Divorce planning 101
Eight steps to protect yourself financially
The thought of divorce can take a serious toll on anyone's emotions. But if you're considering a divorce—or if your spouse wants one—focus on preparing for your new life. Planning for a new life without your partner can be daunting, especially after sharing 5, 10, 20, 30 or even 40 years together. Here are eight things you should do if a divorce is on the horizon:
- Put a team behind you.
The right advisors can save you from making costly mistakes. You should have a divorce lawyer, an accountant, and a financial professional. If you and your husband will split up a business along with other assets, you may also need a business valuation expert.
- Make a list of all your expenses.
Create a budget for monthly expenses and don’t underestimate or omit living costs. Without your spouse’s income, your earnings will go toward many or most of these expenses, so you want to be sure everything is covered.
- Be aware of your state's divorce law.
State laws differ on who gets what when a marriage ends. In the United States there are two different divorce standards, equitable distribution (marital assets are divided based on factors such as length of marriage, earnings, etc.) and community property (marital assets typically split 50/50). The more you know about your state's divorce laws, the better you will be able to anticipate your gains and losses, allowing you to better budget for your altered living costs.
- Gather your financial records.
Create a list of all your assets. Also, before divorce proceedings begin, collect the following records: savings, checking, and CD statements; credit card and loan bills, including mortgage statements; tax returns; statements for stocks, bonds, mutual funds, and other investments; retirement plan statements; real estate holdings; documents for personal property, including furnishings ad automobiles; life insurance policies; and documents relating to any co-owned business. Monitor your joint bank and brokerage accounts, as well as the cash value of life insurance policies, for unusual withdrawals.
- Account for inflation.
Because expenses related to child support will increase due to inflation, be sure to negotiate cost-of-living increases. The “Rule of 72” is a simple way to judge the impact of inflation: simply divide 72 by the rate of inflation. For example, if the inflation rate is 3 percent, the cost of living will double in 24 years (72/3=24). If college costs go up 5 percent, they’ll double in 14.5 years (72/5=14.5).
- Avoid being saddled with all of the taxes.
While a 50/50 split of assets would seem to be fair, you could actually suffer financially if you’re the one who receives the taxable investments. Make sure you understand the tax consequences related to accounts with pre-tax contributions such as 401(k) plans, and accounts that grow tax-deferred such as IRAs. Before you agree to a settlement and accept any assets, have your accountant or financial advisor evaluate equivalent after-tax values.
- Review designated beneficiaries.
Since you probably named your spouse as a beneficiary on your will, life insurance policy, IRA and 401(k), review and change these documents. You should also consider changing your trustees and powers of attorney, especially if you divorce later in life. Don't assume that your adult kids are still appropriate to name as powers of attorney. They may have unresolved feelings over the divorce. The same goes for in-laws who may have sounded like good options to have as a trustee before the marriage ended. It may be best to contact an independent trustee instead.
- Plan for the unexpected.
Make sure both of you have enough life and disability insurance. If your ex-spouse dies prematurely or becomes disabled, you might lose child support and college tuition payments, as well as money related to a property settlement.
FAST FACT: SOCIAL SECURITY
If you’ve been married for 10 years or more, you’re entitled to receive half of your ex-spouse’s Social Security benefits at retirement if this yields a higher monthly benefit than what you would receive based on your own earnings. The amount of Social Security your ex-spouse receives won’t be affected.
FAST FACT: LIFE INSURANCE AND DIVORCEThe owner of a life insurance policy has all rights over the policy, such as changing the beneficiaries, borrowing against cash values, and canceling the policy. Your divorce settlement must address policy ownership.