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Managing Divorce Finances

Managing Divorce Finances

Life can feel impossible when you are going through a divorce, but there are some financial things you’re going to need to handle immediately. And it’s best to tackle these head on, and as soon as possible.

Divorce Finances

During a divorce, the absolute last thing you might want to worry about is your financial situation, but you’re going to have to deal with it sooner rather than later. Here are somethings you’ll want to do to ensure your financial well-being.

Build a Team

Mike Lynch, vice president of strategic markets at Hartford Funds, says, “Don’t go it alone. Build a team today – a qualified team of legal, tax and investment professionals. Maybe it’s your current investment professional, or you may seek a new one that understands your situation better.”

In addition to this team, you’ll also want to build a team of counselors and friends that can help you through the emotional pain you’re feeling.

Be Civil with Your Ex

It’s important that you remain civil when it comes to your ex. This can be crucial when it comes to working out aspects of a divorce, including marital property division, alimony, and child custody and visitation. This might mean working with a counselor or relationship therapist that can advise the both of you on how to find a common ground, or at least a civil way of communicating. As senior vice president of David A. Noyes & Co., Linda M. Conti knows, it’s important that clients remain calm when making important financial decisions during divorce. “My parents went through a bitter divorce,” she says. “They separated when I was 3 and the divorce was final when I was 6. I grew up living through ‘what not to do to your kids during a divorce.’ I wish someone could have counseled my parents better through all aspects of the divorce.”

Consider Selling All Shared Property

While it might feel smart to hold onto property – such as a primary home or vacation home – and just decide who will take over ownership, this can become a major sticking point between couples. Who will take care of maintenance, who will take the utility bills? It’s often advised that a couple sells their home and split the proceeds.

When it comes to a secondary home, “It’s much more effective to sell the house and distribute the proceeds to the children,” says Ric Edelman, chairman and CEO of Edelman Financial Services. “You get into the issue of fights amongst the kids – issues of maintenance, repairs and upkeep.”

Work with a Certified Divorce Financial Analyst

A Certified Divorce Financial Analyst can act as an advisor to a divorce lawyer or as a mediator for both parties. “Decisions made during divorce are long-lasting and it’s important to stay focused and recognize the significance of the proceedings,” says Allison Alexander, a CDFA, CPA and financial analyst at Savant Capital Management. “As painful as it is, there is no advantage to rushing the process and making errors in judgment.”

Divorce and Money

Create a Budget
According to certified divorce financial analyst Eva Sachs, the first step toward finding your own financial independence is to balance your income with your expenses. Figure out how much money is coming in (via work, alimony, and/or child support) and then see how much is going out and being spent on living expenses.

“Think of it as a spending plan rather than a budget,” says Sachs. “Knowing where your money goes is key, especially after divorce. There will be many new expenses you might not have thought about prior to your divorce; this is a critical time to refrain from spending money you don’t have.”

Update Your Beneficiaries
Emily McBurney, attorney and qualified domestic relations orders (QDRO) expert, says the top of your to-do list should include updating the beneficiary that is listed on your life insurance and retirement accounts. It makes sense that during your marriage your spouse was listed as your beneficiary, but now that might not make sense. Until you remove he or her name they will remain on there.

“Review all of your accounts and insurance policies and change the beneficiaries. A divorce does not automatically terminate your former spouse’s rights to be the beneficiary on your retirement plans, bank accounts, and life insurance policies –- even though your divorce decree might say that your former spouse has waived all rights to the benefits,” she says. “You will need to formally submit a change of beneficiary form to each financial institution. Otherwise, the benefit will be paid to whoever is listed on their forms at the time of your death — regardless of your divorce.”

Update Your Will
Since you’re already updating your beneficiary designations, don’t forget to revise your will, according to certified divorce financial analyst Donna Cheswick.

“Meet with an estate planning attorney to discuss your state’s laws regarding possible updates to your will, power of attorney and advanced directives,” Cheswick advises. “You want to be sure that your former spouse is no longer entitled to any distribution in the event of your death. And if your settlement agreement requires one party to maintain life insurance on the other, then there needs to be a method in place to be sure this is actually occurring. Just because the former spouse says they will do something, doesn’t mean that they are following through.”

Plan for Emergencies
In a marriage, you rely on your spouse when you lose your job, face a medical emergency, or run into an unplanned home expense. But if something happens now, after your marriage, you’re going to need to go it alone. In order to protect yourself, Sachs advises you create an emergency fund. You should add to this fund whenever you are able to. Additionally, doing this also adds to your emotional well-being. There’s a satisfaction in knowing that you can stand on your own two feet if anything goes wrong.

“An emergency fund should equal three to six months of your living expenses,” she says. “If you can swing it, I recommend six months because you’re now single and need an even bigger cushion if you are not able to work or an emergency occurs.”

Taxes

It’s important that you remember tax season during your divorce, as it will have repercussions when it comes to alimony and child support payments. Remember that there will be taxes on assets that are divided, and though it might seem a fair settlement, come tax season it might not be.

Financial planner, Monica Garver, worked on a case where the husband proposed a division of assets that, on face value, amounted to a nearly even split. He proposed a settlement where he kept $2 million that was in an after-tax investment account. His wife would receive $2 million that was in tax-deferred retirement accounts.

“Each and every dollar [in the retirement accounts] had to pass through the hands of the taxman before the spouse could put it in her pocket,” says Ms. Garver. She encouraged her client to push for an increase of the couple’s assets to compensate.

In a similar case, Ms. Garver’s client’s husband wanted to give his wife investments worth $500,000 that had cost $150,000 to purchase, while he kept $500,000 in investments that had cost $480,000 to purchase. Tax-wise, the wife faced a tax bill on $350,000 in capital gains, while the husband would only owe $20,000 in gains.

“Familiarize yourself with your joint tax return, because this is where many key elements about investments, partnerships and other sources of income are listed,” says Vickie Adams, a financial planner in Los Angeles who specializes in divorce and taxation. “In fact, the coming months are the best because a lot of this information will arrive in the mail.”

Create Your “Single” Budget

You’re entering a new life as a “single” person, so you’re going to need to budget for that life. “Be as specific as you can and make the necessary adjustments to your budget as soon as possible,” says John Garvey, senior vice president of wealth management at UBS. “Next, plan for your future as a single person. If fewer assets are available to you, you may need to reprioritize your spending. As an example, college savings plans may need to be revisited to account for decreased income flows.”

Working with a Divorce Attorney

If you are facing a divorce, you should work with a divorce attorney that will take a vested interest in your specific situation and advise you on what you might face in a divorce regarding property division, child support and custody, and alimony. They will be able to advise you on your options. A divorce attorney will provide support and guidance as you work towards ending your marriage.

For advice on divorce, you need the expert law firm of Law Offices of Korol and Velen, Certified Family Law Specialists.

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