Divorce is a traumatic experience and financial aspects can add to the stress. 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 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 needs by doing the following:
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. Knowing the cost basis of each asset is also important so that when the assets are divided, each party will understand their individual tax liability upon sale. This is particularly important if assets need to be sold in order to meet the cash requirements of either party.
Determine 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 expenses. Don’t forget the impact of inflation on your spending.
Analyze 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.
The division of property and the amount of supplemental payments will be determined through negotiations. The asset division may be equal or weighted more heavily in favor of one spouse. A 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. 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 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.
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.
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 as well as consider relationships with new advisors and financial service providers.
The financial aspect of a divorce settlement is key to the future security of both parties. A fair division of assets and supplemental income payments can be more easily attained if the "fear factor" is removed. Before negotiations begin, become knowledgeable yourself or find a trusted advisor who can help you through the process.
Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine’s book, "Advice You Never Asked For… But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at email@example.com.