How to Survive a Divorce

Divorce is a traumatic experience. Financial aspects can create great stress.  Settlement decisions are hard to make if you don’t have a clear and complete understanding of the family’s current financial situation and what your future may look like. 

The primary financial objective in a divorce settlement should be to allow both parties to be as economically secure as possible. If total security cannot be achieved, due to limited family assets, you must have a plan. The “fear factor” will be removed if you have confidence that your future financial situation is workable.

Preparing for the Negotiations

Prior to entering into the negotiation stage, it is important for both parties to have a clear understanding of their financial position and personal need by doing the following:

1. List family assets. 

   Determine the value and ownership title of all family assets.  Be sure to include investment accounts, real estate, and employee benefit plans such as 401(k)s, stock options, and pension plans. You may need to have some assets appraised or professionally evaluated to determine a market value that both parties can accept.  It is also important to determine the cost basis of all assets.  When assets are divided, you want to be sure that cost basis is divided appropriately so that one party does not incur an unequal portion of the capital gains tax liability.  This is particularly important if a portfolio of stocks and bonds needs to be sold in order to meet the cash requirements of either party.
   
   

2. Determine your living expenses. 

   As you contemplate your future, reduce your thoughts to numbers.  Consider both a comfortable amount and the absolute minimum you need to meet living needs.  Don’t forget the impact of inflation on your spending.
   
   

3. Analyze your income sources. 

   If you work, earned income may be a major source for meeting your living expenses.  If you do not work, or if earned income cannot meet your needs, the division of assets becomes very important.  In cases where the family assets are not significant, finding a job that can provide for your lifestyle must be considered.  The earlier you face this reality, the better.

Settlement Negotiations

Asset division and the amount of supplemental payments will be determined through negotiations.  The asset division may provide for a 50-50 split or may be weighted more heavily in favor of one spouse.  One factor that may influence the percentage split is the unequal future income potential of one spouse over the other. 

Once the settlement percentage is agreed upon, it is important to understand the advantages of owning one asset over another.  Each spouse will have different needs.  The appropriate assignment of assets can benefit both of you.  For example, if one spouse needs immediate liquidity, it may be more appropriate for a savings account to be allocated to that person and the stock investments to be allocated to the other.  If liquidity is not needed, it is more advantageous to have a tax-deferred investment, such as a 401(k) or IRA, than a regular investment account where taxable dividends and interest are created each year. 

If a family business is an asset to be divided, it may be better for one spouse to accept a note from the other for his or her share instead of forcing the business to be sold.  It may also be difficult to manage the business if both remain as shareholders.

Divorce Agreement

In order to protect both parties, the divorce agreement needs to reflect settlement provisions as well as future financial responsibilities, such as college and medical costs for children.  Along with the division of assets, the agreement should also indicate who is responsible for initiating account or property transfers.

Life Insurance should be considered as a requirement on either or both parties to ensure financial responsibilities are met in the event of an untimely death.  This should include any on-going monthly or lump sum settlement payments as well as future obligations for children.

Follow-Up Issues

Once the divorce is completed, review all aspects of your financial plan to make sure everything reflects your new situation.  Beneficiary designations on retirement accounts and life insurance should be reviewed.  You will likely need to update your estate plan.  You may need to establish credit in your name.  You may need to establish relationships with new advisors and financial service providers.

Summary

The financial aspect of a divorce settlement is key to the future security of both parties.  The negotiation for a fair division of assets and supplemental income payments can be more easily attained if all parties know their needs, the family assets, and their future financial situation. Taking the time to understand will help you through the process.

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