If Divorce is in Your Future, a Financial Advisor Should Be Too

Why Those Going Through Divorce Need a Financial Advisor to Protect Their Financial Future.

Though the divorce rate is on the decline for most age groups, a high percentage of marriages still end in divorce. When a married couple splits, the consequences can ripple across every aspect of life, particularly finances.

Getting ahead of the situation can help reduce the impact of a divorce on your financial wellbeing. In Part 1 of this series, we review how proper financial planning can help you make the most informed decisions before you enter into a divorce agreement. Part 2 focuses on the role of financial planning in helping you adjust to your new circumstances post-divorce so you can enjoy a secure financial future.

The Financial Realities of Divorce

Regardless of your income or net worth, divorce will most likely affect your standard of living. And the older you are, the greater the impact may be. When people divorce or separate after age 50, household income drops by about 41 percent for women and 23 percent for men.

Whether or not you have decades to work longer and make up for lost ground, having to operate two separate households will probably affect your financial picture. The key is to minimize the financial impact of divorce to the greatest degree possible. That’s why proper financial planning is so important before you agree to a divorce settlement.

When you and your spouse decide to separate, one of the first professionals you’re likely to contact is a divorce attorney. But since divorce can have a long-lasting, significant effect on your finances, consulting with a CERTIFIED FINANCIAL PLANNER^TM professional is equally important for many people. It’s not always easy to look to the future and foresee how your life will change after the marriage ends. But starting the planning process as soon as you separate can help to avoid regrets later.

The Role of Scenario Planning

While an attorney or other legal expert will lead the divorce strategy, it’s important to understand the financial consequences of that strategy before you agree to it. Scenario planning can help you avoid the common pitfall of arriving at a settlement too fast, without fully understanding the financial implications.

Modeling various scenarios and evaluating their impact helps you understand how your life will change post-divorce and what tradeoffs you’ll need to make to achieve your desired financial outcomes. As with any major life decision, there is no single “right” choice during a divorce settlement. By methodically assessing possible scenarios, you’ll be able to make an informed choice for your situation.

Here’s an example: Let’s say you’re working part-time to devote more time to raising your children. Once you divorce, will you need to take on full-time work or change jobs (or careers) to make the numbers work? Knowing how much money you need to operate a separate household, what your anticipated expenses will be, how much in liquid assets you’ll have based on different settlement scenarios, and how much income you’ll have based on various employment scenarios lets you answer that question with confidence.

Deciding What to Do with Your Home

While working out a divorce settlement, you’ll make many decisions. One of the most important, and potentially most difficult, is determining what to do with the family home.

Emotions often dictate whether a couple sells the house or if one person takes sole ownership by buying out the other’s share—especially if you have children who’ve spent much of their lives growing up in the home or if moving would require them to change schools.

But when it comes to a major decision like what to do with the family home, consider the short- and long-term financial consequences. If you keep the house, will you have to deplete much of your share of the liquid assets to buy out your spouse? How will that affect your ability to retire at a reasonable age with a comfortable standard of living?

If instead you agree to sell the home, can you afford to buy another property and qualify for a mortgage if needed? If not, you may end up paying high rent rates—and you’ll lose the mortgage interest and property tax deductions that often help offset the cost of home ownership.

Dividing Your Assets Fairly

Another decision to plan for in a divorce agreement is how to divide your assets equitably. It’s not typically as simple as adding it all up and dividing in half, because all assets are not created equal when it comes to liquidity and taxes.

A house with a great deal of equity may be a high-value asset, but it doesn’t provide immediate liquidity. A large balance in an IRA or 401k can help you achieve a secure retirement, but under certain circumstances a withdrawal may incur a penalty, making it less liquid than other assets.

Different marital assets also may have different tax implications. When you withdraw funds from a retirement account, they will be subject to federal tax (based on your total income) and potentially state tax. Assets in a taxable account are purchased with after-tax money, so their withdrawals are treated differently. Selling individual stocks might result in short- or long-term capital gains tax, depending on whether the stock has appreciated and how long you’ve held it. The same can be true if you sell shares of a mutual fund held outside a retirement account.

If you expect you’ll need to sell assets to cover your living expenses or to buy out your spouse’s share of the home, understanding the tax treatment of different account types can help you make the best decision about asset division.

Aside from tax and liquidity considerations, it’s important to anticipate any large expenses that may be looming and will require significant assets, such as college tuition, helping elderly parents financially, or your own long-term care. Whether you receive spousal support and/or child support may also impact how you agree to divide your marital assets. The laws governing division of assets vary depending on whether or not you live in a community property state, so consulting with a divorce attorney and a CERTIFIED FINANCIAL PLANNER^TM professional will help with that decision.

Keep in mind that in order to assess the appropriate division of assets, it’s important to make sure you have an accurate picture of the assets in the first place.  A forensic accountant may be needed if there is uncertainty over the validity of the figures provided by the other spouse.  Assets can potentially be undervalued through suspect appraisals or hidden through offshore trusts or crypto wallets.

When a Business is Involved…

While entire articles could be devoted to the topic of how business ownership can impact your divorce agreement, from a financial perspective there are two key items to keep in mind:

• It’s worth hiring a professional advisor to determine an accurate valuation of a business owned by your spouse, since that could be a valuable asset in the divorce settlement.
• Some business owners run expenses through the company to reduce their income, which can work against their spouse in a settlement. A divorce attorney may recommend hiring a forensic accountant to trace the movement of money within the business and arrive at an accurate picture of personal income.

Going through a divorce tends to bring about feelings of uncertainty about the future and a loss of control over your life. By engaging in sound financial planning before you agree to a settlement, you can gain greater control over the situation and greater certainty that you can enjoy a secure financial future.

The CERTIFIED FINANCIAL PLANNER^TM professionals at Team Hewins have extensive experience helping clients work through the financial details of divorce before agreeing to a settlement. It’s not just a transaction to us; we work closely with you to determine your priorities, consider all the options, and arrive at the best decisions to support your long-term financial wellbeing. Discover our complimentary portfolio review for greater peace of mind.

For help navigating the financial complexities of a divorce, contact the fee-only advisors at Team Hewins.

 

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made.  We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein.