Nobody gets married to then get divorced, but things change. People change. It’s an unfortunate reality of today’s generation. Recent headlines of reality TV sensations John and Kate Plus 8 and their divorce filings is a sad reminder that it can happen to the best of us. I’ve been fortunate as a financial planner to not have been involved in many ugly divorce cases, and for the few that I have been involved in, that’s more than my share than I want to have. After the divorce is final is where the fun begins.
In an easy divorce, the assets are split down the middle, and for the most part, everybody walks away happy. But in some cases, it gets much more complicated. For example, let’s say that the ex gets the house and some of the stock holdings, and you’re left with the rest. If the overall portfolios were allocated appropriately, the drastic market swings have probably left them completely out of whack. For a financial planner like myself, there’s nothing more troubling than an out of whack portfolio. In a common market, the impact might not be as severe, but it’s no news to anybody that we are not in a common market. After the assets have been split, it’s important that the portfolios be realigned as soon as possible. In addition to that, here’s a few more things that you want to consider.
Most post-divorce individuals do not get around the planning related issues for many months or even years, taking time to recover emotionally at first. You need to realize how important it is to not postpone. Most, with the help of their attorneys, will focus on the tax implications of the assets whenever they’re splitting things up. In addition to the tax aspect, we also need to look at asset protection beneficiaries. Divorcing clients often have substantial retirement accounts or other assets governed by beneficiary designations.
Remember your 401k at work?
Many times, you’ll forget about the beneficiaries you had on your 401(k) account, maybe annuities, or any other type of retirement account. Once the divorce is final, you will want to make sure to double check and update these beneficiaries accordingly. I’m not a big fan of keeping too much paperwork, but in this case you will want to keep a copy. With my firm, we’ll always have a copy of the beneficiary designation form for your convenience, as well.
When clients divorce, there’s a good chance there’s a critical area of making sure things are spelled out for each other correctly. One aspect that is often over looked are the insurance policies. With the divorce being imminent, the purpose of the insurance now may have changed. Does it make sense to continue with the policies? What about if there is built up cash value in the policy? Divorce raises an issue whether one spouse maintains, after divorce, an “insurable interest” in the other spouse’s life or ability to continue earning an income at levels established or expected at the time of divorce. Another aspect is if child support is not only required but all a necessity, then making sure that the paying spouse has enough life insurance to account if something were to happen to them. As you can see, there are several details to be worked out.
When kids are involved, that’s when it tends to get more interesting. Most often than not, both parents will agree that saving for college is in the best interest for the kids usually in the form of a 529 plan. One thing to consider though is that only one parent can be the owner of the account. What’s the problem in that? Well, if your ex-spouse is the owner on the account, they will always have access to cash out the funds at any time. Divorcing couples should consider appointing an independent third party to be in control of the account.
Without an accurate picture of your marital income, expenses, assets and liabilities, you could get a poor settlement. Discovery is designed to uncover unaccounted for and hidden assets, unknown liabilities and missing information, but the best practice is to do your own homework as well. Tax forms , financial documents, and even safety deposit boxes will help you compile a complete and accurate balance sheet of your marital assets. Then, you can value the assets and liabilities, and identify which are marital and which are separate.
Don’t Forget Taxes
Your settlement could have severe consequences if you take an asset that will result in a big tax bill, while your spouse gets an asset with a small tax bill. The home is often the biggest asset in a divorce and usually has the most sentimental attachment. Buying out your spouse might seem like the best option, but be wary of possible tax implications of doing so. Buying the home might lead you down a path of debt destruction.
In The End
When beginning divorce proceedings be sure to seek legal counsel. Even in a “good” divorce when you think you can settle issues without attorney, you will be surprised on the little things that can arise such as property disputes, investments, and who will win custody of the children. Little promises can be easily forgotten and it’s best to get it in writing. Look for attorney that specializes in divorce to ensure that things are taken care of properly.