Divorce: How to Get It Right, and Get on with Your Life

Dividing assets such as investment accounts and pensions may seem painfully complicated. Your lawyer can help demystify the process but you may also want to consult a financial planner to help project your future needs. A new breed of experts, known as certified divorce planners, specialize in the financial aspects of divorce. You can find one through the Institute for Certified Divorce Planners. In addition, knowing a few basic principles can help you ask the right questions:

The options for your options
Stock options are increasingly becoming a larger slice of the marital pie. If they're part of yours, quiz your lawyer on how much he knows about the subject. If he can't explain how options work, find a new lawyer. Laws that govern their distribution and value are rapidly evolving and changing.

While laws vary by state, options acquired during the marriage are generally subject to distribution if they were granted for past employment services. But the methods used to value options--especially those that haven't been exercised--are not as clear cut.

One method adopted by many states relies on the difference between the stock price at which the option was granted and the market price at the time of the divorce. The catch is that options granted just prior to the divorce can be rendered worthless if the stock price hasn't increased--a likely scenario for many short-term stock projections.

Opponents of the method say it unfairly deprives one spouse of the option's true value, since the stock price may increase over time. Another method that some states are adopting considers the difference between the grant price and the potential future value of the stock.

Call your pension plan administrator
If you or your spouse have contributed to an employer-sponsored defined benefits plan, you can agree to share the future benefits, but you'll have little say over the process. The pension plan administrator will provide you with its own rules for dividing future retirement benefits between two people in the event of a divorce. They generally require a Qualified Domestic Relations Order (QDRO), which your lawyers will prepare, to officially notify the plan administrator of your divorce and intention to split future benefits.

Be a tax savvy planner
If you're planning to divide a tax-sheltered account such as an IRA, consult an accountant about the correct procedures. Consider the case of Michael, who withdrew $110,000 from an IRA and gave it to his ex-wife in exchange for her share of the house. He assumed she'd be responsible for one-half of the taxes and early withdrawal penalties, but the United States Tax Court ruled that things didn't automatically work that way. Michael was unexpectedly on the hook for the entire income tax bill, a 10 percent early withdrawal fee and other penalties. This costly situation that could have been avoided or minimized with thorough planning.

Dividing a standard brokerage account can also have costly tax ramifications if you don't look beyond the numbers on your statement.

Next: Figuring Your Taxes >