Divorce planning: Financial considerations

By Trent Doty, CFP®, CDFA® Financial Advisor On 05/11/2021

Financial considerations that are important to take into account when going through a divorce.

Divorce can strain your finances as well as emotions. But being prepared with an investment plan before, during, and after divorce can help protect yourself and take charge of your future financial well-being.

Let’s take a look at a few of the financial considerations that are important when going through a divorce:

What do you have right now?

One of the first, and most important things to do when starting the divorce process is to make a list of assets and debts you and your spouse have. It is imperative that you have your own copies and access to all important records. Assets include all properties, possessions, investments, businesses, and other items that have a cash value. There may be other items depending on your unique situation, but your list of assets and debts should include:

  • Personal bank accounts, shared accounts, retirement accounts, brokerage accounts, life insurance/long term care/disability insurance 

  • Real estate properties, vacation homes, land

  • Cars, boats, motorcycles, and any other vehicles

  • Any other high-value assets such as jewelry, art, antiques, etc.

  • Home loans (mortgage), equity loans, personal loans, auto loans, student loans

  • Medical bills, credit card bills

  • Any other debts

Once you have these assets compiled, it is important to list the assets/debts that you 1. Owned prior to the marriage 2. Inherited during the marriage 3. Received as gifts during the marriage. These can sometimes be protected when it comes to the division of assets. 

Equal isn’t always fair

It is important to understand that the division of assets/debts may or may not be ‘equal’. For example, if one spouse is a stay at home parent while the other spouse has a salary that provides the majority of the income for the household, the stay at home spouse may need more assets in order to keep the same standard of living since they haven’t worked outside of the home for many years. Oftentimes, the stay at home spouse gave up a previous career in order for the working spouse to progress through the ranks and grow their career.

This is sometimes covered by alimony, but not always.

How do you value the assets?

Is $250,000 in a checking account the same as $250,000 in a traditional IRA/401(k)? What about a home worth $500,000? My spouse has a pension, how is that valued?

This is where it can help to work with someone familiar with the divorce process. It is important that the valuation of these assets is correct. For example, a pension that pays $6,000/month can be challenging to find the present value if you haven’t done that before. In addition to valuing a pension, understanding the tax liabilities and valuations of certain assets can also be an extremely vital piece of the division of assets.

Which assets do you need?

While going through the division of assets, how do you know which assets are best for you?

You need to make sure the liquidity of the assets you’re receiving match what you need. Let’s look at an example: You are a non-working spouse and you want to keep the family home. The home is worth $500,000, which is 50% of the total assets. The house is not paid off and costs $2,500/month to maintain. If you are not planning on returning to work or aren’t sure what level of job you qualify for, you may not be able to afford to keep the home. It may be more beneficial for you to request a liquid asset such as the checking account or brokerage account.

For this reason, it can be beneficial to have an investment plan that can show your monthly income/expenses and what you can afford. 

The division of assets have been made and the divorce is final. Now what?

One of the often overlooked pieces following a divorce is creating and reviewing a new investment plan. The cumulative income and assets that were previously supporting one household have now been divided to support two households. This can change your goals and objectives and it could be a good time to review your investment plan. 

What does your support team look like?

Friends and family are incredibly important during this difficult time – they can provide the support and structure you need. However, it is also important that you have a team of professionals on your side to assist with the divorce. You should have a divorce lawyer and a Certified Divorce Financial Analyst® (CDFA®) at a minimum. In addition, it can help to have a mediator, accountant, and a business valuator. These professionals can potentially save you from making costly errors regarding your settlement, and can give you piece of mind while you are dealing with the emotions that come with a divorce.

 

Tagged with: divorce, financial, considerations, spouse, assets, value, division, support team