If you’re uncertain about the future, it’s good to remember that with challenge opportunity tends to follow not too far behind.
Even after the court finalizes the divorce, there is work to be done that can be accidentally overlooked. The items below should help you to regain a sense of security and peace of mind, in knowing you're protected financially. Soon enough, you'll be putting the past behind you, carving your own way, and embarking on a new adventure. Know that there is hope after divorce, even if it might not seem like it right now.
There's no doubt that going through a divorce can be an emotionally difficult time. Discussing divorce settlements, attending court hearings, and facing competing attorneys can be significant burdens to carry for everyone involved. It's not only an emotional issue though, and it's important to be aware of how your financial position might change. It's critical that you look after yourself and your future by doing your due diligence and ensuring that you're in control of your own finances. You will then be able to put the past behind you and set in place the building blocks that can be the foundation for your new financial future.
If you’re considering divorce, or in the earlier stages, find practical suggestions in the article “Dealing with Divorce”, which reviews decisions like whether to hire an attorney and how that works, child custody, alimony, and divorce do’s and don'ts. If you’re uncertain about the future, it’s good to remember that with challenge opportunity tends to follow not too far behind.
First, read the following list of items to consider during this time.
Client Advisor Julianna Rote gave a list of things that should be considered during this time. These can give you a better foothold on the situation, and be helpful down the road. If you are unsure, seek the help of a trusted, fiduciary financial advisor, like Mission Wealth.
Estate Document Updates
You will want to prepare a new will, health care directive, power of attorney and trust documents that reflect your change in marital status and heirs.
Beneficiary Designation Updates
It is common for spouses to name each other as the primary beneficiary on their IRA/Roth/401(k)/life insurance and retirement accounts. You may want to change this.
Estate Settlement and Asset Splitting
Your divorce decree will outline the amount of money that should change hands, but it does not always indicate which assets. With investment accounts pay attention to the tax basis of the holdings to transfer. The asset number may be fair, but is the tax drag equitable?
Start collecting statements for all your financial holdings and create a list of your assets. If it comes to negotiating a divorce settlement, this will be important. Below are some examples of items you’ll want to add to the list or Asset Worksheet. Include the value of the asset, percentage owned, and by whom.
- Real Estate
- Liquid Assets
- Business Interests
- Personal Property
- Retirement Assets
- Cash Value Life Insurance
Evaluating Income and Expenses
There will likely be a significant change in cash inflows and outflows that should be evaluated. An advisor can help you strategize best spending and saving techniques, prioritize and manage your goals, and can provide different retirement scenarios. This budget should be based on needs rather than wants, so you can manage your bottom line. Think about any sources of income, including spousal and child support, and consider the amount of time you’ll receive this income.
Use a detailed worksheet to develop your budget, and don’t overlook any costs. The best source to use for expenses is whatever method your use to pay bills. Include payment frequency, such as monthly, quarterly, or annually. Finally, find a friend or family member that you can trust to critically review your budget, to see if anything seems unreasonable. We will go into more detail later in this article.
Tax Planning
Meet with your CPA so you can best prepare for your new income tax situation, or you can discuss this with your Advisor who may be able to coordinate with them on your behalf.
Social Security Planning
If you were married for more than 10 years and don’t remarry, then you may be eligible to collect spousal Social Security based upon your ex-spouse’s benefit.
One of the best things you can do for yourself and/or your family is to be prepared to manage your finances responsibly. Even if you see investing as overwhelming or complicated and boring, you need to know the basics behind a well-thought-out investment strategy — at least enough to protect yourself from fraud and/or communicate effectively with a financial professional or spouse.
Decide who is claiming the children as dependents on your tax returns. Usually this would be whoever the children live with for most of the year, but not always.
Life Insurance and Disability Insurance
Insurance on your former spouse may be required as part of the decree. This can ensure that child support/alimony will be replaced if something happens. Additionally, you may personally want additional coverage for yourself. Make sure that these policies have the proper beneficiary designations. Read More: The Divorce Is Final: Now What?
If divorce is happening, has happened or could be on the horizon, the following suggestions can provide some peace of mind that your bases are covered.
Fully assess your current financial situation.
Following a divorce, you'll need to get a handle on your finances and assess your current financial situation, taking into account the likely loss of your former spouse's income. In addition, you may now be responsible for paying for expenses that you were once able to share with your former spouse, such as housing, utilities, and car loans. Ultimately, you may come to the realization that you're no longer able to live the lifestyle you were accustomed to before your divorce.
Consider the potential financial outcomes.
For example, Client Advisor Jenna Rogers shared some of the possible implications of single parenthood. Being put in a position where you’re a single parent will means that you are now the head of your household, which can be a lot for anyone to take on. It can be even harder with any added financial stress. You would be responsible for creating a stable financial future for both yourself and your children; that burden can often seem overwhelming.
Establish a budget.
A good place to start is to establish a budget that reflects your current monthly income and expenses. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. If you will be receiving alimony and/or child support, you'll want to include those payments as well.
As for expenses, you'll want to focus on dividing them into two categories: fixed and discretionary.
Fixed expenses include things like housing, food, and transportation.
Discretionary expenses include things like entertainment, vacations, etc.
Keep in mind that you may need to cut back on some of your discretionary expenses until you adjust to living on less income.
