Imagine that one day you wake up and have to create a complete new life for your adult self! That’s what happens when you begin the journey of divorce planning. Because a lot of the pieces are not necessarily of your choosing, you need to play the hand you are dealt, protect your financial rights and craft the best possible future for you and your family.
In the short-term, you focus on custody of the children, ongoing support payments and splitting assets (even your air miles!). Of course, you’ll pay attention to those matters. But some are so occupied with negotiating the big items, they overlook a half-dozen other items that may look minor. They aren’t. Left unsettled, these issues can create misery during the process, or for years afterward.
Spouses who have stayed at home – more typically women – for some or all of a portion of the marriage will need to be especially careful when claiming their financial rights. Much of the common property, including retirement accounts, may be titled in the working spouse’s name, and more of the costs of caring for children may fall on women after a divorce.
Myriad studies show women tend to make out worse after a divorce; one British study showed men’s income rose more than 30 percent. After divorce, specifically, women's household income fell by 41 percent, on average, almost double the loss men experience, according to a 2012 report from the U.S. Government Accountability Office.
For women and non-working spouses, it pays to focus on a handful of items that might not seem front-and-center – but that can have a big impact.
- Cash flow. You may receive or pay ongoing support, but you’ll also need operating capital to pay big bills during the divorce process, and all legal and related fees. Be sure you have timely access to the liquidity you need and ask your attorneys to have it in writing. Your financial rights vary from state to state, and may also be affected by a prenuptial agreement.
- Insurances. Which assets are yours and when? You’ll need to insure everything from cars to homes. Additionally, pay attention to medical insurance for you and your children. If you’ll be paying for insurance through COBRA, typically available to divorced spouses for a maximum of 36 months, start shopping that around soon in case you want a different option. Consider life and disability insurance to protect support payments and be sure the beneficiaries of those policies are correctly handled.
- Variable expenses for your children as part of the settlement. Who is paying for extras like coaching, therapy (not typically covered in full by medical insurance), music, tutoring, prom, and all associated college costs? And if you are sharing these, who gets to decide what will be spent? Sometimes setting aside a joint account, mutually governed, is best. Other times decisions in advance as part of the settlement, formerly called the Marital Settlement Agreement or MSA work well. Put a realistic plan in place both spouses can live with and agree to.
- Unpredictable and uneven compensation. Many of us have inconsistent compensation year over year due to stock options, self-employment income and other situations. Include a formula to handle those inconsistencies and select a financially neutral person to audit appropriate documents no less than annually to be sure that your financial rights are honored. Include deadlines and time frames. Also include in the settlement who ultimately owes the taxes (and how) regardless of which party receives the compensation.
- The tax math! The divorce process can drag on for months, even years, and then suddenly it’s “rush rush rush.” Slow things down enough that you can ensure your CFP® professional and tax advisor have time to review the tax ramifications. There may not be any tax due at divorce if assets are simply divided and not liquidated in the settlement. But someday most everything will have a tax consequence. Those consequences need to be equal and fair.
- A new estate plan. Begin working with an estate planning professional shortly after you start working on your divorce, so that you have an estate plan ready to go, a new successor trustee (and alternate) named, new powers of appointment and a new will. You probably won’t be able to move most assets into the new estate titling until your divorce is final, and you may not be allowed to rename beneficiaries until then. But be ready to execute changes as soon as practical.
Like so many epic journeys, divorce is not always a joy, but paying attention to each step will help you reach your destination in the best possible financial shape. Holding onto the vision you have of your new future as you collaborate with your team, including a CFP® professional, will make all the difference.