No one says, “I do,” with the idea they’ll someday say, “I don’t.”
Unfortunately, divorce remains a fact of life. Even as the divorce rate has been declining for decades, and according to the Institute for Family Studies, the divorce rate hit a 50-year low in 2020.
However, the stress of the pandemic may have spurred an uptick in divorce and/or divorce inquiries, according to data from a 2020 survey by LegalTemplaces. Another interesting trend shared by Pew Research Center is the increase of “gray divorce,” or divorce among those over 50. This type of divorce is led by the Baby Boomer generation.
Also taking into account the number of separations, that translates into roughly half of the married population in the U.S. facing the tough decisions around dissolving a relationship.
One of the trickiest aspects to navigate when going through a divorce is dividing marital assets and liabilities. Untangling financial assets that have been enmeshed over years, sometimes decades, can be a challenge and may require the assistance of a financial professional to help ensure costly mistakes are avoided.
How to Financially Prepare for Divorce – First Things First
“We find the majority of clients engage with financial professionals at the end of the process once settlements are already made. This can be a costly mistake,” said Jama DeHeer, CFP®, CDFA® and senior wealth planner at Regions.
A Certified Divorce Financial Advisor® (CDFA®), DeHeer has been helping advise wealth clients through all stages of divorce for two decades. Her advice: as soon as possible, find a credentialed professional to handle managing the financial complexities related to dividing marital assets both during and after divorce.
“Engaging a financial professional early in the divorce process can help clients identify, organize and interpret financial data in order to help them and their legal team negotiate financial issues and considerations strategically,” said DeHeer.
Having a credentialed professional engaged early on allows them to be part of the divorce team. Together, it’s important to build out a budget and complete a lifestyle needs analysis, which can help frame the foundation of negotiations as the legal team works to equitably divide marital assets through the divorce settlement process.
“I seek to educate our clients on the types of assets they have, the tax implications of the different asset types, and help them understand which assets will likely support their long-term goals of achieving lifetime financial security as we build a divorce proposal,” said DeHeer. “This educational process does not replace legal advice, but the information we share can be provided to guide the process for the best outcomes.”
How to Financially Prepare for Divorce – Understanding Marital Assets
Often in a marital relationship, there is one spouse that handles most of the personal finances – from managing investments to paying bills and making significant financial decisions. The individual who has been less involved in the day-to-day finances may feel overwhelmed and confused on how to move forward in their best interest when dividing assets.
“We often work with clients who may not have much experience in managing finances and are left wondering how to maintain the routines of life and with minimal disruptions,” said DeHeer.
According to the U.S. Bureau of Labor Statistics, married women are increasingly becoming primary breadwinners, with 30% earning more than their husbands. However, despite increased earning power, 58% leave financial planning to their male partners.
“Especially for those who have not been actively involved in the day-to-day finances, engaging a financial professional in the initial discovery phase can help identify and capture a complete breakdown of all marital assets, known as the Statement of Net Worth and the potential tax exposure of each asset,” noted DeHeer. “Creating an inventory of assets and liabilities can be challenging and overwhelming when one spouse historically took the lead on managing the couple’s finances.”
DeHeer adds that the Statement of Net Worth is one of the most critical documents in a divorce, as it provides a foundation from which many decisions are based.
A Note on Gray Divorce
“The increasing trend of gray divorce brings a different host of considerations,” said DeHeer, who noted that many of the clients she works with fall into this category. “Gray divorces create a challenging set of circumstances that individuals in this situation may need to find financial solutions to overcome.”
- Wealth created in one’s late 20’s and middle 30’s usually becomes commingled during marriage and therefore becomes a marital asset subject to division upon divorce. This means giving up 50 percent, if not more, of the pre-marriage wealth.
- Often, one partner takes time away from their career during this phase of life to take care of kids and/or aging parents. This temporary leave may significantly impact earnings potential when/if re-entering the workforce.
- Divorcing after the age of 50 leaves fewer years to rebuild a retirement nest egg.
- This is often an age when people experience more health-related issues, sometimes taking them away from work and/or impacting savings.
Any one of these circumstances can potentially derail an individual’s retirement plan, leaving them unsure of how to make the most of the assets they do have available to support their retirement income needs.
How to Financially Prepare for Divorce – Navigating the Path Forward
If a client has not previously been involved in managing personal finances, they often have many questions.
- How much can I afford to spend on a new home?
- How can I build an income plan with the assets I receive?
- Will the assets I receive support my lifestyle goals?
- Do I need to go back to work?
- What income tax issues should I anticipate?
Another concern: who keeps the marital home?
“If you are keeping the marital home, it is critical to fully understand if you can afford the ongoing mortgage payments and associated home related expenses post-divorce. Will the financial settlement fully cover these costs without negatively impacting your financial security, or will you need to re-enter the workforce if you have not previously been employed, to cover some of the costs,” DeHeer said.
Once the proceedings are complete, there are additional financial considerations. Building a plan around your post-divorce life goals is the first step towards creating a comprehensive strategy to build and sustain financial security.
“It starts with establishing a realistic and sound cash-flow plan based on individual financial needs and implementing income tax minimization strategies that may be available,” said DeHeer.
The next step involves identifying short- and long-term financial goals.
“For clients with children, there may be additional financial considerations, including increased childcare costs and planning for higher education funding, as well as the day-to-day expenses of raising children,” noted DeHeer.
There are various considerations when contemplating divorce. In addition to engaging lawyers, a financial professional experienced in divorce planning can help make this often emotionally fraught process a bit less stressful.
Once you have a clear picture of current resources and financial needs, a Regions Private Wealth Management wealth advisor can work with you to develop a sound financial plan to manage your income sources and investment portfolio to support your financial needs and wants throughout your life. Think of it as a road map of your financial future.
Check these additional insights on how to financially prepare for divorce and related topics:
Divorce: After the Break – How to get Your Financial House in Order Amid and After a Divorce
Achieving Financial Independence After Divorce
Divorce Checklist: Preparing Your Financials
Empower Yourself: Women who are Involved in Their own Financial Planning are Better Prepared for the Future
This information is general in nature and is not intended to be legal, tax, or financial advice. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rules.