You and your spouse should develop budgets independently as the only way to ensure it's realistic is to compared your actual spending behavior.
However, it's important not to deprive yourself entirely of any enjoyment. You'll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.
Reevaluate and reprioritize your financial goals.
Your next step should be to reevaluate your financial goals. While you were married, you may have set certain financial goals with your spouse. Now that you are on your own, these goals may have changed.
Start out by making a list of the things that you now would like to achieve. Do you need to put more money towards retirement? Are you interested in going back to school? Would you like to save for a new home?
You'll want to be sure to reprioritize your financial goals as well. You and your spouse may have
planned on buying a vacation home at the beach. After your divorce, however, you may find that other goals may become more important (for example, making sure your cash reserve is adequately funded).
Gain control over your debt.
While you're adjusting to your new budget, be sure that you take control of your debt and credit. You should try to avoid the temptation to rely on credit cards to provide extras. And if you do have debt, try to put a plan in place to pay it off as quickly as possible.
The following are some tips to help you pay off your debt:
- Keep track of balances and interest rates
- Develop a plan to manage payments and avoid late fees
- Pay off high-interest debt first
- Take advantage of debt consolidation/refinancing options
When you get divorced, you are still responsible for any debt in your name. If you and your spouse had a joint credit card, you are just as liable for that debt as they are.
Establish credit, and learn to protect it.
Since divorce can have a negative impact on your credit rating, consider taking steps to try to protect your credit record and/or establish credit in your own name. A positive credit history is important since it will allow you to obtain credit when you need it, and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for
employment.
Review your credit report and check it for any inaccuracies. Are there joint accounts that have been closed or refinanced? Are there any names on the report that need to be changed? You're entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies. You can go to annualcreditreport.com for more information.
To establish a good track record with creditors, be sure to make your monthly bill payments on time and try to avoid having too many credit inquiries on your report. Such inquiries are made every time you apply for new credit cards.
Review and understand your insurance needs.
Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement. However, you may have additional insurance needs that go beyond that which you were able to obtain through your divorce settlement. When it comes to health insurance, make having adequate coverage a priority. Unless your divorce settlement requires your spouse to provide you with health coverage, one option is to obtain temporary health insurance coverage (up to 36 months) through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can also look into purchasing individual coverage or, if you're employed, coverage through your employer.
Now that you're on your own, you'll also want to make sure that your disability income and life insurance coverage matches your current needs. This is especially true if you are reentering the workforce or if you're the custodial parent of your children.
The cost and availability of an individual health insurance policy can depend on factors such as age, location, and the type of insurance plan purchased.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
Finally, make sure that your property insurance coverage is updated. Any applicable property insurance policies may need to be modified or rewritten in order to reflect property ownership changes that may have resulted from your divorce.
Change your beneficiary designations.
After a divorce, you'll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts you may have in place. Keep in mind that a divorce settlement may require you to keep a former spouse as a beneficiary on a policy, in which case you cannot change the beneficiary designation.
This is also a good time to make a will or update your existing one to reflect your new status. Make sure that your former spouse isn't still named as a personal representative, successor trustee, beneficiary, or holder of a power of attorney in any of your estate planning documents.
Consider any tax implications.
You'll also need to consider the tax implications of your divorce. Your sources of income, filing status, and the credits and/or deductions for which you qualify may all be affected. In addition to your regular salary and wages, you may have new sources of income after your divorce, such as alimony and/or child support.
Your tax filing status will also change. Filing status is determined as of the last day of the tax year (December 31). This means that even if you were divorced on December 31, you would, for tax purposes, be considered divorced for that entire year.
Finally, if you have children, and depending on whether you are the custodial parent, you may be eligible to claim certain credits and deductions.
Depending on your basis in different assets at dissolution, the subsequent sale of any assets awarded at divorce proceedings could result in disparate tax consequences.
These could include the child tax credit, and the credit for child and dependent care expenses, along with college-related tax credits and deductions. Ask a tax professional for information on your individual situation.
Consult a financial professional.
Although it can certainly be done on your own, you may want to consider consulting a financial professional to assist you in adjusting to your new financial life. In addition to helping you assess your needs, a financial professional can work with you to develop a plan designed to help you address your financial goals, make recommendations about specific products and services, and monitor and adjust your plan as needed.
A CDFA® professional's role is to assist the client and their lawyer in understanding how the financial decisions the client makes today may impact the client's financial future. After a divorce, someone may go to a financial advisor to learn how to best position his assets.
How Mission Wealth Can Help
At Mission Wealth we work alongside our clients that face divorce to help them align their financial plan with their biggest life goals and aspirations.
Our highly experienced advisors specialize in identifying the challenges that are commonly experienced during divorce, in addition to leveraging unique opportunities. If you or someone you know would like to schedule a free conversation, reach out to your advisor or use the form below.
Disclosures
Divorce planning is complicated and intersects with the tax, legal and investment professions. Please seek advice from your accountant, attorney and financial advisor. Keep in mind that unless you authorize a financial professional to make investment choices for you, a financial professional is solely there to make financial recommendations to you. Ultimately, you have responsibility for your finances and the decisions surrounding them. There is no assurance that working with a financial professional will improve investment results.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.
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