We in the financial advice community have long recognized several life events are significantly more stressful than others. Death of a spouse, birth of a child, home remodeling, home relocation, job loss, and of course, divorce. Like any major life transition, divorce can be one of the most difficult to navigate as couples must untangle their lives financially and emotionally. For those in their 40’s and 50’s, divorce is often times viewed (correctly so) as a “financial reset” as newly single people have less time to get back on track with financial and retirement goals. And while every marriage has roles and division of responsibilities, for those who did not handle the finances in their marriage, it can be even more difficult know where to begin.
Getting help and establishing your “team” as soon as you know you are potentially facing a separation or divorce can help immensely. From gathering important documents, to completing your statement of net worth (which your divorce attorney will need to file with the courts), developing an updated budget and investment strategy only scratch the surface of what you’ll need to do. Aside from the following steps below, it’s important to remember to take care of yourself both mentally and physically.
1. Begin your information gathering before — NOT after you file for divorce.
A crucial step of the divorce process is gathering important documents. Both you and your spouse must complete a sworn statement of income, expenses, assets, and liabilities. You may find that joint statements and documents aren’t as accessible once the divorce commences. That’s why information gathering is best done BEFORE filing for divorce so that pertinent information does not “disappear.” Here are some of the documents you’ll need:
Bank and Investment Account Statements
Credit Card Statements
Tax Returns for the past 5 years
Any Business Partnership Agreements
Estate Planning or marital documents, such as Wills, Powers of Attorney, Trusts, and Pre-Nuptial Agreements
Payroll Statements for both you and your spouse
Investment Property Income, deeds, debt statements
Insurance Coverage Information
Deeds or Titles for any owned vehicles and Real Estate (vacation or rental property)
Inheritances
Don’t forget to list out artwork, jewelry, or other prized possessions you own
2. Outline Joint vs. Individual Ownership
Of the items listed above, it is important to detail what you own in your own name vs. what is jointly owned. If you live in a community property state like California, ALL marital property will be divided 50-50 according to the court, unless you and your spouse have a separate agreement in place. If you live in an equitable distribution state, your marital property will be divided in a way that the court deems equitable and fair. This is divided based on a set of factors that includes the length of your marriage, each spouse’s financial situation and contribution, and what each will need to move forward post-divorce. Therefore, it is critical in both community property and equitable distribution divorces to have an accurate assessment of what is owned jointly vs. what is owned separately.
3. Outline Which Assets You Wish to Keep
For most couples, your home will be your largest asset. You’ll need to agree on who will retain the home, or whether it needs to be sold to help finance part of the divorce settlement. If you plan on selling your home, have you thought about where you will relocate after the divorce? If you want to keep the house, you’ll need to determine if you have assets and ongoing income to afford the mortgage, taxes, and maintenance going forward. Your financial planning professional can help you navigate either option, and help guide you through the decision process as you determine what option is best for you. The family home is by far, one of the most difficult assets to negotiate. Remember that about 80% of divorcing couples must, out of necessity, sell the family home in order to meet the asset split requirements of both parties.
4. Understand your Debt Obligations
After determining which assets are yours and which assets you desire, make sure you take the time to understand your debts as well (credit card debt, vehicle loans, mortgage, student loan, etc.). You should document the outstanding balances, monthly payments, and interest rates for any debts you might have. In community property states, any debts incurred during marriage are presumed to be owed by both spouses and must also be divided in a divorce. In an equitable distribution state, marital debt will be divided between spouses in an equitable and fair way. Generally, one is only liable for their spouse’s debts if the obligation is in both names.
You’ll also need to know if your spouse has transferred assets in the three years prior to the separation or divorce, as this must be disclosed. Work with your financial advisor and/or attorney to review any transfers have been made without your knowledge from bank and credit card statements.
5. Outline Your Future Financial Goals and Priorities
Think about your financial priorities. Looking at the information you’ve gathered, what does it cost to run your life and your family's life now? How will your financial needs change during and after your divorce? If you expect to have a decline in income after your divorce, then this will need to be factored in to both your budget, as well as your retirement planning. For example, you may want to focus on your children’s college planning, or your parents’ elder care costs. Or you may want to focus on your own. This is why it’s essential to work with a financial advisor to help you sort out your priorities so that you can focus on what matters, and equally important, what you can actually control.
6. Establish Your Statement of Net Worth
In its essence, your net worth is a listing of things you own (assets) minus the debts you owe (liabilities). The Net Worth Statement is nothing more than a description of these items. This document will need to be filed with the court and outlines your joint financial situation. This is what the judge or mediation team will use to determine alimony and child support payments. This information will provide a clear picture of where you are today and what life will look like after your divorce. If you are not involved in the preparation of the document and don’t understand the details, you will be at a disadvantage after the divorce is settled.
7. Revising Your Estate Plan
As you work through the divorce proceedings, you will also need to update your will, trust, healthcare directives, power of attorney, and other estate planning documents to reflect your new status. If you don't have a will, now is the time to create one. A will allows you to dictate how your assets will be distributed after your death. Without a will, your assets will be distributed according to your state's intestacy laws, which may not reflect your wishes. If you already have a will, it's important to review it and update it as needed.
In addition to a will, there are other estate planning documents you should consider, such as a durable power of attorney and a healthcare directive. A durable power of attorney allows you to appoint someone to handle your financial affairs if you are unable do so yourself. A healthcare directive allows you to specify your wishes for medical treatment if you are unable to communicate them yourself. Creating or updating your estate planning documents may not be a pleasant task, but it's an essential one.
8. Updating your Insurance Coverage and Beneficiaries
This is also a good time to review your insurance coverage to make sure that you are adequately protected. This includes policies for your home, cars, health, life, and disability. Your advisor can help you understand your options and obligations regarding any shared insurance policies and take steps to help you maintain the coverage you need going forward.
Additionally, one area that’s often overlooked is the beneficiary status of any insurance policies. Making sure that your ex-spouse is not (but not always) still a beneficiary, will be important. Also, include in the beneficiary review any retirement accounts or accounts that are designated to be passed down via beneficiary designation so that they’re in alignment with your wishes!
9. Developing your new Budget
Finally, you will need to create a budget and stick to it to stay on track financially. This is incredibly important as a single person. By carefully tracking your expenses, you can develop a plan that will help you stay on track financially. First, take a close look at your income. This may include your salary, child support, alimony, and any other sources of income. Determine if there’s a timeline to the income, such as there is with child support – it generally ends when the child(ren) turn 18. Then, determine your necessary expenses, such as your mortgage or rent, car payment, insurance, and food. Once you have a clear picture of your income and expenses, you can start to work on creating a budget that fits your needs. With careful planning your new budget can help you survive and thrive after your divorce.
If you have immediate questions, don’t delay! Request an introductory meeting with one of our Certified Financial Planning (CFP®) and Tax Professionals to begin the process of planning for your immediate and future finances.
About Aspire
Aspire Planning Associates was founded to help you achieve everything you aspire to. That means we go beyond a traditional advisor’s focus on investment management to emphasize comprehensive financial planning that organizes all the disparate parts of your life – your wealth, including real estate, compensation plans, taxes, and retirement. Because your dreams will take time to realize, we are committed to working with you over the long term, giving you confidence that you have the support to reach your destination.
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