Financial Factors for a Successful Divorce

A divorce is one of the most impactful financial decisions you will make in your lifetime and it is important to understand the financial implications for a solid financial foundation post-divorce. This is a time when people can most benefit from the advice of an experienced financial advisor.

To help those navigating the waters of a divorce settlement, I have listed below key financial factors.

1.    Know your Cash Flow

Know your current and expected cash inflows and outflows as best as possible. This involves knowing your future income sources, potential amounts and anticipated expenses.

Various settlement options may be more attractive than others in terms of affording you financial security, liquidity and peace of mind.

This means a strong understanding of the difference between assets, their inherent risk, liquidity, growth potential and tax consequences. For example, understand the difference between retirement assets versus brokerage accounts in terms of the applicable taxes (ordinary income tax versus capital gains tax).

2.    Minimize Time on Emotional Assets

Emotional assets rarely retain their emotional impact post-divorce. Yes, you might “win” something as retribution or that you fought over during the marriage. But the focus should be on those assets that provide income, financial stability, or ability to recover some of the assets lost in the division of the marital property.

Income and growth assets are key to your financial well-being post-divorce. Especially in the era of “gray divorce” if you are close to retirement age (50s-60s) you will most likely not have the opportunity to recoup the assets that will no longer be available to you post-retirement that took decades to accumulate. A long-range planning approach rather than a focus on the emotional assets that may not benefit you in the short or near term is a more strategic approach to divorce.

3.    Be Cautious about Financial Decisions

While it might be satisfying and give you some closure to move on by closing accounts, dividing assets and quickly deciding upon support amounts, it is important to make these decisions in context. Understand the nature of assets you are dividing, especially their tax implications (e.g. unrealized capital gains, and securities with low basis).

Keep in mind the options for support, including offsets and tradeoffs in duration and amount and other important factors such as potential for future loss of support due to macroeconomic factors.

This is not to advocate for punting on major decisions, but rather to analyze them in context and with a global perspective while you gain an understanding of all the pieces to the divorce puzzle. You may be able to make some quick decisions such as dividing up your charitable Donor Advised Fund into two accounts to manage going forward. Because the gift has already been made, these are no longer your assets but rather have been already gifted and now each of you will be able to manage the charitable recipients going forward if you desire.

4.    Stay Invested

Some states have automatic lockdowns on all your assets. Be advised of your jurisdiction’s laws. In California, for example, there are Automatic Temporary Restraining Orders which are put into place upon filing the petition for divorce. No assets may be traded, sold, or otherwise touched without both parties’ agreement. Other states, such as Michigan, require you to file a motion with the court to impose the restraining order. Be sure you are operating under the laws of your state. 

It is unwise to start liquidating assets or moving to cash to “prepare” for large payouts. Instead check with your financial advisor before making any of these decisions and be certain that you need to make the decision pursuant to the divorce. Sometimes creative solutions may evolve eliminating the need for drastic measures and avoiding any potential tax implications that may accompany such actions.

5.    Assess your Retirement Accounts

Not all retirement accounts are alike. Roth IRAs may be withdrawn tax-free after age 59.5, whereas Traditional IRA withdrawals after 59.5 are taxed as ordinary income. The government imposes Required Minimum Distributions (RMDs) on all traditional IRAs (including SEP IRAs)  and Qualified Retirement Accounts such as 401(k) and 403(b) accounts. However, no RMDs are imposed on Roth IRA accounts.

When dividing assets be sure to account for the tax impact, liquidity and timing of the withdrawals of those funds for an equitable distribution.

6.    Consider your Future Financial Needs

Take a hard look at estimating the cost of your post-divorce standard of living. Post-divorce life can be much more expensive than people realize. Depending upon your situation, housing is the largest expense most people face. Identifying an affordable housing arrangement will make a significant impact on your future finances. You may no longer be at the same standard of living you enjoyed during the marriage; but you will be able to make choices that suit your new lifestyle, goals and needs.

Consider the cost of ownership of the family home or a replacement home. Expenses of maintaining a home go well beyond principal, interest, mortgage and insurance. The upkeep and maintenance, including short-term repairs, long-term repairs, and improvements can be financially devastating. Carefully assess the true costs and ensure that they are well within your budget not the “qualifying” amount the lender identifies as “affordable.”

Get a good handle on what the reality of future expenses will entail. Healthcare is another major concern that would have been possibly covered by an employer plan and now must be purchased at the individual level on the Healthcare Marketplace. This is a huge differential compared the typical cost of employer-sponsored healthcare programs and should be considered as a significant factor in the marital settlement agreement.

Both parties may have to reduce lifestyle costs post divorce so that they may not be consuming assets that may not be replaceable. Adjust to your new lifestyle by trimming discretionary expenses and minimizing the cost of non-discretionary expenses to fit the new budget you will need to work within. 

7.    Think About Kids’ Needs First

Try to get as granular as possible in your marital settlement agreement regarding every possible expense in your child’s future. Clearly outline who will cover what to save you from more disputes down the line and potentially keep you from going back to court.

This is especially critical for families with children who have special needs. It may be prudent to carve out a portion of the marital assets for care and well-being of the child with special needs because of the financial impact that may be required in the future. If only one spouse comes to the plate later, it could be financial devastating. Ensure that these issues are addressed now.

8.    Consider Mediation over Litigation

While not all couples are candidates for mediation, this is a less expensive approach to your divorce. Mediation includes the specialty approach, Collaborative Divorce, which is more costly than typical mediation because of the various parties involved (two attorneys, a financial neutral and a mental health professional) but can allow for more creative and “satisfying” divorces.

Litigated divorces rack up hefty bills in lawyer fees and in worst-case scenarios, can result in court orders to liquidate investments, sell the marital home, or other lesser-acceptable solutions that could have been circumvented. Counties in some states, such as in Michigan, require mediation before litigation.

This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.