Chapter 8 Financial Fact-finding: What Must I Know and when Must I Know It?

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 8: Financial Fact-Finding: What Must I Know and When Must I Know It?

Advice to the Terminally Disorganized

If You Think Your Spouse May Be Hiding Assets

Don't Forget the "Easy-to-Forget" Assets

The W-2 and the Tax Return

What About the Gifts You Gave Me?

Financial Facts Checklist

Questions to Ask an Attorney

Frequently, one partner takes care of the paperwork and financial decision making. This is practical when you're still together, but a potential disaster during divorce.

The answers to the questions posed in this chapter's title are straightforward: You must know everything that can be known about your finances, and you need to know it as soon as you possibly can, preferably before filing for divorce.

No one can make proper financial decisions without adequate information. How can you tell whether to keep the family home if you do not know what it costs to maintain it? On what will you base requests for alimony or child support if you are in the dark about living expenses? Both you and your spouse will need to document your financial life as you go through the divorce. Now, in the early stages, is the best time to start.

If you left the bookkeeping to your partner, you may feel as though you are starting from scratch. It's important not to panic. Take control by finding out as much as you can about the finances of your marriage.

Linda, a 35-year-old mother of two, recalled that when she first separated from her husband, she was petrified at the thought of confronting her financial life. As she kept at it, however, the job became easier. "Now I can look at all of these complicated papers and forms and not feel scared," she reported.

SKIP AHEAD

If you were the family bookkeeper, you will be in much better shape than your spouse who did not participate in managing the finances. You can move on to "Don't Forget the 'Easy-to-Forget' Assets," below, and begin verifying the financial information you will need during your divorce. Otherwise, continue reading.

Whatever role you played previously, by the time the divorce is over, you will probably know more about the details of your financial life than you ever cared to. You gain this knowledge by going through these three steps:

1. Information gathering. Find information and sort files, receipts, bill statements, and other papers.
2. Information analysis. After sorting your papers, review your files, appraisals, and valuations. It's also important to calculate taxes and other costs—either by yourself or with an accountant or financial adviser.
3. Decision making. Once you analyze what you own and owe and what it costs to live, you can begin to decide what to do with your property in the divorce.

Start investigating your financial position now. Do not wait until you are at the bargaining table to determine the worth of your house or the value of your spouse's retirement benefits. When you enter the negotiations, you want to have as much up-to-date information as you can.

In this beginning stage of the divorce process, focus on information gathering only. Even if you do not understand all of it, do not get sidetracked from your fact-finding mission. Later on, you can concentrate on decision making. For now, your time is best spent on documenting your economic situation. Staying focused may seem hard, but it gets easier as you go along. Besides, it will help you:

• save time and money, especially once you hire an attorney
• distinguish your separate property from the marital assets
• negotiate a settlement from a position of strength, and
• begin building a foundation for a secure financial future.

Advice to the Terminally Disorganized

Ideally, your books and accounts are up to date and in order. More likely, however, you will have to hunt for records and receipts. You are not alone. Few people are as on top of their personal finances as they would like to be—or pretend to be.

Fortunately, you have a number of options in finding what you need. Tax returns, for instance, are gold mines of information in a divorce. The "Financial Facts Checklist" at the end of this chapter will give you other clues for finding financial data. But before you get there, here are some ideas to get you started.

Tax Returns. You will need the information found in your tax returns from as far back as you can go, with the past three years as the bare minimum. This is one time when you will be grateful that the IRS keeps records (often electronically) of everything you send them.

You can get complete copies of your returns by using IRS Form 4506. However, retrieving these copies requires considerable time and money.

The IRS will provide you with the "transcript" of any tax return you filed within the last three years, free of charge. A transcript will display most of the line items in the return and is often sufficient for divorce purposes. It can be helpful to start with these free transcripts and then decide whether you need to pay for copies of your actual returns. Transcripts can be useful when time is a factor, as they are generally delivered within five to ten days. You can order transcripts of your returns online, using Form 4506-T or 4506-T-EZ.

You may also order a transcript of your tax account, which will show any adjustments that have been made (by you or the IRS) to your returns. Both these transcripts can be ordered free of charge on the IRS website or by calling 800-908-9946.

If you require an exact duplicate of a complete tax return for any given year (or if no transcript is available), it can be ordered for a fee of $50. Copies of tax returns may take up to 60 days to be processed.

The IRS generally sends your tax information to the address shown on your previous return. If you've moved or are concerned about arousing your spouse's anger or suspicion, ask that the forms be sent to your office, your attorney, a friend, or a post office box. Once you have copies of the tax returns, you can review them with a trusted accountant or financial planner who can show you how to find basic financial information on the forms.

Loan applications and account statements. Check recent copies of credit or loan applications, canceled checks, and bank, brokerage, and credit union statements for information on assets or debts.

Insurance policies. Look for the names of the beneficiaries on any insurance policies. Determine whether the insurance is term or whole life. If it is whole life, find out the cash value.

Estate plans. You may find a wealth of information about property you and your spouse own by reviewing wills, trusts, and other estate planning documents.

Retirement plans. Keep track of work-related pension or savings plans, both your own and your spouse's.

Financial professionals. Make a list of accountants, lawyers, and other financial advisers you or your spouse have been using.

Credit reports. You can get a copy of your credit report periodically from one of the major credit bureaus. (See Chapter 5.)

Title reports. Visit your county land records office and conduct a title search, or have an escrow company do one for you, if you suspect there might be liens against your home or other real estate. (See Chapter 13 for details on liens.)

If you know you'll have trouble staying organized once you begin collecting your paperwork, you can hire a bookkeeping service, a virtual assistant, or a professional organizer. Before hiring one of these professionals, make sure the person has references and listens to you and asks what you want, instead of telling you what you need.

No matter what approach you take in organizing your documents, keep it simple. You can buy an inexpensive three-ring binder to hold your various papers. As your stack of information grows, create categories of documents by using the divider tabs that come with the binder. The "Net Worth" and "Cash Flow" statements in Chapter 12 will give you an idea of the kinds of divisions you can make.

When you begin to feel overwhelmed, remember that you are not just shuffling papers to get through your divorce. You are doing the groundwork for your financial decision making and security for many years to come—and that is worth the effort it takes to become informed and get organized.

Taxes and Power of Attorney

You may have a tax return transcript sent to a third party by completing the instructions on Form 4506-T. This can be useful when you're working with an accountant, an actuary, a financial manager or an attorney in your divorce.

However, there are some circumstances in which you may need greater involvement from a third party, such as your attorney. IRS Form 2848 provides authorization for a third party to communicate with the agency about your tax filings. In some cases, when a client is impaired or simply overwhelmed, an attorney in good standing with his or her state bar may be authorized to practice with the IRS and receive documents on the client's behalf.

This type of authorization would be helpful, for example, where a client's husband prepared all tax returns for his spouse over several decades, but never provided her with copies of the forms. If the client becomes subject to collection, she may want to sign a limited power of attorney that allows her lawyer to receive documents from the IRS and resolve the collection attempt.

Make sure your attorney is a professional in good standing with the state bar before you grant them even limited power to uncover previously unknown documents and negotiate on your behalf.

If You Think Your Spouse May Be Hiding Assets

Unfortunately, divorce...