearer evidence for how much marital expenses were paid and/or build a clearly marital debt that only reflects marital expenses (as discussed earlier).
Key takeaway: If useful to draw only marital expenses from marital assets or marital debut, use the marital credit card for marital expenses and open a new credit card for only separate expenses.
Time Is Money
Every month, separate income accrues, and expenses must be paid. If either spouse delays action, that spouse could face the lose of significant settlement equity. In some cases, the loss of equity could be as great as half the value of that person’s income plus half the value of all expenses paid by that individual.
Considering that expenses tend to escalate during separation and considering that separation can last over a year, pervasive disregard could reduce a settlement by far more than the equivalent value of a person’s annual income. Considering that a typical person saves less than 10% of their income (especially in the years following a divorce), this loss of equity could require far more than a decade for an individual to recover after settlement.
Grand takeaway: Act fast and act smart to avoid needing potentially over a decade to recover lost equity.
Financial management during the settlement process can be complicated. Baron Analytics understands and regularly advises clients for how to navigate smartly through a divorce process. Don’t make mistakes that could degrade a settlement significantly. Work collaboratively with your divorce financial analyst and attorney to act fast and act smart… and protect your equities as much as possible. The cost for an attorney and financial analyst to do so should account for a very small fraction of the equities that could be gained in settlement.
For further reading:
7 Ways to Ready Your Finances for Divorce – NerdWallet
