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Split Decisions
By Ric Edelman, March-April 2004
Can they stop a divorce from becoming a disaster?
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Warren and Janice brown, ages 55 and 54, have filed for divorce after 35
years of marriage. Fortunately, it's amicable: they've agreed that
their two younger children, ages 14 and 17, will stay with their mother in the
family home. (The two older children have graduated from college and live
independently.) Warren and Janice married while in college; when Warren entered
dental school, Janice dropped out and became the couple's sole money
earner. Once Warren started his practice, Janice became a stay-at-home mom.
Throughout their marriage, Warren has handled 100 percent of the finances. Once
the divorce is final, Janice wants to complete her degree in nursing and then
find full-time work.
Strengths
Warren's pretax income is around $140,000 per year. Their home was
recently appraised at $210,000. The assets in Warren's pension plan are
worth about $80,000. Five years ago, Warren bought a 20-year term life
insurance policy for $500,000; Janice is the beneficiary, and the four children
are the contingent beneficiaries.
Weaknesses
They owe $15,000 on three joint credit cards, and the re-maining mortgage on
their house is $160,000. Warren owes $25,000 on his 2002 Buick; Janice owes
$18,000 on her 2001 Camry. They have less than $3,000 in the bank and
haven't saved a penny for their teenagers' upcoming college
expenses.
The Plan
The divorce decree should include clauses to protect Janice, as she's
most likely to suffer financially after the divorce. For starters, it should
allow Janice to live in the house until the youngest child turns 24. By then,
it's reasonable to expect, the last two kids will be on their own and
Janice will be working. The Browns should then sell the house and split the
proceeds equally.
The decree should further state that until they sell the house Warren will
pay the mortgage and maintenance costs, cover Janice's car payments, and
pay her child support and alimony (enough for her to pay for health insurance
and her college tuition). Warren must also pay for college and health insurance
for the two younger children, just as he did for the two older ones.
Another item for Warren's to-do list: transfer ownership of his life
insurance policy to Janice. Warren should continue to pay the premiums
(directly, or by adding the cost to her alimony). By putting the policy in
Janice's name, he won't be able to change the beneficiary.
To ensure Janice's future , the decree should entitle her to part
(usually half) of Warren's pension. Warren hasn't objected to this, but
he shouldn't transfer the funds until he's ordered to do so by the
court. Otherwise, he'll owe the IRS for taxes, plus a 10 percent early-withdrawal penalty. He can avoid this by getting a Qualified Domestic Relations
Order, which is a court-issued outline of howone spouse's retirement assets
will be shared with the other.
Finally, Warren should take out a loan (using his practice as security) to
pay off the couple's credit cards and legal costs. Janice should then
cancel their existing credit cards and open two new credit cards in her name.
She'll likely get better rates before divorcing, as credit card companies
expect divorcées to have financial problems.
These moves will help the Browns stay friendly—and solvent—as
they begin their new life apart.
Ric Edelman is president of Edelman Financial Services.
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