Divorce is one of the most emotional events a person can face in his or her lifetime. There are periods of grieving, anger, fear, and insecurity. Regardless of how amicable the split may be, the parties involved experience pain which can lead to decisions based on emotion rather than an informed process. This can be dangerous to a person’s financial health, which is why divorce financial planning is so important.
I’ve worked with several clients through their divorces over the years, advising them on their finances and the various steps they can take to ensure that they have a complete understanding of their financial situation today and what the possibilities may look like for their new life moving forward.
If you are considering a divorce, are currently in the process, or are newly divorced, there are specific actions you can take to feel financially prepared, avoid making emotional decisions and have a wise financial plan in place. While I am walking through many of the financial considerations throughout the process, you should consider consulting with or hiring an attorney on any legal questions you may have:
Financial Planning Before the Divorce
In most marriages, I find that one spouse is the primary manager of the household finances. While the other spouse may participate, he or she may not have intimate knowledge of the details or may later learn there are many unknowns. These can be anticipated with proactive planning:
- Run a credit report. This will reveal all accounts that are open in your name so you’ll know about all loans and other liabilities you may be responsible for. In an ideal world, you’ll recognize everything listed. Or, you’ll learn ahead of time about any joint accounts your spouse may have opened without your knowledge.
- Review your recent tax returns and documentation. Here, you’ll see the sources of all of your household income, including jobs, stock or retirement account distributions, rental income, or any other combination of cashflow coming in.
- Understand your financial plan. If you have access to an online system to view your accounts, log in and be sure to capture an inventory of all 401(k), IRA, brokerage, or any other investment accounts you may have. Or, if you currently work with a financial advisor, request current statements and balances.
Financial Planning Issues to Prepare for During the Divorce
The pre-divorce planning phase will help you prepare for sharing the financial documentation the courts and the opposing attorney will ask you for. They’ll be looking for your full financial picture, both as individuals and as a couple. Expect to do the following:
- Prepare a complete financial inventory. This includes all of your assets, income, ongoing expenses, and liabilities. Both you and your spouse will be required to submit this information. Depending on your state’s laws around marital property and assets, everything may be on the table (with some exclusions) and up to the courts to divide up.
- Consider a forensic accountant. Some couples’ financial situations are more complicated than others. If you suspect that your spouse is not being 100% transparent about his or her finances, a forensic accountant can help uncover things that may be hidden from you.
- Have a short-term financial plan in place. In some cases, you may not be able to touch your assets during the divorce except for the purposes of paying your day-to-day bills. Have a clear understanding of, and plan for, how you will pay for unexpected expenses.
- Don’t forget the small things. The bigger ticket items such as the house, educational expenses, stocks and other assets are usually top-of-mind during most divorces. But think about who gets things such as pets, furniture, dishes, crock pots and the bar-b-que grill in the backyard – and be realistic about it. It’s not wise to run up legal fees arguing over a toaster, so make a list and prioritize.
Your Financial Plan After the Divorce
It is critically important to review your new reality once your divorce is finalized and take actions on items declared by the court in your settlement. This includes:
- Close joint accounts and open new accounts in your name
- Change beneficiaries on all of your insurance policies, wills and trusts, etc.
- Create a new estate plan so that you control who is the recipient of your legacy and how the money is passed down.
Most importantly, post-divorce is the time to define your new normal:
- Create a budget. The first year can be the hardest, as this is your adjustment period in determining how much income you need and how much you can spend. I advise clients to start month-by-month, then build to developing a quarterly budget, and expand it from there.
- Establish your own credit. If you didn’t work during your marriage, or have never held assets or liabilities in your own name, it is important to establish credit so that you may purchase a home, car, open credit card accounts, or any number of financial activities that you’ll encounter in life. You must show proof of income, and depending on your situation, you may need to start small and build up to qualifying for larger loans.
- Surround yourself with a trusted team. When your divorce is finalized, you may not know where to start. It’s OK to ask for help. In fact, you should ask for help. Work with a financial advisor, estate plan attorney and a CPA you trust to begin building your new financial life. It’s important to do this soon after the divorce, as you may find yourself back in court if your financial situation changes drastically. Your team will help you transition, and make the new normal as easy as possible for you.
Many things can happen throughout the course of your life, and divorce is one of them. Krilogy is committed to helping clients prepare for these moments, whether expected or unexpected. We can take the work off your plate to help ease your fears so that you can make informed decisions. Whatever you are facing and whatever challenges you may encounter through the divorce process, you’re ready.