Kevin Greenard: Financial considerations when ending a marriage: Creating a departure plan

Kevin Greenard

Second in a four-part series

Last week, we talked about the importance of hiring a good lawyer when planning to end a marriage. In conjunction with meeting with a lawyer, I recommend mapping out your tentative plans immediately following separation. You should plan for about three to six months living expenses post separation. These funds should be in an individual bank account that you know you will be able to access and pay the necessary bills.

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Date of separation

One of the pieces of information that is stated in a separation agreement is the date of separation. We recommend that you clearly determine the date of separation. This can have important financial ramifications when the time comes to finalize the separation agreement. If the date of separation is disputed, you will want to have support for your interpretation of that date, such as documenting the date in communications (copy of a letter written to end the marriage, email or text message). There are many other forms of evidence to support the date of separation and we recommend you keep all documentation.

Living arrangements

When you begin living apart is normally one form of evidence to support the date of separation. However, it is possible to be separated and still be living in the same house. Normally this would mean that you are no longer sharing the same room / being intimate, and no longer going to social events together. In these situations where you are still living in the same house, it is even more important to obtain appropriate documentation to support the date of separation.

Financial information

Regardless of whether you settle your divorce outside, or inside, of the court room, you will need to gather certain financial documents. The process of gathering this information can be very time consuming. If you are able to gather the information below, before the date of separation, you will be able to assist your lawyer in analyzing your situation more quickly and, providing you with the best options on proceeding forward. Another benefit of gathering this information, prior to the date of separation, is that you are in the household, and it is easier to gather than if you are in separate households. Gathering and organizing the information could potentially save you thousands of dollars in legal fees.

The following is a list of financial information you should gather about your assets and debts:

• Three years of income tax returns (you and your spouse)

• Three years of notices of assessments

• Current statement of earnings

• Three years of financial statements if you or your spouse are self employed

• Three years of financial statements if you or your spouse own a corporation

• Three years of financial statements if you or your spouse have any partnership interests

• Property tax assessments with a legal description of any real property, including date acquired and estimated value

• Vehicle registration as well as the date acquired and estimated value

• Three years of pension statements from employer

• Three years of non-registered investment statements

• Three years of Registered Retirement Savings Plan (RRSP)/ Registered Retirement Income Fund (RRIF) statements

• Three years of Tax Free Savings Account (TFSA) statements

• Other mobile vehicles (i.e. motorhomes, campers, boats), including date acquired and estimated value

• Other assets (i.e. collections, art, jewellery, precious metals)

• Mortgage statements, including the date incurred and the current balance

• Other secured debt obligations, including the date incurred and the current balance

• Unsecured debt obligations including bank loans, personal loans, credit cards, and loans from arms- length and non-arms-length individuals

• List all disposal of property in the previous two years

• In addition to assets and debts documents, you should also create a schedule of monthly expenses. This can be useful when it comes down to preparing your costs after separation.

• Health related costs (i.e. dental, optical, prescription)

• Personal costs (i.e. clothing, hair care, toiletries, education, entertainment, other)

• Housing (i.e. rent, mortgage, insurance, water, sewer, strata fees, repairs and maintenance)

• Household (i.e. food, household supplies, meals in restaurants, furnishings and equipment)

• Utilities (i.e. heat and electricity, telephone, cable, internet, garbage collection)

Financial institution online access

If you have online access to your financial institution accounts, you may be able to find and save PDF copies of bank and investment statements for multiple years. Online access with the Canada Revenue Agency will also allow you to easily gather tax information. It is relatively easy to save all the files electronically and create a digital filing system. The more organized you are, whether through digital or paper files, before the date of separation, the less time your lawyer will have to spend compiling this information.

Contacting your financial institution

To support the date of separation and to ensure you still get your financial mail, we recommend you contact both your bank and financial firm immediately after separation to advise them of your separation and new address, if applicable. At the same time as updating your address, we would encourage you to schedule a time to meet with your banker and portfolio manager to update them on your personal situation. We would recommend you specifically speak with them about all joint debts and joint investments. At the same time, you could change the beneficiary designation on your registered accounts. Not all firms have the same relationship breakdown procedures. Below, I have outlined some of the topics to discuss with your financial advisers (i.e. bank representative, portfolio manager).

Joint credit cards

With any type of debt, only one of you is considered the “primary” on the account. You should first determine who is the primary account holder. The term primary with respect to debt is an important concept to understand. A credit card is no exception. Normally, the “primary” on a joint credit card is the person who makes the most money.

The reason for this is easier approval of the original application. Another term to be familiar with is “secondary”. When a credit card is taken out with both a “primary” and a “secondary” then the approval is based on both persons’ incomes. Either the primary or secondary may request closure of a card. Another term to be familiar with is “supplementary holder.” It is easy to confuse the terms “secondary” and “supplementary holder.” If a spouse is a supplementary holder, they may be able to spend an amount of the authorized limit, but they have no responsibility for the debt in the event of default. A supplementary holder has the ability to cut up their own card, but they can’t make changes to the account like primary and secondary holders can. If you are planning to end a marriage, you need to be aware of certain things with respect to joint credit cards.

Care should be taken before cancelling joint credit cards as it means the cards can no longer be used by either one of you. The debt does not disappear, however, and is still a joint debt obligation of both the primary and secondary holders. One option is to pay the remaining credit card debt off with funds from your joint bank account and then the card could be cancelled after it is paid off.

