John E. Chapman
Chief Executive Officer
Life is full of milestones. While many are joyous occasions, such as getting married or the birth of a child, others are less so. Sadly, divorce touches just under 750,000 American couples per year, equal to roughly 2.7% of the US population. (SOURCE: CDC.gov, data as of 2019) While this figure has been steadily dropping over the past 20 years, divorce is a factor in many lives. Such a life-changing decision has many aspects that need to be considered, many of which require specialized knowledge that many do not have. This lack of understanding can often be a barrier for people, preventing an unhappy couple from pursuing the course they would both otherwise prefer. Where will I live? How will I pay the bills? What will this do to my retirement plan? To help demystify the divorce process, here are a few things to consider as you begin the process.
Assemble Your Team
The first step that should be taken when divorce becomes a joint decision, is to assemble your professional team around you. The first, and most obvious, member of that team is a qualified attorney that specializes in family law in your area. While many divorces are completed amicably without the assistance of attorneys, anyone contemplating divorce should at the least consult with an attorney early on in the process so that they fully understand their options and what the implications of proceeding without an attorney could be. While many families have long-term relationships with their attorneys, one should be cautious of sharing an attorney with their soon-to-be ex-spouse due to the obvious conflict of interest.
The next member of your team should be a qualified wealth advisor, who can help supplement the advice provided by your legal team with specific and detailed financial advice. This advisor should be brought into the process as early as possible and will be responsible for helping you and your legal team in assembling and analyzing financial affidavits, understanding the differences in property types, valuing financial and retirement assets, and understanding the broader financial implications of proposed divorce settlements. Much like with the attorney selection, it is important that each spouse have their own advisor that is operating in the sole best interest of that spouse in a Fiduciary capacity.
The final member of your team should be a qualified accountant. While your wealth advisor will be able to give basic information around the tax impact of certain decisions, the accountant will be able to give a more specific analysis to help solidify tax ramifications. They may also be helpful in auditing account activity and finding potentially hidden assets in certain circumstances.
Get Organized
One of the early steps of the divorce process is the creation of a financial affidavit. This document details all financial data applicable to each party, including income, expenses, assets, and debts. Your professional team must review this document carefully to ensure its completeness and accuracy. As an example, 401(k) contributions listed as an expense would generally need to be removed as they are a voluntary contribution and not a true expense. Including them overstates that party’s expenses. Similarly, that same 401(k) contribution may be getting used to reduce that party’s income if they are using the net income number from their pay stubs, thereby understating their income. Sometimes both happen.
It is also important to begin determining which assets and liabilities are marital property and, therefore, subject to division. The laws surrounding the definition of marital property vary from state to state so it is important that your professional team be involved in this process. Generally, marital property is anything earned, created, or purchased during the marriage. Property that pre-dated the marriage, was gifted or inherited during the marriage, and property acquired after the divorce are considered separate property. However, there are nuances to each of these circumstances that can convert an asset into marital property. For example, co-mingling of non-marital assets with marital assets in the same checking or savings account.
Start Considering Financial Life After Divorce
Whether you are a dual-income household or a single-income household, your finances will likely change meaningfully post-divorce. Based on the information gathered during the process, your professional team will work with you to determine an acceptable settlement and then help you understand the implications for your post-divorce lifestyle. As an example, an entrepreneur that has spent their life building a business may find that any settlement will require them to give up the majority of their liquid assets to keep their business. In other cases, installment notes may be required to buy out the former spouse over time if sufficient liquid assets do not exist. In either case, cashflow planning will be impacted.
Perhaps the most challenging transition after a divorce is when a non-working spouse is faced with the task of translating a divorce settlement into a lifestyle. In many cases that non-working spouse will have to make decisions regarding their living situation, lifestyle spending habits, and employment status. Further, in most marriages, one spouse tends to take the lead on the family’s finances. For the other spouse, they find themselves responsible for handling their finances themselves, a task many are not equipped for. For many, learning to manage their finances can be an overwhelming process. In either case, this is where a qualified wealth advisor can step in to help create a plan that combines goals and desires with the new reality of post-divorce life. With proper planning during the divorce process, this transition will already have been taken into account during the negotiation phase so that both spouses know what to expect when the process is completed.
Set yourself up for success by getting the help you need to navigate the divorce process as early as possible. No divorce is pleasant, but with proper guidance, much of the fear and confusion can be removed from the process while also helping you avoid common pitfalls that befall the unknowing.
