We’ve all heard the statistics: divorce is quite common in addition to being a difficult process and experience. There are numerous adjustments to be made during and after a divorce in many aspects of life. Your living arrangements and location may change, you may have to begin working again, and you will certainly need to be responsible for your own finances. Often one of the biggest obstacles for someone going through a divorce is that they may have had very little or no involvement in the finances during the marriage.
In my experience, there is usually one person in many couples that handles most, if not all, financial matters. That may be the person picking the investments in the portfolio, managing the checkbook, paying the bills, and keeping track of the budget. So there will be an adjustment period of becoming familiarized and comfortable with the finances for the partner that wasn’t previously involved prior to the break up. If you happen to be the person who was not involved with the finances, I recommend first creating a balance sheet that contains:
• A list of all checking, savings and investment accounts
• A List of all debt accounts (mortgages, lines of credit, student loans, auto loans)
• Specific information on how all accounts are titled
• Current Values for each
This initial step will help enable the negotiations to come.
Negotiating Asset Distribution
Negotiations may happen in several ways. If you and your ex are still on good terms, you may be able to have discussions and come to agreements together. If you are not on good terms, your attorneys will help facilitate these negotiations. Either way, your assets will be split up in some manner. This could entail exchanging of money from one partner to another to retain a house or property. It could mean division of bank, brokerage, IRA and even 401(k) accounts. Some examples of decisions you may have to make are:
-Do you want to hang on to the shares of Apple stock in your portfolio or would you rather have the bond that’s yielding 5% for the next few years?
-Did you consider the low cost basis of the Disney stock which may cause you to have to pay more in capital gains at a future date?
-Would you prefer to retain the 401(k) plan as opposed to the house because your kids are all off at college and you would like to downsize?
-Should you sell the house and split the cash because you need the money for a down payment on a new condo?
These are just some of the scenarios that need to be considered and weighed before coming to an agreement.
Another aspect of divorce that needs to addressed and negotiated is debt retention. Companies and banks to which you jointly owe money do not simply remove you or your ex-spouse from a mortgage or debt obligation because you are divorced. If you have equity in your home, you may decide to sell it and split the proceeds. Luckily the real estate market has improved over the past few years and home values are being restored for many. Other times one partner agrees to stay in the house and needs to come up with the cash in order to buy out the other’s share of equity in the home. If you are in a situation where you are leaving the home but your partner will remain and your name is still on the mortgage, you will need to make sure that the payments continue to be made so your credit is not negatively affected. You should also consider putting an agreement in place which puts limitations on the period of time in which your ex-spouse needs to refinance and thereby have your name taken off the mortgage obligation.
After the Divorce is Final
There are a number of important estate planning items that need to be addressed when your divorce is finalized. First, you need to review the beneficiaries on your accounts. This includes IRA accounts, life insurance, annuities, employer accounts and the like. All too often this step gets missed and an inheritance may be left to an ex-spouse for whom it was not intended. However, there may be some instances where you will not change your beneficiary. For instance, you and your ex-spouse may have purchased life insurance policies with each other as the beneficiary to protect your children and this need does not go away because you are getting divorced.
You may also need to retitle assets including investments, property, bank accounts and retirement accounts. Court documentation will likely be required for many of these transactions. Lastly, you need to update your estate planning documents like wills, trusts, and powers of attorney, which most likely named your ex-spouse as the beneficiary of your assets and to act on your behalf in certain financial and healthcare situations. Some financial elements of the divorce process will be more challenging than others, but addressing them is critical to getting your financial life back on track.
Chrissy Canapari, ChFC® serves as Senior Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at firstname.lastname@example.org.
This original post was authored in 2013 and content has been updated, where necessary, to reflect current financial data. We encourage you to contact us if you have any specific questions about the content of this article. The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.