Marriage confers many financial protections, rights and benefits on a couple. But by the same token, the dissolution of a marriage through divorce requires
unraveling a household’s structure. It is often the immediate effects of the transition that take center stage — who will stay in the house, what will happen with the children, how joint property will be split or liquidated. But to create an equitable settlement for you and your spouse, it is important to consider the long-term financial impact of the division.

Smoothing Emotional Discussions

Divorcing couples are often anxious to get the process over with as soon as possible. Or perhaps one party hopes to reconcile and doesn’t want to alienate the spouse. “No matter how amiable the divorce is, discussions about assets, liabilities and finances can be emotionally draining, inconvenient and expensive,” says Anne Lober, a partner with Sherman, Williams, Lober & Thompson in Santa Cruz, Calif., which publishes www.divorcehelp.com. The average length of a U.S. divorce process is one year, according to the Institute of Divorce Financial Analysts. Bringing a third party into the decisionmaking process can help ease the negotiations. While it is common to consult a divorce attorney, engaging a qualified financial advisor early in the process as well can provide a thorough knowledge base for financial decisions. This may save time and money.

A qualified professional can help you prioritize goals for your situation and forecast a settlement’s long-term effects related to:

Retirement Planning.

Strategies for dividing pension plans, qualified retirement plans and stockoption elections.
Valuation of assets. Considerations related to the growth potential of your assets, like inflation, future earning potential and compound interest.
Tax liabilities. The taxable results of transferring or selling assets.
Cost-of-living expenses. Continued health insurance premiums, life insurance and long-term cash flow needs.

Real Estate Trade-Offs

Although real estate is often the largest portion of a couple’s net worth, it is also an illiquid asset that may be expensive to maintain with just one income.
While it may make financial sense to sell the home and split the proceeds, this adds to the emotional weight of the divorce, and one or both parties may try to keep the house.

Generally speaking, the transfer of real estate during a divorce is nontaxable. However, any property acquired as part of a settlement will be taxed in the future. When determining the financial effect of keeping the house, it’s important to remember that “cost basis — not just the current market value of the asset — needs to be taken into consideration prior to the divorce settlement,” explains Lober. For example, say a couple bought a home for $40,000 30 years ago and it is now worth $425,000. The unrealized capital gain is $385,000 — $135,000 more than the $250,000 exclusion that the person who keeps the house is allowed as an individual. If the person sells the house, he or she will have to pay taxes on that $135,000. Had the couple sold the house before they divorced, they could have used their combined $500,000 exclusion
and paid no taxes.