8 Considerations for Divorce Financial Planning
By David K. Little, CFP®, CFA®
Orange County has long been tagged as the Divorce Capital of California. While that statistic is VERY debatable, there’s no denying that many marriages do end in divorce. And with the economy growing at a faster rate than it has in years, there’s reason to believe the divorce rate could increase.
As financial planners, we’ve dealt with the financial ramifications of divorce with many clients over the years. Here are some things to consider if you or someone you know is affected by divorce.
Hire an Attorney to Write Documents
In this age of trying to do things yourself to save money, don’t cut corners by trying to negotiate your own divorce. Emotions run high during this difficult time, which can cloud your ability to make good decisions. We’ve seen spouses agree to terms just to speed up the process, which can unnecessarily hinder finances in the long run. A good attorney will put the brakes on this mindset and look out for your best interest.
Have a Financial Advisor Review Your Agreement Before It’s Finalized
Attorneys typically do a good job on basic agreements, but they sometimes don’t address all the financial details, which could have significant effects. We saw one agreement calling for the husband to liquidate his entire IRA and pay the after-tax balance to his soon-to-be ex-wife. The correct procedure here is to divide the IRA tax-free so that each spouse controls their own tax liability. We were able to contact the attorney in this case and have them re-draft the agreement.
Let the Professionals Do Their Jobs
Since divorce is so prevalent, you’ll hear stories from your friends about how much support you should receive or how much support you might have to pay. Before making plans on anything you hear from friends or acquaintances, make sure to consult experts on the subject. Many factors affect financial settlements, including how long the spouses were married, how many kids are involved, and the income differential. Don’t believe everything you hear from your friends.
Make Sure You Consider Recent Changes in the Tax Law
In the 2017 tax bill that was passed just before the end of last year, significant changes were made to the taxation of support payments. For divorces finalized after 12/31/18, alimony will no longer be deductible by the paying party. On the other side of the coin, alimony will no longer be taxable to the recipient either. This change does not affect agreements that have already been made, but its impact on future divorces is significant. A good attorney will make sure to factor in this change as support payments are calculated and worked into divorce agreements.
Plan Realistically for the Future
Once you’re on the other side of a divorce, it’s probably time to sit down and make realistic plans for the future. Since it is usually true that two people can live together more cheaply than they can live apart, your long-term future will probably look different. A good advisor will help outline what retirement might look like for you, taking into account all the changes the divorce brings into the picture.
You’ll want to make sure you’re saving enough for your planned retirement, or you might need to shift your expectations and plan to work longer, save more, or plan for a different kind of retirement.
One factor some recipients of support fail to account for is a change in future support. If the paying spouse has a change in employment (reduced wages, retirement, etc.), the support you receive could decline. Factoring the likelihood of that into long-term planning is critical.
Make Sure Your Estate Plan Changes
We have seen numerous clients who, years after a divorce is finalized, still have their ex-spouses included in their estate plans. Seeing an attorney to have your will and trust updated is a must. You’ll need to make sure ownership of assets is transferred as specified in any court-ordered division. You’ll probably want to name someone other than your ex-spouse as your executor, power of attorney, and power of attorney for healthcare.
Update Beneficiary Designations
One often overlooked change that should be made is to your beneficiary designations. Life insurance policies, retirement accounts, and any other accounts with a beneficiary named do not necessarily transfer to people named in your trust. In other words, if after a divorce you change your will so that your house is left to your children, but forget to change your IRA beneficiary and continue to have your ex-spouse named, your ex-spouse would receive the IRA should you pass away. Beneficiary designations trump designations in your will or trust.
Know Yourself and Hire Experts When You Need Them
In many cases, one spouse handles virtually all the finances of a married couple. When couples divorce, the non-financial spouse might need significant help. Make sure to ask for help if you need it, and take the advice of experts you hire. One spouse in a divorce came away with a settlement of about $1,500,000. Because the husband had handled the financial details in the marriage, the wife needed advice on spending the money from the settlement. Unfortunately, she would not take the advice given and ended up spending all of the money she received in about two years.
Schedule a 15 minute discovery call with a fee-only financial advisor to discuss your personal situation.