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Article written by Chris Coulter
The shortest answer is – it depends. A financial planner is one professional who can help you reach a better divorce settlement; your lawyer and your accountant are also important players in this process.
It also depends upon what a “better divorce settlement” means to you. For some, an unemotional and pragmatic approach translates to a “better divorce” settlement. To others, an equitable and quick settlement means a “better divorce” settlement. And there are those who feel that coming out financially further ahead of their ex-spouse is the definition of a “better divorce”.
Generally, the more amicable the breakup, the more pragmatic both parties are through the divorce process, and if you remember just one thing from this article, let it be this: When both parties come to the table with cooler heads, both parties leave it financially better off.
There are several significant reasons for letting calmer heads prevail, and avoiding substantially higher legal bills is just one of them.
1. Family Net Worth Statements: Working with a financial planner can provide clear and accurate Family Net Worth Statements (Assets minus Liabilities). A clear understanding of where a family is financially makes it much easier to divide assets between the divorcing parties. Clarity of assets can make it easier to avoid having to liquidate assets, therefore minimizing the taxes from disposition that will need to be covered.
2. Taxes: If negotiations can’t be arrived at amicably, the disposition of assets becomes a major focus. Items like cottages, business holdings and investment properties may need to be liquidated to arrive at a settlement. This would mean that any appreciation in value would be subject to Capital Gains Tax. If properties can be divided amongst the parties, capital gains taxes can be deferred until the property or business is sold at a later and desired date.
3. Registered Investments (RRSP/RRIF): These assets get divided equally between the two divorcing parties, and left in a registered retirement plan, therefore not subjected to immediate tax consequences. Depending upon the split of these registered funds, the outcome will likely leave the parties in a retirement shortfall. A financial planner can help you get your retirement plan back on track.
4. Non-Registered Investments: Since non-registered investments are subject to taxation on an annual basis, the tax burden may not be as significant, but the disposition of these assets can potentially be subject to penalty fees, cancellation charges and other service fees. An amicable split of these assets would eliminate such costs if possible.
5. Permanent Insurance Policies: One of the benefits of cash value held within a permanent life insurance policy is that it grows on a tax-free basis. Depending upon if and how you access the cash value, you may receive this cash in a tax-preferred manner (Insured Retirement Plan). Because permanent insurance is considered an asset, if an amicable resolution can’t be achieved, the cash value would be considered a disposition and therefore subject to taxation. Unlike non-registered investments, they would be taxed at the individual’s marginal tax rate in that year versus being subject to capital gains.
There are clearly significant advantages to keeping a divorce amicable. The most significant savings in dividing family assets amicably comes from not having to immediately pay the potential tax bill if a number of these assets need to be liquidated in order to be divided. As most of these assets would eventually be subject to taxation, it would make much more financial sense to have these assets liquidated over a lifetime.
A financial planner can help you valuate your assets, create a family net worth statement, and show you how to minimize the effect of having to liquidate any of these assets.