A Primer for Your Newly Divorced Clients

Typically, one spouse takes care of the mundane task of paying bills. If that was your former other half, you need to set up a system so bills get paid on time. If you are somewhat computer literate, a program such as QuickBooks can help with the record-keeping. It may take a little getting used to, but is well worth the time and effort. As an aside, many community colleges and adult schools offer courses for learning QuickBooks. Of course, you need to understand the cash flow process, which simply is how much money will be coming in and how much is expected to get spent each month.

2. Budgeting

When people hear the word “budget,” thoughts of scrimping and saving immediately come to mind. However, there are huge differences between living on a budget and creating a budget on which to live. It doesn't have to include every dollar, it is just there to provide a framework. Include fixed expenses, such as mortgage or rent; mostly fixed expenses, such as utilities or gym memberships; and variable expenses, such as food and entertainment.

We use Microsoft Excel to create budgets, which, for basic spreadsheets, is easy and effective. List each income and expense item, limiting it to cash flow items. For example, if you receive interest or dividends on investments, but don't use them on a monthly basis, don't include them in your budget. On the expense side, estimate amounts to be paid each month. Regarding loans, start by using the minimum required payment. Amounts can always be increased if there is an excess of cash inflows over outflows.

While it is not expected that anyone will stick scrupulously to their budget, it provides a way of understanding cash flow. For the first several months, we recommend that you compare inflows and outflows to your budget. If anything is significantly off base, adjust it. Remember that your budget reflects your lifestyle and its purpose is to help with money management.

3. Investment Management

If you are fortunate enough to have received investments through equitable distribution, decision-making is inevitable and difficult, even for a seasoned investor. If you are comfortable with the prior investment manager, ask him/her to discuss your needs and goals, both current and long-term. If you are the least bit uneasy because of the prior relationship between the investment manager and your ex-spouse, it would be best to interview several investment advisers, asking each how they would invest your money. Then choose the one with whom you feel most comfortable. In addition to discussing your needs and goals, consider risk tolerance and personal feelings about certain industries. Remember, it is your money and you have the final word.

4. Pensions and Retirement Plans

Whether you had your own plan during the marriage, received a portion of your spouse's account through a Qualified Domestic Relations Order (QDRO), or have no retirement plan, you need to prepare for your retirement. Even if you do not work, but collect alimony, you are allowed to contribute to an IRA or Roth IRA. There are several differences between traditional IRAs and Roth IRAs. While contributions to a traditional IRA are tax deductible, contributions to Roth IRAs are not. The second important difference occurs upon withdrawal. After a person reaches retirement age, amounts withdrawn from Roth IRAs are not subject to income tax, whereas amounts withdrawn from traditional IRAs must be allocated based on the total amount contributed and the appreciation on it. While alimony may be for life, once the payer stops working, it is likely that it will be reduced. One of the best ways to protect yourself and supplement your income during yours golden years is with retirement accounts.

5. Social Security

This is one of the most complicated areas, even without getting divorced. There are over 2,700 rules governing retirement benefits and over 500 possible filing strategies available to a typical couple. For the divorced person who did not work, claiming Social Security benefits through a former spouse's earnings is available ' given certain parameters. The couple needs to have been married for over 10 years, both spouses must be over age 62, and the applicant seeking benefits cannot be married at the time of the application. Of course, there are a lot of other rules and factors, but it is important to know that you still can collect against your former spouse's account without affecting the amount that he/she will receive.

6. Estate Plans

Draft a new will. You'd be surprised how many divorced individuals do not do so and, without realizing it, leave all of their worldly possessions to their former spouse. When we discuss estate planning with our clients, we explain that the most precious assets are their children. If minor children are involved, discuss the issue of guardianship with your attorney, especially if the noncustodial parent has moved out of state or has a new family. A codicil or affidavit to the new will also should be prepared so that any family court, needing to decide on future guardianship, is aided in its decision.

7. Insurance

When it comes to insurance, a lot of people suffer from “ostrich syndrome,” which is burying your head in the sand and hoping it will go away. It won't, so be diligent. There are a variety of different types of insurance, many beneficial and some mandatory.

