We have seen many new clients recently who have experienced a very long period of separation from their spouse. Why? The couple made a conscious decision to simply live apart in separate households without progressing to divorce proceedings.
There are many divorce financial planning complications created by these long separations. Here are a few that come to mind.
1. How will we determine the date of separation for valuing assets and other considerations?
Many of the couples choosing to live separate lives do exactly that with the exception of their finances. We see cases were the couple owns two homes together and each lives in one of them. They may even continue to share income by having both parties deposit their earnings into joint accounts.
In the State of California all earnings of an individual are the separate property of the party earning them. In the event the divorce does happen down the line a decision must be made about separating out these post separation earnings. In the instance where only one party has earned income they may argue for a much earlier date of separation in order to claw back all of those post-separation earning as their separate property.
Of course the non-working party would then seek the latest possible date of separation to combat the other’s claim. Date of separation is a legal issue with potentially major financial implications. We suggest you work with your attorney and your Divorce Financial Analyst at Wellspring Divorce Advisors to determine the cost vs. benefit of making a claim on date of separation as the litigation can be costly and your position hard to prove.
2. Who has had use of the community property assets?
In the State of California we have precedent case law that requires the party making use of the community asset be charged for the value of that usage. The most common example is a home owned by the community used exclusively by only one party for an extended period of separation. This is known as a Watts Credit in California.
In order to determine the amount of a Watts Credit for exclusive use of a Community Property home a real estate appraiser will determine the Fair Rental Value of the home. Your Divorce Financial Analyst will then determine the actual cost of maintaining that home such as mortgage, property taxes, insurance and basic maintenance if the Fair Rental Value exceeds the cost of maintaining the home the party with exclusive use must pay the Community for the difference.
Example: I can rent my home on the beach in La Jolla for $12,000 per month (The Fair Rental Value), it has no mortgage, $2,500 per month in Property taxes and $300 per month in insurance and $700 per month in maintenance for things like a gardener and large water bill to maintain my rare orchid garden. In total it costs $3,500 per month to maintain the home but is worth $12,000 in Fair Rental Value to the Community resulting in a $8,500 per month credit owed from the party with use of the home to the Community. Over a four year separation the total Watts credit would be $408,000 or $102,000 per year. Ouch.
Talk to your attorney and Divorce Financial Analyst at Wellspring Divorce Advisors for assistance in making a decision about the long term viability of maintaining the home in your individual financial circumstances.
3. Who has control over Community assets during separation?
Whether it be a traditional stock and bond portfolio traditionally managed by one party, a real estate portfolio managed by a professional manager or a business started and owned by the Community, someone must maintain control and oversight of the assets or else risk their partial or complete loss due to lack of management. We usually see couples separate and simply maintain the status quo where whomever was responsible for certain financial decisions remained in that role during separation.
We are here to tell you – DO NOT FALL INTO THAT TRAP.
Abrogating your responsibility for financial decisions during marriage is a bad idea in our opinion and a full scale sin in the middle of a separation. Yes, you may trust your spouse still but now you have no ability to see what they are doing, what kind of decisions are being made and where you might find concerns in those decisions because your financial partner now lives in another house.
The minute you separate you should discuss the separation with a Divorce Financial Analyst at Wellspring Divorce Advisors so we can help you to set up workable ground rules for financial decision making and assist you in making those decisions through our sophisticated and experienced financial advice. We have seen jobs lost, investment accounts dissipated, credit card debt accumulated and many other financial calamities during these long separation and can help you avoid making the same mistakes.
Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.
Contact us to find out how we can help you through this process.