Crucial Extra Items to Cover in a Divorce Settlement
College costs, “right of refusal” time and tax hits
Civil and quick, or dramatic and drawn out, most divorces have a largely predictable result when it comes to the house, retirement funds and parenting.
Most states split up assets acquired during marriage “equitably.” Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) divide everything 50/50, regardless of when acquired. Each state has its own guidelines for minimum child-support obligations, alimony and custody arrangements. You can access state details on DivorceNet.
But there are costly things that most state laws fuzzily touch upon or don’t address at all, especially where minor children are involved. Over 80% of custodial (“primary”) parents are mothers, according to Census data, so extra costs not covered in a settlement can leave conscientious moms on the hook for thousands — or tens of thousands — of dollars. Divorce lawyers or mediators can earn the fees they charge by ensuring that your settlement addresses these future costs. My colleague Carla Fried explains the benefits of mediation.
Who pays for college? State laws vary greatly regarding parental obligations. In Illinois, Washington, Connecticut and New York, for example, exes are each generally on the hook for splitting four years of in-state tuition, room and board at the state’s flagship university (or cost equivalent elsewhere). But in California, Pennsylvania, Minnesota and Florida, among others, divorcing parents can’t be forced to pay for college if they don’t have it voluntarily worked out in their settlement.
Judges typically won’t enforce a private college tuition, an average $32,410 a year after loans, merit aid and scholarships, according to the College Board. Nobody pays the rack rate, so at the least get language covering the cost of four years of an in-state degree. The truth about private college tuition discounts.
All the extra stuff in college. Books and supplies alone cost an average $1,298 a year, according to the College Board. The average cell phone bill is $1,118 a year, according to the Bureau of Labor Statistics. Make sure there’s language on how you and your ex will bankroll your future college student’s textbooks, cell phone, laptop, desktop, extra meal expenses, travel to and from college, unreimbursed medical expenses, car insurance (if needed) and monthly allowance. Get these costs listed as college expenses. Also consider language covering financial twists on the academic road to adulting, like a gap year or study abroad.
Prepping for college. The costs of high school tutoring, test prep, ACTs/SATs/AP exams and college applications add up. Apply to 10 schools with an average application fee of $50, and you’re in for $500. One-on-one online SAT or ACT tutoring through Kaplan costs from $1,999 to $4,599, depending upon how many hours you want. Even with joint custody, the parent who winds up being the custodial parent (the parent with the majority of child time) can end up footing these hefty bills if the other side doesn’t voluntarily pony up for expenses that aren’t explicitly covered in your agreement.
First in line for kid time. Say your ex has an out-of-town business trip when they have scheduled parenting time with your third-grader. Ex calls in their sister to handle things for five days. If you’d rather have the kids when the ex is away, get right-of-first refusal language in your settlement.
Know the potential tax hit for portions of any investment accounts that you might be awarded. Splitting a traditional IRA and a Roth IRA straight down the middle can yield wildly varying results, as gains on a Roth IRA aren’t taxable, while those in a traditional IRA bear ordinary rates upon withdrawal. So $100,000 of a Roth IRA is more valuable than $100,000 of a traditional IRA.
For investment accounts, know the cost basis (the price originally paid for the initial investment) of what you’re getting. If the judge awards you a chunk of a stock account worth $150,000 with a cost basis of $50,000, you’ll owe long-term capital gains tax of 20% (plus the 3.8% Obamacare levy) on the difference. Make sure that a split-up investment account divides cost basis equally.