The advantage of cancelling the joint credit card is that you do not have to be concerned about your spouse recklessly spending up to the authorized limit on a credit card, that you are jointly liable for, after you discuss ending the marriage. This is especially important if you feel that charges would be made and the balance not paid at the end of the month.

You will want to ensure that the credit card balance is paid off regularly as to not impact your credit rating. The disadvantage of cancelling a joint credit card is that it can no longer be used to pay family bills that are necessities of daily life. And, once the credit card is cancelled, then you would have to apply for an individual credit card in your own name. That means that the application will factor in only your income.

An alternative to cancelling a joint credit card is requesting the authorized limit be lowered. Either the primary or secondary holder can request that the authorized limit of the credit card be lowered, provided it is not currently over the requested threshold. For example, if you feel a limit of $25,000 is no longer necessary, and you wanted to lower your risk, then you could request that the limit be lowered to $5,000 provided the current balance outstanding is $5,000 or lower. This can work well when you can speak with your spouse about what the cards can be used for and to have the card paid for automatically from a joint bank account.

Another option is to make an agreement with your spouse to keep any joint credit cards active until the separation agreement is done and everything is formally dealt with. This works provided both of you use the cards for regular charges and communicate in advance of any irregular charges.

One recommendation I have for clients considering ending a marriage is to obtain online access for all joint debt obligations. Once you have established a formal date of separation, then any unusual transaction on, or after that date, could be addressed with your lawyer. The key component is to make sure you have all the documentation in place. We also recommend that you keep a filing system that has all receipts and statements if necessary in the future.

Joint bank accounts

Extra care should be taken with joint bank accounts. Before online banking individuals would have to go into a bank to deal with joint bank accounts. Either individual could walk into the bank and request funds. If the amount was significant, it would likely raise some red flags and possibly the attention of the representative or branch manager. Before online banking, when individuals opened an account in their individual name, they met with a representative at the bank and signed forms in person. If after opening a new individual account, a spouse wanted to transfer funds from a joint account to the new individual account, they would have to speak with a person to do this. In the past, it was not uncommon for a branch manager to phone a joint owner to see if they were aware of the transfer. I have seen situations in the past when transactions were not done in good faith and full transparency, and the branch manager reversed the transaction.

Today, a person can open a bank account from the comfort of their own home. They can transfer the funds from a joint account to an individual account without the other spouse knowing ahead of time. With a click of a mouse, and without even talking to you, your spouse can transfer funds out of your joint account to an individual account. In fact, your spouse can even move the funds to another bank, which renders the reversal of the transaction extremely difficult.

One recommendation I have for clients considering ending a marriage is to obtain online access for all joint bank accounts. Once you have established a formal date of separation, any unusual transaction on and after that date could be addressed with your lawyer. The key component is to make sure you have all the documentation. We also recommend that you keep either a paper or digital filing system that has all bank account statements if required in the future.

Lines of credits

Many couples have lines of credit set up that may or may not have been utilized. I would talk to your personal banker to make sure you have complete details on all debt facilities whether they have been utilized or not. Sometimes lines of credit can be significantly larger than the borrowing limits on credit cards. As with bank and credit card statements, I encourage getting online access set up that has the line of credit listed so you can monitor whether it has been utilized. It is especially wise to keep track of all post-separation transactions. The spouse that does the post-separation financial transaction should be asked to state the purpose of the transaction and whether the debt was used for the benefit of one individual or the family.

Safety deposit box

If you have personal valuables in a joint safety deposit box (SDB) then I would look at removing those items and safeguarding them. It is not possible to remove one name on a joint SDB. The SDB account must be closed completely and then re-opened as a sole box. The only exception to this upon death of one of the spouses.

Joint and several liability

Nearly any debt can be joint debt. Often financial institutions will ask both spouses to sign a debt instrument. This makes approval of the debt easier, and limits higher. But it also makes both parties have joint and several liability. I cannot stress enough the importance of having complete understanding of all documents you have signed where you have potential financial liability.

Individual accounts

Putting non-registered funds, either in a bank account or investment account, solely in your name will provide you with cash you need to manage the period between the date of separation and signing the separation agreement.

All registered accounts, such as RRSPs and TFSAs, are only in one person’s name. I recommend obtaining all details of the accounts solely in your name. If the non-registered funds you have put aside are insufficient, then it may be necessary to withdraw funds from your registered accounts. Withdrawals for the TFSA can work in these situations as you will not be taxed on the withdrawal and when financial situations improve in later years, you may replenish the amount(s) you withdrew. You will not need permission from your ex to pull funds from registered accounts as they are only in your name. They can provide some much need liquidity in this transition period. However, your spouse may have a right to part of the value of your registered accounts. Ask your lawyer for advice on this point.

Finding your financial footing is a key component of creating your departure plan. Having three to six months of funds in a bank account, and the above financial information organized, will help you and your lawyer during this period. Lawyers and financial institutions have helped many clients navigate the separation process. Keeping organized and working with the right people makes this process significantly easier.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears at timescolonist.com every week. Call 250.389.2138. greenardgroup.com

The series

Part 1: Picking the right lawyer

Part 3: After the separation agreement — Feb. 21

Part 4: Second marriages are especially tricky — coming Feb. 28

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