If you are contemplating a divorce, going through one now, or have recently finalized a divorce, you know there are many moving parts that need to be considered.
If you’re in the contemplation or beginning stages, you may be thinking, “Wow, my spouse has always been the one to handle the finances. I have no idea what to make of all of this.” You may not have been involved with where your family assets are held or even how much you have. Maybe your eyes glaze over anytime investments, retirement savings, or life insurance are mentioned. If you’re finishing up a divorce or just finalized one, you may be thinking, “What now? Where do I go from here?”. You may have just gone through a long emotional battle with someone you thought you’d spend your life with. Now you must think about what your future life looks like. At any of stage, your world can feel as though it has been turned upside down.
With the many moving parts in the divorce process, there are steps you can take to help you get to the other side efficiently and with an outcome that is beneficial for you. Below I’ve outlined tips and guidelines to help you avoid mistakes along the way.
Many people are not prepared financially for a divorce. Maybe you are mentally prepared to end the marriage, but are your financial ducks in a row? It’s important that you take these necessary steps.
Have access to funds and credit: Open your own bank account and begin saving cash on the side to pay for the upcoming legal expenses you will occur. Open a credit card in your name before the divorce. It will be easier to be approved and you may obtain a higher credit limit. Many of your assets might be in joint name and you may lose access to this money until the divorce has been finalized. A credit card gives you a fallback option for even your daily life expenses.
Collect important documents: Begin compiling documents such as your marriage certificate, tax returns, account statements, prenuptial agreements, vehicle titles, insurance policies, and the deed to your house. Modera has created a “divorce checklist” to help you get organized: Divorce Planning Checklist
Learn the different ways to get divorced: There are four types of divorce – Do it Yourself (DIY), Mediation, Collaborative, and Litigation. Begin learning about each to decide which method is best for you. Don’t forget to consider the impact on your children.
You may not have been involved in the finances in the past, but it’s important to be knowledgeable about what you own during a divorce process. These action steps will help you feel more educated and confident with your financial situation.
Know what you owe and what you own: You should be familiar with any assets that you own individually, in joint name, and what was owned prior to the marriage. Also, be familiar with what debt you and your spouse have. If you think your spouse is hiding assets or income and debt, take steps to find out what this entails. You should be informed about what assets you will likely be entitled to.
Remember you are still married. In the eyes of the IRS, you are either married filing jointly or married filing separately. As difficult as it may be to work together with your spouse during this time, it is beneficial to you both to minimize total taxes during a separation and after the divorce. These are a few other areas of focus as it relates to taxes and fees.
Analyze the tax impact of property division: Depending on the property or asset, the tax treatment can be very different. When you are working with your lawyer to determine how the assets will be split, consider the tax impact on what you will receive. Bring in your CERTIFIED FINANCIAL PLANNER® or Certified Divorce Financial AnalystTM and your tax accountant to determine what is best for you. For example, most retirement accounts defer taxes until money is withdrawn. The withdrawals will be taxed as ordinary income to the owner.
Use your lawyer efficiently: Be resourceful about the time you spend with your lawyer. They are here to help you through the legal aspects of your divorce and as you’re aware, they charge by the hour. The key to any financial plan is to have a team. Remember to ask your financial planner to educate you on the financial implications of your actions. Meet with your therapist to blow off steam and vent about the struggles you’re going through. And as I already mentioned above, utilize your accountant or tax advisor to analyze your taxes. Having a team of professionals behind you will not only help you save on costs, but it will help save your sanity.
It’s easy to get caught up in the moment and what you are going through right now. As hard as it may be, try to let go of the past, look beyond today, and think about your future. These tips will help you make forward looking decisions.
Limit emotional decisions: It’s easy to try and avoid conflict through this whole process. Lean on your financial and legal team to help you focus on the long-term goals. Try to let go of emotional attachments to your assets. Many people want to keep the house that your children have grown up in their entire lives. This can cost you a significant amount in upkeep in the long run.
Jumping into a settlement that is “too good to be true”: If it seems like it’s too good to be true, it probably is. Be conscious about the difference between the value of the asset and the worth of the asset. Continuing with the house example, there may be no mortgage, so you think it’s beneficial to take the asset. No mortgage interest to deduct on your taxes could be a disadvantage when you are moving from a joint tax return to and individual tax return. More importantly, when you sell the house later you may owe higher capital gains taxes. As a married couple, you don’t pay tax on the first $500,000 in capital gains but as an individual that number is cut in half. It could be in your best interest to sell the house during the divorce and incorporate the proceeds into the asset division plan.
Think about your post-divorce lifestyle: When your divorce is final, your life and expenses will change. When you’re reviewing your potential expenses to determine how much alimony you will need to live, keep in mind your future lifestyle. Only thinking about “the now” could lead to less income and assets to maintain your life.
Financial planning is important. Maybe you and your ex-spouse set up a joint financial plan, or maybe you never have. Either way, focusing on your financial health will help you continue to feel empowered as you move into your new, refreshed lifestyle. These three steps will help you get started.
Update your estate documents: You may have your ex-spouse listed on all your accounts as the primary beneficiary. Your financial power of attorney and health care proxy may be your ex-spouse. Update these documents post-divorce. You may even want to do this before or during the divorce to ensure your wishes are met should something happen to you.
Insure your ex-spouse: To protect the future for you and/or your children, consider taking out life insurance and disability insurance on your ex-spouse. If they were no longer able to provide alimony or education assistance, these policies can provide you replacement income.
Set up your own financial plan: Hopefully you met with a financial planner at the beginning of the divorce process. Even if you haven’t, now is the time to set up your own financial plan. You don’t have to have focus on the long term yet. You can focus on the next year or two years. Your financial planner can help you take things one step at a time to develop, organize, and achieve your goals. Modera has a checklist to help you get started: Planning Checklist for Your New Financial Future
Divorce is sometimes a long, emotional journey. Along the way, try to stay focused, remain patient, and forward looking. Your financial future is in your hands, but you don’t have to do it alone. Be sure to form a “divorce team” of legal, financial, and tax advisers to help. For more information about how Modera can help with your divorce, please reach out to your team of advisors.
Learn more on how we can can help clients going through a divorce: moderawealth.com/specialties/divorce
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