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Planning a divorce

“Divorces are made in heaven”, or so believed Oscar Wilde. But while they might be ordained, the actual mess is created on earth. In addition to the emotional trauma, there are financial aspects to be considered too

Divorce means two households will henceforth survive on the cash pool that formerly supported one. There are murky details of who owns what assets, whose pay cheque meets household expenses and who is servicing loans. Hence, unless one spouse is desperate enough to pay the not-so-better other half to exit from his/her life as soon as possible, a proper financial planning (see box) can effect a clean and fair break, while securing each party’s future.

 

 SPLITSVILLE: A CHECKLIST
 Review Current Situation
• Compile, organise and value assets
• Analyse liabilities
• Estimate immediate needs
• Prepare statements of net worth
• Develop realistic budgets
 Long- Term Planning
• Discuss and prioritise goals
• Estimate career training, cost and time horizon
• Estimate future earning potentials
• Estimate educational costs of children
• Compare after-tax asset sales
• Project retirement needs
• Analyse insurance needs
 Divorce Settlement Analysis
• Look at after-tax proposed settlements
• Estimate maintenance needs
• Analyse long-term cash flow and net worth
• Compare and contrast settlement proposals
• Develop alternate settlement proposals

A bitter court battle can be avoided if couples maintain independent bank accounts to clearly demarcate whom the income belongs to, while naming the other spouse as a nominee. Keep in mind that all accounts should not have only one spouse as the owner, nor is it a good idea to pool income of both spouses into a single bank account.

Clarity of ownership of assets is also essential, based on whose income is being used to buy them. For example, investments in stocks made from the wife’s income should be held in a different demat account than those made from the husband’s. This will not only help in establishing the ownership of the asset in case of a divorce, but will also be useful in answering queries from the income tax department relating to the acquisition or sale of assets.

A dependant spouse must maintain a separate account of the funds acquired either at the time of marriage or through gifts later. This ensures transparency. Says Veer Sardesai, chief executive of Sardesai Finance, “Funds received at the time of marriage or later on by a dependant spouse might increase substantially by investment. The dependant should thus keep track of where these funds are going. In case of divorce, both the initial amount and the profits must be claimed.”

The couple’s house is usually a major bone of contention. If the property has been purchased jointly and is in both spouses’ name, matters become more complicated. Advocate Malini Poduval, who practises at the Supreme Court says, “If the divorce is so bitter that the couple cannot decide who will walk away with the house, the court settles it depending on the case.”

Once the ownership of assets is clear, the courts decide the alimony. Working women may also need to pay alimony in case the husband is unemployed. Over and above the alimony, either spouse can claim interim maintenance while the divorce litigation is underway. Alimony and maintenance is decided on the basis of income and background. In select cases, the alimony paid to the wife also factors in the standard of living enjoyed by the couple when married. The wife can claim a higher alimony on account of the fact that her income is not enough to support the lifestyle she was accustomed to.

The financial impact of a divorce is in many ways more profound on the children.   With the increasing cost of higher education it is very important that a pool of funds is available to finance the same. Child support, irrespective of custody, if not decided mutually, will be decided by the courts depending on who can better afford the upkeep.

Things can become complicated if there are insurance policies, assets or instruments in the name of the children. To avoid legal problems in the case of a divorce, right from the outset, the couple should arrange to be nominees of an equal number of such assets. If the father is the nominee for say the life insurance policy, the mother can be named for a Public Provident Fund in the child’s name. Tax benefits, of course, would accrue to the parent contributing monies in the child’s asset.

More often than not divorces get very acrimonious. Rational and judicious thinking is the first to fly out of the window. It is best to be educated about your assets and your rights. Pre-nuptial agreements are thus slowly gaining ground among the aware. Though not legally valid, they act as a good guideline for couples to adhere to. At the very least, they help cut short the time— and money—consuming litigation process. But for a secure financial future it is best to plan ahead. After all Mr Wilde, why leave it to the gods?

(With Sushmita Choudhury)