Wading through the emotional land mine of divorce is far from simple. With the added stress of separating finances, the process can become much tougher. But beyond the division of your physical assets, there are many other financial consequences to consider: Are your retirement savings secured? How will you ensure your child’s college education is funded?
Couples who are contemplating divorce are often surprised to discover the steep costs and extensive time it takes to complete the process. In fact, the average divorce process typically takes one to two years and varies in cost from a few hundred to several thousand dollars, according to the Association of Divorce Financial Planners (ADFP).1
Facing a decision that will likely impact future generations both personally and financially for years to come requires the help of an experienced professional, such as a tax planner, financial advisor, or better yet, a Certified Divorce Financial Analyst (CDFA™), who is specialized in managing the financial impact of divorce proceedings. These professionals can help you gain greater control over the divorce process and develop a more clear understanding of your current and future financial picture.
If you are contemplating divorce and ready to start making financial preparations, here are a few tips to help you start the planning process and work toward a smooth transition.
There are a number of factors that can impact the planning process — for instance, the number of years you and your spouse have been married, and whether you co-own a family business. It’s also important to consider whether one spouse is the primary earner for the family, or if one or both of you own stock options.
Evaluate Your Assets and Liabilities – Before you start the divorce process, a financial professional can help gather, organize and value the net worth of your liabilities and assets, including which assets are owned jointly or separately. Budgeting will also play a huge factor for both parties before and after the divorce has been finalized. Before you and your spouse are physically separated, it’s crucial to regroup with your advisory team to estimate immediate needs and budget for the short-term expenses that will be directly associated with the divorce, including separate residence expenses, attorney fees, court costs and all other living expenses that you are not sharing with your spouse.
Your financial team can also help you define your long-term goals, and develop a plan for the future while you focus on your immediate needs.
Prepare Tax Projections – Additionally, consider contacting an accountant to retrieve copies of previous tax returns and ask him or her to prepare two different estimates for filing taxes for the year, under joint filing status or separate filing status. This will depend on the actual date of separation and the date the divorce is final.
Prepare for Potential Risks – Unfortunately, not all divorces end amicably or transparently. For instance, one spouse may attempt to secretly hide or camouflage a marital asset from the other spouse. He or she may even delay a bonus, pay raise or retirement benefit until after the divorce settlement has been decided.
If you encounter this type of situation or simply want to protect yourself, hiring a forensic accountant to investigate for any missing assets or misrepresentation of values of investments, properties or businesses could be beneficial. Any funds accumulated during the time of separation or before the divorce are subject to the divorce proceedings.
As soon as you and your spouse are separated, it’s important that all financial connections between the two of you are removed to help ensure your financial safety and security. There are still financial risks that can come into play even after you and your spouse are separated, such as fraud, defaulting on a loan(s) or bankruptcy.
Separate Your Accounts – At the time of separation, new checking and savings accounts should be opened for each spouse. If you don’t have your own credit history or the credit you have built is tied to your spouse, this presents a good opportunity for you to get started and gain independent financial footing. All financial accounts tied to you and your spouse should be frozen or monitored until the end of the divorce.
Safeguard Investments, Retirement Accounts and Property – A written request should be sent to your advisors relaying instructions for the management of any investment or retirement accounts. This will ensure that no holdings should be transferred without written approval from both parties, especially for joint accounts. Any equity credit lines should also be frozen through a title insurance company.
While steps can be taken to safeguard your investment and retirement assets, recovering assets or valuables that have been removed from a safe deposit box can be difficult.
To ensure these items are protected, photograph the contents within the box and have a list of the inventory signed by a bank officer.
Finally, if you want to protect your share of real estate property from your spouse in the event of your death, work with your attorney to establish a tenancy in common, which gives you the right to leave your share of the property to any beneficiary in the event of your death.2
Planning and saving for the future can be challenging for anyone, but divorcing couples have to plan for an entirely different life after their divorce is finalized. Your income, expenses, spending and the quality of your lifestyle may not only change for you, but for your children as well. Prior to your divorce, you and your spouse will also need to estimate your career-training costs and timeline, including your future earning potential. This is a major factor if one of you has been out of the workforce for a number of years or only worked part-time.
Now that you are no longer married, you will need to develop a more realistic budget that only includes one provider of income. The difference in potential income and workforce background for each spouse will be taken into account by the courts when the divorce settlement, alimony and child support are determined. Once determinations have been made, your financial and tax advisors can help ensure those factors are reflected in your new financial plan.
Another critical step to take post-divorce is updating your estate plan to reflect a new executor of your will, a successor trustee and a successor power of attorney. As you’re making these changes, don’t forget to review and name new beneficiaries to your life insurance policies and retirement accounts. This crucial step is often overlooked once a divorce has been finalized, and the potential outcome will not be good when an ex-spouse is the unintended beneficiary of an account.
Once the divorce has been settled and you have started to move forward with your life, both you and your spouse should continue to meet with your respective financial advisors to help stay on track to reach your new retirement goals, manage your investments and taxes, and move on to a stable, happy future.