Yesterday I received a call from an existing client letting me know that she and her husband had decided to get a divorce. I felt sad for their family and was sorry to hear the news.
Unfortunately divorce seems like an all too common event these days, which is probably why the new Reality TV show, “Untying the Knot” which feature a divorce attorney as a mediator for divorcing well-to-do couples has gotten so much media attention. I’m really not sure what to think about this, as it is a pretty sad state of affairs.
We’ve all heard the statistic that approximately 50 percent of all American marriages end in divorce. Although I consider this a sad statistic, divorce does happen and it’s always better to be prepared than not as it sometimes take more work to get divorced (especially if children are involved) than to make the marriage work.
I spend almost an hour on the phone with her discussing the situation and answering her questions mainly on the topic of distribution of property and the division of debt. It’s definitely not easy… even if you’re the one who wanted the divorce.
From a financial standpoint there are a few things you need to be aware of, if you’re considering a divorce.
FOR STARTERS
You should get all you ducks in row… gather all your investment and bank statements, going back at least a year. You should also make a copy of your tax returns for the last three years as this will give you documentation of your income history. Also get a summary of your and your spouse’s debt by running a credit report.
It may also be a good idea to find a lawyer in case you require legal counsel down the road and also to learn about state law. There are nine community property states where the assets acquired during the marriage are owned as community property (50-50). In the rest of the states, the court decides on the split percentage.
You should also start putting money aside for emergencies and possible legal fees. Open up a checking account in your name and also get a credit card in your name while the combined household income is higher. If you have joint bank accounts you may want to take out the funds divide it evenly and close the accounts.
WHEN YOU’RE READY
I would recommend mediation as it might be less adversarial (particularly if you have children) and normally allows for greater control and privacy. This will achieve the same results with a faster settlement as well as save you money in the long run.
But if your personal finances are large and complex, you may need the help of an attorney. Do not take financial advice from friends or family. Getting the appropriate help will help you avoid mistakes and costly concessions… especially if the separation is not amicable. As hard as it may be, a divorce proceeding is for lack of a better term, a business deal.
It’s always important to have a strategy in place. Letting go of personal possession is always difficult. In other words, don’t be married to your stuff. Even if you love your house, be open to selling it to keep assets and investments of equal value. If you have to divide up retirement funds specify percentages instead of amounts… this puts you in a better position in case the market goes up or falls. Also, if you can, pay off any consumer debt before the divorce gets finalized – I know, easier said than done.
I’m not an attorney so I don’t really have all the information on how much alimony a person receives but I think its one year of support for every two years of marriage. However, I do know that alimony is considered income and is taxable and must be reported on your income tax return… and if you’re the payer you can expense the money from your gross income provided it meets all the qualifying conditions.
If you’re the one who’s going to pay, make sure you can afford to pay the amount agreed upon as well as the length of time that you will be paying. Also, if you can, try to avoid a situation that requires you to reveal your income every year… and if you do have to reveal your income, make sure it’s a mutual thing.
If you’re the one receiving alimony payments, if at all possible, try not to use the alimony as a paycheck to live on… rather use the funds as an investment into your future.
If you have children, make sure the settlement is clear on how you will handle any and all cost associated with your kids…medical, dental, sports, summer camps, college etc.
If you are going to be the one who will receive child support and/or alimony support, you should insist that the provider get life insurance to ensure the payments. This can be as simple as a 10, 15 or 20 year term policy depending on the length of support. The amount of insurance coverage can easily be calculated.
For example: If your combined child support and alimony payment is $1500 per month, simply multiply the amount by the number of months or years you will receive support. If it’s for five years than the insurance coverage will be $90,000 ($1500 x 60 months), and you may also want to take the cost of college into consideration when doing a needs analysis calculation.
On a personal note: It is my opinion that if you have children, regardless of the way you both feel about each other… you should take your eyes off yourselves and put them on your children. Try to avoid getting into heated discussions or legal talk when your children are present. Be friendly with each other when around the kids and ALWAYS edify each other to your children.
I’m not trying to be Dr. Phil here, but I do remember reading somewhere that it’s always important to convey one important message to your young children… keep reassuring them that what happened is between mom and dad and not the kids’ fault.
OKAY, IT’S DONE
After the divorce is finalized, it’s important to make sure your health insurance is in place. If you were on your spouse’s health plan, the next least expensive option will more than likely be your employer. You can consider Health Insurance via COBRA if your ex’s employer has more than 20 employees… it’s a costly option…but if you chose this option be sure to notify the plan administrator within 60 days of the divorce. Your other option is to shop the market for competitive rates based on your personal situation.
Many things can change on your taxes after a divorce, so make sure you meet with a tax advisor the first year after the divorce.
You should also seek the help of a competent financial coach to help you create a plan for your new life. You may have to increase your retirement savings… both to rebuild what you gave up and to cover continued higher living cost in retirement… depending upon your age you should also plan for a guaranteed sustainable income stream during retirement.
I always recommend a Revocable Living Trust over a will especially if you own real property. If you don’t have a trust make sure your bank accounts are listed as POD (payable on death) and your brokerage account are listed as TOD (transfer on death), this will avoid any probate issues if God forbid, something were to happen to you.
And last but not least, name new designated beneficiaries on any qualified retirement accounts such as 401k, IRA, 403b, 457, TSA, TSP, Pension and any life insurance policies you have in force. This is very important as here is where I typically find a lot of mistakes when I review client portfolios.
I hope this helps.
If you have any questions or you require any additional information please feel free to contact me. As always I will do my best to help you or lead you in the right direction.
