Navigating Divorce in 5 steps

Nicole Gopoian, JD, CFP® Advisor
Nicole Gopoian, JD, CFP®

Navigating Divorce – 5 steps to take when you’re in the unexpected 50%

The tale is tried and true; it’s the stuff fairy tales are made of. Two people fall in love, get married and live happily ever after.  Unfortunately, the “happily ever after” only happens about 50% of the time according to the American Psychological Association.  The other 50% of American marriages end in divorce.

Divorce can have a profound emotional impact. It can have an equally catastrophic effect on your financial well being.  How do you reconcile your old life and the new life ahead of you?  Here are five steps you can take if you find yourself in the unexpected 50%.

1: Do Things the Easy Way

Wise divorce attorneys know there are two ways to settle a divorce: the easy way and the hard way.  Good attorneys promote the easy way, while greedy ones promote the hard way and fill their pockets in the process.  The easy way facilitates a non-contentious approach to handle disputes rationally and with compromise. It also generates lower fees for both parties and provides a quicker resolution.  If you pick the hard way, compromise is rare and the court often decides the outcome.  This path racks up hours of legal work, generates costly bills and often publicly displays each party in their worst light.  As you look to implement the easy way, interview attorneys that have a great track record, but who also understand the benefits of an amicable agreement.

Divorce2: Clearly Define the Division of Assets

Once you agree on the terms of the divorce, your attorney will memorialize your agreement in a divorce decree.  Be clear on how assets are divided.  Assets can be split by specific dollar amount or by percentage.  Be aware that if you elected a fixed dollar amount and the market goes up or down before the split, the percentage share you receive could be more or less.  Using a percentage method means each party gets the desired allocation regardless of market changes because the values are adjusted proportionally.  In addition to investable assets, be sure to consider how personal assets are divided — pictures, antiques, family mementos and even the dog or cat!  Sometimes the most meaningful assets are the hardest to split.

Additionally, consider your tax bracket in the split.  Determine the after tax amount that each party receives and define it as a term in the decree.   Keep in mind that a 50/50 pre-tax dollar split might not mean an equal amount goes to each party after taxes.  For example, if the assets are held in a taxable account and there are large gains, they might not be worth as much as you hoped after you pay Uncle Sam.  Work with your attorney and financial planner to address both of these issues.

3: Update Your Financial Plan

Revisit your financial independence goals and determine the best way to achieve them in light of your new situation.  A divorce can turn your financial life upside down and any previous planning that you’ve done may not be relevant.  Consider current and future sources of income, including alimony and child support. Be mindful of the deductibility or taxability of these benefits depending on whether you’re the giving or receiving party.   Determine if you’re eligible for benefits based on your former spouse’s work record.  Review and reprioritize your goals and needs. Once you’ve updated your financial plan, use it as the tool to guide your investment management decisions.

4: Analyze New Risks

It’s important to revaluate risk in light of your new situation.  Are you moving to a new residence?  If so, make sure that your new homeowners insurance is properly coordinated with your automobile and umbrella coverage.  If you received health coverage through a former spouse’s plan, determine what private insurance options exist in the marketplace to replace it.  If you have dependent children, find out how much of their support you will be responsible for providing.  I’ve discovered in the last decade of counseling clients that thinking about new risks can be daunting because you’re facing them alone.  But once these risks are addressed, a feeling of relief prevails in knowing that you’re prepared for the unexpected.

5: Update Your Estate Planning

It’s necessary to revisit your estate plan after a divorce.  This doesn’t just mean updating your will and trust.  Medical and Durable Powers of Attorney should also be considered.  Think about who you want to make financial or medical decisions on your behalf if you become unable to do so.  Be sure to update the beneficiaries on your banking, investment, retirement accounts,  life insurance and workplace benefits..  Coordinate with your financial planner and attorney to make sure all accounts and beneficiaries are updated appropriately.

Beginning Your New Life

No one walks down the aisle planning to get divorced.  However, if the unexpected should happen, it’s important to get your finances in order as quickly and efficiently as possible so you can focus on living your new life to the fullest.