5 Financial Steps for Divorce Planning
Early in my career, a friend confided in me that her husband wanted a divorce. She was filled with sadness and incredible anxiety. Her attorney asked about their marital assets, and she was ashamed to admit that she had no idea about their finances. Her husband had handled everything. Unfortunately, her spouse was not very forthcoming, and it took a lot of time and money to gather the necessary information. The experience taught me a valuable lesson about educating clients, especially women, on understanding their finances.
Divorce, like death, is not something anyone wants to think about. Some couples have already faced their fears and planned ahead for the unfortunate by creating a prenuptial agreement. Others are practically blindsided by the prospect.
Divorce can be complicated, confusing and emotionally challenging to deal with, and the financial aspect tends to make it more stressful and overwhelming. As a wealth planner, I’ve worked with many people who are going through the difficult transition. I focus on helping the client figure out their financial situation and put them on a path to maintain a desired lifestyle and meet personal financial goals. However, I find new clients often know little about their financial affairs or how they will sustain themselves after separation.
So it’s important that at whatever stage your marriage is in, you educate yourself and understand your personal financial situation as much as possible. And if it’s starting to look like the marriage is ending, thinking ahead and taking essential steps early can empower you to exit the divorce in a financially positive situation.
These are key steps I walk through with clients who are considering or responding to divorce.
1. Get financially organized.
One of the most important steps you should take is to get a clear financial picture of your marital net worth, income and expenses. Many women still leave all the finances with their spouse, so it’s important to do a bit of homework and put together your marital net worth, which comprises all the assets and liabilities you acquired throughout the marriage. This would include your home, mortgage, retirement accounts, insurance policies, investments, 529 accounts, credit card debt, limited liability companies, etc. Also identify any separate property or debt before the marriage or separate property acquired during the marriage, such as inheritances or gifts. Even though these assets are considered separate property, they may have an impact in the division of the marital (joint) assets.
Gather copies and start a divorce file of all financial documents such as your:
- Marital agreement (if you have one)
- Most recent federal and state tax returns
- Deed(s) to community real property
- Bank account statements
- Brokerage accounts statements
- Insurance policies
- Loan documents
- Your own and your spouse’s pay stubs
Outlining your monthly income and living expenses will assist you in creating a budget to help get an understanding of what your current lifestyle needs are and what you anticipate they would be after you are living in separate households.
2. Start putting money aside.
If the divorce is not amicable, there’s the possibility that your spouse may cut you off financially, so it’s important to prepare for the possibility. Try to save enough cash to cover a few months of living expenses and legal fees. Consider opening a separate checking account and credit card. Many couples share their checking and savings so it’s important to have your own.
3. Hire an attorney.
Interview at least three family law attorneys to find one you feel most comfortable with. Even if you ultimately work with a mediator, it’s important to have a divorce attorney review your settlement to determine whether you are getting your fair share. Learn about the divorce process to calibrate your expectations and understand your rights.
4. Consider child custody arrangements and costs.
Almost all couples want to make sure the separation impacts the children as little as possible. Beyond who will have custody of the children and when, it’s important to consider their financial needs and who will be responsible for them. As part of their expenses, consider:
- Private school or college tuition
- Health insurance coverage
- Activities and sports
5. Get financial advice
It’s important to consult with financial professionals such as CPAs and financial planners, to learn the impacts and long-term implications of decisions made as part of a divorce settlement. A professional can assist on specific issues such as tax consequences of the divorce settlement, how to divide retirement plans using a Qualified Domestic Relations Order, stock options and other deferred compensation, and the implications of splitting real property interests and valuing a business. Additionally, a wealth manager can bring to light many things you may not even be thinking of, run a variety of financial scenarios, and be a base of support as you work through the emotional layers of divorce. If you already have a financial planner, lean on them to gather the financial details for you.
Divorce can be one of the most challenging moments in a person’s life. Whether or not it’s your choice, planning, educating yourself and being involved in each step will prepare and assist you in your financial future. It will also make the transition easier and help you walk away with a sense of empowerment.
Learn more about women and wealth by reading Aspiriant’s white paper, “Women Taking Charge: Six steps to feel more financially secure.”