The kiss at midnight on New Year's Eve may be the last for many couples, if past years are any indication.
Divorce filings spike at the beginning of the year, and advisers need to be ready to help clients seeking to split.
Clients need to think about the tax implications of divorce, especially as they relate to certain investments.
“Divorce filings increase at the start of the year, unfortunately, with many setting New Year's resolutions to make a change,” said Diane Pearson, a planner and certified divorce financial analyst with Legend Financial Advisors.
For some couples, the holidays may have been unbearable, or they may have just waited until after the holidays for their kids' sake, she said. As soon as school starts up again, many unhappy couples focus on beginning the divorce process.
A FindLaw.com/Westlaw analysis of divorce filings in the U.S. from 2008 to 2011 showed divorces shoot up in January, continue rising through February and peak in March. The whole divorce process takes anywhere from six months to over a year, depending on state laws.
The family home tends to be the greatest asset, and what to do with it requires serious thought, Ms. Pearson said.
There's no one-size-fits-all solution in terms of who should get the house, which requires cash flow for paying taxes, utilities, upkeep and the mortgage, or whether it should be sold before the divorce is final, she explained.
One consideration is appreciation. If a spouse is awarded the family home and sells that property after the couple is officially divorced, only $250,000 in appreciation is exempted from taxes, compared to $500,000 if a married couple sold that home, she said.
Leslie Thompson, principal at Spectrum Management Group and a CDFA, recommends clients focus on the liquidity of assets that will be split by the couple. This can be especially tricky when there is real estate, retirement assets and privately held businesses to consider.
Most of the time she has an answer regarding the primary home, especially the large ones.
“I typically recommend that neither party keep the home,” she said. “Typically the children are grown with the clients I work with and neither of them needs so much house.”
With investments such as mutual funds and stocks, it's most important that everyone understand the cost basis that goes along with those, Ms. Pearson said.
For instance, the low-wage earner of the couple may be the best recipient of stock that was held for 20 years and has appreciated significantly because the spouse who falls in the lower tax bracket will owe a smaller amount in long-term capital gains when they file separately.
In cases with limited partnerships, the tax brackets of the two spouses also are important, as well as understanding any lock-up period that would make it difficult to turn the asset into cash flow, she said.
There also are Social Security implications to think about, including whether and when a person can qualify for spousal benefits.
“Also, make sure to keep both parties in the loop if you have been dealing with them as a couple,” Ms. Pearson said. “Meet with them together if at all possible.”
Lauren Prince, owner of Prince Financial Advisory and also a CDMA, agreed that figuring out the embedded capital gains of investments that will have to be sold is paramount.
“You don't want one half of the couple stuck with high capital gains when the other half isn't,” Ms. Prince said.
She also recommends divorcing couples first pay off marital debts like credit cards.
“They probably want to pay off bad debt and close joint accounts,” she said. “You don't want one irate spouse charging things just for spite or anger.”
Ms. Prince recommends advisers learn about the benefits of different divorce processes.
If there is some cooperation, a divorce facilitated by a mediator or through a collaborative process with the spouses and their lawyers can be more dignified and cheaper, Ms. Prince said.
When there is mental or physical abuse in the marriage, litigation is probably the way to go, she said.
Divorce among older couples is especially on the rise, and differences in retirement plan savings amounts should be a factor of concern. People over age 50 are twice as likely to get divorced as they were in 1990, according to an October 2014 paper from the Council on Contemporary Families.