January is traditionally known as “divorce month” because couples stick out the holidays and then call lawyers as soon as they get back to work in the new year. But after a financially brutal 2022, many couples that want to call it quits are having a hard time with the math.
“Everything is topsy-turvy. There’s a lot of uncertainty and people are scared,” says Chris Chen, a financial adviser and certified divorce financial analyst (CDFA) who runs Insight Financial Strategists.
Even as recently as a year ago, the financial situation was stable—despite the pandemic. Real-estate values were up, interest rates were still low and financial markets were humming along. Now the real-estate market is in turmoil, interest rates are rising, both stocks and bonds are down, layoffs abound and a recession looms. “Now it’s different. It’s harder, because they don’t understand anymore,” says Chen.
These are three main financial factors that will gum up a divorce and make you think twice about how to split up assets, experts say.
Should you sell the house?
Chen has a client who has been trying to work out a friendly divorce for the last five months, but the major sticking point is the house. They bought it for $1 million, and it’s now worth $3.5 million. His client wants to buy out her husband and keep the house, but since it’s worth so much more and interest rates are so high, she can’t afford the potential mortgage payments. He could also buy her out by exercising stock options, but his company is way down in value and that wouldn’t cover it now. If they sell and split the proceeds, they’d each walk away with more than $1 million after taxes, but in their neighborhood, that won’t go far.
“It’s driving them crazy,” says Chen.
If you’re considering divorce and the house is a sticking point, make sure you work through all of the costs involved — not just the emotional pull of staying put in your home. You not only have to figure out how to split the current value of the property, but you also need to consider the long-term cost of the asset like the mortgage, taxes, insurance and upkeep, which might be too much on your own.
Another item to remember: the tax impact of selling later on. If you’re single, you can only exclude $250,000 of the capital gain, versus $500,000 when married.
Pensions and other investments
Most people focus on the house, but your investments might make up more of your net worth than your home equity, especially the present value of a pension. But things can get complicated in a volatile market.
Tricia Mulcare, a financial planner and accountant with Homrich Berg in Atlanta, has a client who has been trying to divorce since last year. The holdup is bitcoin. Her partner was dabbling in cryptocurrency and it sunk their net worth by about half. “She’s kicking herself,” says Mulcare. “If she had gone with her gut and initiated the process at the start of the pandemic, there would have been a lot more to split.”
Now that client is trying to make things work while they sort things out, nesting in the house, with each parent taking turns living there on their custody days and living elsewhere on their off days.
It’s even harder with retirement funds, which require legal agreements to split because of the IRS rules governing them. Pensions are the most complex, and the higher the interest rate today, the less the present-day value of the pension.
If you’re negotiating a divorce with somebody who has a significant pension, you’ll want to make sure you properly value the asset and negotiate the best way to split it—either a buyout or a qualified domestic relations order (QDRO) to divide it at retirement. “Most people have no idea what the value of a pension is and they don’t think much about it,” says Chen.
Company valuations, options and job security
Most couples aren’t made up of two people who have exactly equal incomes and potential for future earnings, and that’s part of the inequality of divorce. This is compounded by the fact that today, much worth could be on paper and in a temporary low—stock options, company valuations and future earnings potential.
Financial adviser Chelsea Ransom-Cooper, managing partner at Zenith Wealth Partners in Philadelphia, has had three clients divorce recently and all of them had lopsided income.
“It was strange to see the confidence on one side and the worry on the other side,” she says. Two out of the three clients ended up having to liquidate their 401(k)s to get back on their feet. “It was unfortunate and not ideal to see.”
Because some of these valuations can be complicated and fleeting, it’s important to get the assets properly assessed and make sure everything is included. Stock options from private companies can be especially tricky. “Make sure you’re bringing those up. State-by-state those can be different. But it could potentially result in more assets to get you back on your feet,” says Ransom-Cooper.