Financially Preparing for Divorce
A Certified Divorce Financial Analyst Gives the Dos and Don’ts
For individuals contemplating divorce, there are two significant dates to consider. They are January 1st and April 15th. Studies show these dates are the most common to start a divorce.
On January 1st, we’re contemplating the direction of our lives. When displeased by our environment, the season and all its newness are conducive to change.
On April 15th, all that has been kept in the dark will finally be brought to light. Assets and spending habits are discovered during the process. Non-financial partners who were unaware of the magnitude of these things may feel cheated or lied to. For the first time, they’re seeing, live and in living color, where the money is, where it was, and where it went.
Probing conversations can become heated. Heated arguments lead to the need for changes in the marriage. Eventually, they result in divorce.
More Questions than Answers
If you find yourself in this precarious position, or if you’re frustrated to the point of wanting to walk away, don’t fret.
The array of issues to consider and agree upon can feel like a whirlwind even with the assistance of a group of professionals around you. Rash decisions are the most common reason individuals get hit with large tax bills or find themselves in financial trouble post-divorce. But this can be avoided.
Divorce is the single largest financial transaction (and the most stressful) of a person’s life, yet is the area most people least financially prepare. Preparing for it is your responsibility. As you get ready to meet with your attorney and financial advisor, here are some dos and don’ts for your financial strategy in divorce.
- Make a list of all assets and liabilities.
Be sure to document the types of accounts they are in (i.e. note the IRA or 401K, do not note is as “Retirement Account”), as this makes a huge difference with regards to access to cash, taxation, penalties, and so on.
It also includes all retirement plans through your spouse’s employer (401K, pension, profit sharing, etcetera).
- Copy all financial records and tax returns.
The financial process of a divorce is very paper intensive. Become friends with the manager at your local FedEx office. You will want duplicate copies of ALL financial records for you, your attorney and your advisor.
Many people skip this step because everything is online. They later regret not hitting the print button when the accounts get closed, and access becomes difficult. Print everything. You’ll be glad you did.
- Create a budget.
If you hate budgets, create a spending plan. Yes, it’s the same thing with a different name. But it’s vitally important to your future as your entire income and spending patterns are about to change.
Divorce is expensive, regardless of how amicable it may be. Having a solid grip on your cash flow is a must.
- Obtain your credit report.
You need to know any lingering debt obligations you may have (On paper, so print it!) forgotten. The most common types are store lines of credit that are paid off but still open.
Your credit report will make you aware of those and any other surprises you’ll want to get a jump on.
- Get your fair share.
Men especially will tend to acquiesce to the other spouse when dividing up the property, including household items, to get the divorce process finished quickly.
At the time, this seems like an easy way to get the divorce completed. Instead, it’s both a financial and positional setback as it sends the message you do not deserve what’s yours.
Additionally, it costs more to furnish a household than most realize. It can significantly add to the overall costs of divorce.
- Understand your Social Security benefits.
If you are at or near retirement age, it’s critical to understand how your divorce will affect your social security benefits.
If your ex-spouse was the higher earner, you’re still entitled to the spousal portion of their benefits, provided you do not remarry.
Social Security benefits can be complicated. Be sure and discuss these with your financial advisor or CDFA during the divorce process.
- Make any significant financial moves.
Before completion of your settlement, do not start randomly paying off debt or moving investment accounts to other firms. You may end up paying off debt with your own money that could have been split with your ex-spouse.
Avoid any activity that could give the appearance you’re trying to hide funds.
Moving accounts could be seen by the courts as an attempt to protect funds to keep them from being found during discovery. Keep your accounts as they are. Close joint accounts. And pay off your debt in an agreed process.
A divorce decree can be thrown out based on the appearance of financial deception.
- Keep joint accounts or debt.
Part of your divorce decree needs to require that all joint accounts be closed, and all joint debt be paid off at the time of the settlement.
Failure to do this opens you up to financial liability.
While you should not go about this on your own, it is vital that getting these accounts closed be included in the process (and in the decree, if needed).
- Make large career moves.
Often, clients preparing for divorce will feel the need to increase their income based on the results of their spending plan (budget).
While this is a prudent move (making more money is always better), be sure that any moves do not involve relocation or drastic changes in your life’s patterns.
These changes could adversely affect child custody. They can even affect getting your divorce finalized!
The divorce itself is a major life changing event. Do not add to your stress by taking on a second major event at the same time.
- Ignore tax consequences.
Be sure to discuss the division of your assets with a CDFA.
People will often split assets in what seems to be the easiest manner possible. Doing so can be to their detriment when it comes to taxation and their access to funds.
After the costs associated with divorce (i.e. attorney fees, moving, furnishing a new household), taxation is the second largest financial setback endured.
- Keep the home if you cannot afford it.
It will be important to determine who is keeping the home. If the house will be sold, do it early in the process.
The tax exemption for capital gains is cut in half after you get divorced. So, if selling the home is at all a possibility, it could make a world of difference getting that done before your decree is signed.
Keeping a home you cannot afford will become a major burden. Creating your spending plan early in the process can help to clarify if keeping the home is financially possible.
Divorce is an incredibly stressful process that often leads to rash decisions. They can negatively impact an individual’s long-term financial success. All of it can be avoided by financially preparing for it with these tips. And bring in professionals to help you where you need it.
Do not let emotions, frustration, or the myriad of other factors included in the divorce process drive you to make choices that you will later regret.
Understanding your options and how they fit in your financial landscape will ensure you make the best decisions possible and emerge from your divorce with your finances intact.