Divorce is an inherently scary and stressful process. Not only are you grieving the loss of a relationship and imagined future, but you must accept some new financial realities, as well. These could include the loss of a second income, the splitting or loss of assets, a change in your living location, and/or a decreased lifestyle (at least at first). This is not even to mention caring for common children and their expenses in the process.
Divorce can have a devastating effect on many areas of a person’s life, but there are steps that can be taken to safeguard your financial stability amidst the chaos of the split.
1) Gather Important Documents ASAP: No matter how amicable a divorce may seem at first, there is always the possibility that your future ex-spouse could have a change of heart and make things significantly more difficult for you. Before filing for divorce, or immediately after being notified that your spouse has filed, you’ll want to gather your financial record. Gathering these documents could be quite time consuming so it’s best to get started right away. Additionally, your spouse could make gaining access to these records more difficult as the divorce progresses. Important documents to gather include:
- Recent pay stubs
- Investment account statements
- Retirement account statements
- Checking and savings account statement from the past year
- Loan documents for mortgage, vehicles, personal loans, business loans, etc.
- List of pre-marital assets and pre-marital debts
- List of marital assets and marital debts
- Income tax returns from the past 3 years
- Insurance policy information
Having these documents on hand will not only help you to protect your financial stake in the divorce, but can expedite the process and reduce stress when your lawyer or financial services professional reaches out for any of the above information.
See Our Harbor West Related Article: Your Divorce Asset Inventory: Know Where Your Assets Are
Another tough reality is that some future ex-spouse’s will either (a) accrue significant debt or (b) attempt to hide assets once they learn of an impending divorce. They falsely believe that they will be able to pawn off half the new debt on the divorce settlement or avoid having to split hidden assets. The only way to prove these actions were taken post-filing is to keep good records of your financial status before your spouse takes these actions. With this important information on hand, you can demonstrate that such moves were not made with your consent and hopefully avoid becoming responsible for them in the divorce settlement.
Download our FREE E-book: 10 Critical Things to Consider Before a Divorce
2) Prepare Your Finances for Your New Future: One of the most common fears individuals have when contemplating or facing divorce is how they will survive their new financial reality. In many cases, a couple will be leaving a dual-income situation and have to split all other assets before heading their separate ways. More often than not, this means a decreased standard of living for each person for at least a few years following the divorce. While adapting to a tighter budget may be difficult at first, it will protect you from accruing unnecessary debt or spending all your savings in the meantime.
As soon as you learn of your impending divorce, take inventory of your household income and expenses. Track where your money is being spent. Not only will this help when filling out your financial affidavit, but it will help you estimate what your financial need will be once you and your spouse part ways. Will you be able to afford the home where you currently reside? Or will you have to downsize for a few years? Answering these questions early will help you plan and re-organize your finances so you can maintain sound financial footing as the divorce progresses.
3) Don’t Make Any Major Money Moves: While it may seem prudent, at first, to go ahead and make changes to beneficiaries on insurance policies or retirement accounts, or to go ahead and take half of the assets out of a joint account, these moves can be seen as impetuous and unfavorable in the eyes of the court. It’s best to allow these touchy financial matters to be settled legally in court before you make changes, otherwise you risk your spouse being awarded.
4) Mind your Future Tax Burden: One of the most common and costly mistakes individuals make when separating their assets is failing to consider the tax implications of the types of assets they will acquire in the divorce settlement. For example, some retirement account funds are contributed pre-tax and some aren’t, which will change the way taxes are assessed on liquidated withdrawals. As a financial advisor, I specifically remember meeting a woman who unknowingly agreed to split her and her husband’s marital assets 50/50 with little tension and relative ease. However, she later found out that her husband had access to his half of the assets tax-free while she received a $20,000 tax bill in the mail the following year because her half was not tax-exempt. Failing to consider the tax implications of capital gains or losses, pre-tax contributions or post-tax contributions, early withdrawals, etc. can significantly tip the scales in terms of equitable after-tax asset distribution in a divorce settlement. It’s best to consult with a financial professional and a CPA before agreeing to the financial terms of your settlement.
5) Build a Team of Trusted Professional to Guide You: Having experienced professionals on your side during this major life transition can make all the difference in the type of future you walk into post-divorce. Not only can a team of qualified professionals—including a divorce attorney, a financial advisor, and a CPA—help you prepare for the ins and outs of the divorce process, but can help insulate you from making rash financial decisions amidst the turmoil.
Psychology research indicates that we, as humans, let our emotions and behavioral biases drive our financial decisions. You may find yourself tempted to give in to your spouse’s requests in order to restore flow to your daily life, but doing so may put you in significant financial peril in the days that lie ahead. Having a team to protect your interests will help you maintain clarity of thought and sound decision-making when your emotions will likely be in flux.
In many cases, even, it may be wise to contact your financial professional before contacting your divorce attorney in order to get some guidance on how to best prepare for the divorce. Your advisor can help you take inventory of your assets beforehand, stand by you throughout the process, and help optimize the financial outcome of your settlement.
If you are considering or facing divorce, the advisors at Harbor West would be happy to meet with you and learn more about your situation. We are passionate about helping individuals maintain sound financial footing throughout the divorce process and can even help connect you with vetted divorce attorneys and CPAs in the area with whom we have worked in the past.
Divorce is without a doubt a devastating life event, but it doesn’t have to hinder your ability to protect and care for yourself in your new future. Contact us here to schedule a complimentary Get Acquainted meeting today.
Download our FREE E-book: 10 Critical Things to Consider Before a Divorce
Disclaimer: This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.