Over the past few years we have worked with an increasing number of divorcing or divorced clients. Divorce and personal finance are, by themselves, challenging. Mixing the two can be even more so.
But there are steps you can take to achieve a financial outcome that works -- and works well -- for both sides.
Below are a few lessons from working with divorcing clients. I recently became a Certified Divorce Financial Analyst® professional. (You can learn more about the CDFA® qualification here). Old Peak is more capable than ever to assist someone through this challenging time.
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- Get professional help. At a minimum, both sides need experienced family law attorneys. Having a financial adviser with divorce experience will also maximize the chances of a positive outcome.
- Understand your finances before you divorce. It's especially important that the spouse who is less familiar with the family's finances have a full understanding of their money profile. Sadly, that may even require a surreptitious inventory if he or she is worried assets could "disappear" before divorce negotiations.
- Prioritize your asks. Divorce laws in most states may constrain the overall division within a narrow range. But there is plenty of room to negotiate who gets what - houses, retirement vs brokerage accounts, life insurance policies, tax refunds, etc. There is scope for "win-wins" here.
- Understand your spouse's priorities.
- Remember the impact of taxes. A classic example: a retirement account is worth less than a brokerage account, because you will owe taxes when you sell and distribute the cash from a 401k or IRA. By contrast, tax on sales in a brokerage account is only on the gain, and the rate is lower. The 2018 tax law eliminated the tax deduction for payers of alimony. But tax is still a big issue in divorce.
- If possible, take your time before making big decisions. Once the divorce is finalized, concentrate on near-term "mechanical" priorities like re-titling accounts. But, if possible, let some time pass before making big decisions. Emotions may lead you to do something you will regret later.
Nothing can eliminate the emotional pain of divorce. For many families, it complicates their financial picture. But if you are proactive, most couples can create an outcome that allows each party to create a new, happier life.