Obviously, you need health insurance. Even if you get coverage under COBRA through your former spouse, it will run out. While you may not need to do something immediately, recognize your short-term and long-term needs. You also should have homeowner's or renter's insurance, and you must have auto insurance.

Two other types of insurance that should be explored are long-term care and life. For those with minor children, life insurance, while not mandatory, may be necessary. You must determine your insurance need, which is a combination of the amount needed to preserve the lifestyle for your children, including college costs, for as long as deemed appropriate and other amounts, such as weddings and funeral costs. It may be a morbid thought, but it is inevitable. For example, if your children are already in college, your insurance amount can be smaller.

For existing policies, be sure to update your beneficiaries. If your existing policies name your ex-spouse as the beneficiary and you do nothing, the law in many states is that the insurance company will ignore the primary beneficiary and pay out the proceeds to the contingent beneficiaries. If no contingent beneficiaries are named, payment will be made to the estate. If the intent is to have your ex-spouse as the beneficiary, you must sign new beneficiary designation forms after the date of divorce. By doing so, the positive action of naming the beneficiary will be allowed, whereas doing nothing is a negative action and the beneficiary designation will be ignored. Also, it may be advisable to form a trust to own and be the beneficiary of the policy.

It is strongly encouraged to consider all options and to discuss those options with your professionals. As the cost of health care for seniors has spiraled upward, long-term care insurance has increasingly become more important. It is another way to preserve your assets. If you choose to purchase this sort of coverage, be sure to consult with an insurance adviser, who truly understands all of the nuances.

Cohabitation

Cohabiting with a member of the opposite sex post-divorce can, in many cases, lead to a loss of support payments from an ex-spouse.

New Jersey's alimony statute, for example, defines cohabitation as “involve[ing] a mutually supportive, intimate personal relationship in which a couple has undertaken duties and privileges that are commonly associated with marriage or civil union[,] but does not necessarily maintain a single common household.” N.J.S.A. 2A:34-23(n). Further, when evaluating whether cohabitation is occurring, the court is required to consider the following factors:

• Intertwined finances such as joint bank accounts and other joint holdings or liabilities;
• Sharing or joint responsibility for living expenses;
• Recognition of the relationship in couple's social and family circle;
• Living together, the frequency of contact, the duration of the relationship, and other indicia of a mutually supportive intimate personal relationship;
• Sharing household chores;
• Whether the recipient of alimony has received an enforceable promise of support from another person within the meaning of subsection h. of R.S. 25:1-5; and
• All other relevant evidence.

In our state of New Jersey, there are two important points a person should know regarding the amendment to its alimony statute, which took place in September 2014, especially if they are entering into a divorce agreement to receive or pay alimony. The first important part of the amendment is that “[a]limony may be suspended or terminated if the payee cohabits with another person.” N.J.S.A. 2A:34-23(n). There seems to be no second step in the amended statute.

Prior to the amendment, the a New Jersey court would review the economic needs of a supported spouse upon a finding of cohabitation. The burden, once placed on a spouse challenging an alimony obligation, would create a two-step process and costly litigation. Upon a finding of cohabitation, the court would then move to the second step, shifting the burden to the dependent spouse, “to show that there is no actual economic benefit to the spouse or the cohabitant.” See Ozolins v. Ozolins, 308 N.J. Super. 243, 245 (App. Div. 1998), and Gayet v. Gayet , 92 N.J. 149 (1983). The extent to which this amendment will affect cases and preclude further litigation must be further parsed out by New Jersey courts in case law.

However, the amended statute allows for a court to make a ruling without any further costly litigation based on the plain language of the statute. Furthermore, the amendment opens the door to the possibility of a court finding cohabitation without finding that the parties live together on a full-time basis, but based on only a part-time living arrangement. Therefore, the new language of the amended statute is set to act as a deterrent for those trying to scam payors by not moving in with their significant others and delaying the inevitable termination of the support obligation based on their marriage-like relationship with their significant other.

Jennifer E. Presti is an associate at Mandelbaum Salsburg in Roseland, NJ. Michael H. Karu, CPA/CFF, is a member of Levine, Jacobs & Company. This article also appeared in the New Jersey Law Journal, an ALM affiliate of this newsletter.