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Sudden Wealth - Divorce
Oct 15, 2020
Divorce isn’t easy and is often riddled with uncertainty, denial and confusion. The focus of most divorce proceedings is money. How much is involved? Who gets it? Who pays it?
In most situations, the divorce process takes just over a year to reach a settlement, at which point planning, especially financial planning, is essential. Your short- and long-term goals may change, and you will be facing a financial future with an entirely new set of facts.
An organized approach in planning will alleviate stress and help you successfully manage the days ahead.
Preparing to Make Decisions
- Get organized. Gather all the financial information you can, including tax returns, real estate paperwork, and retirement and other investment account statements.
- Determine your goals. What are your near-term goals? Longer-term goals? Identify these and share with your team of advisors.
- Build your team. There will be myriad, often conflicting, emotions at this time, so having a trusted team guiding you through essential decisions and actions can help you avoid regrettable mistakes. Be sure your team members are fiduciaries who have a legal and ethical obligation to act in your best interest. It’s their job to make sure you understand what they propose and why. If you feel intimidated or confused, move on. In assembling your team, be sure to include these four critical members:
- Trusted friend or family member who can provide emotional support
- CPA
- Financial Advisor
- Estate Attorney
Essential Decisions and Actions
- Identify Tax Changes. Post-divorce, you will have a new tax filing status and may be in a new tax bracket. Proper tax planning with your CPA is critical to avoid mistakes that may not be apparent until years after the divorce and which could result in substantial taxes, penalties and interest.
- Audit your current estate plan. You don’t need to completely rewrite your will (although this wouldn’t be a bad idea), but at a minimum, remove your former spouse as executor and update your beneficiaries. Working alongside your estate attorney and financial advisor, make sure your advance directives, power of attorney and other related legal documents reflect your post-divorce instructions.
- Change Registration on Accounts. If your bank and brokerage accounts were held jointly, they need to be renamed as soon as possible.
- Review Liability Protection. Revise beneficiaries on insurance policies. For property insurance, verify that you are still in possession of the property you’re insuring. Some items may have been granted to a former spouse in the divorce settlement and you certainly don’t want to pay premiums for something you no longer have.
Your financial advisor can assist you in ensuring your existing life insurance coverage is appropriate and cost-effective, and restructured in a way that meets your new financial goals and objectives.
- Update Retirement Accounts. Revise beneficiaries on your retirement accounts. If you fail to do this, your former spouse could end up with your IRA, 401(k) and other assets when you pass away. An unchanged beneficiary designation would override your will.
If your divorce settlement includes rights to a portion of your former spouse’s retirement, your financial advisor can assist you in determining if the assets can be rolled into your own retirement accounts or withdrawn altogether.
- Create a new financial plan. Post-divorce you will likely have the same expenses (although some will be reduced), but only one income. It’s imperative to identify your goals and work with your financial advisor to develop a plan to meet those goals. Your financial advisor can evaluate your current investments (if applicable) and see if they’re still prudent with consideration for your new situation, goals and risk tolerance.
Monitoring
The most common fears in the early stages after divorce are:
- Not having enough money to live on
- Being financially alone, without another source of income
- Losing settlement money through imprudent investing.
To alleviate these fears, look to your financial advisor to help you monitor your plan to confirm you’re on track to meet your goals, and make adjustments as necessary.
In the midst of divorce, it is easy to become fixated on what you have lost, rather than on making the best use of what you actually have. Following the above steps will ensure that you have the support you need to make wise decisions and maximize your chances for success.