Money missteps during or just prior to divorce are common and can be costly, but with financial forethought you can make the best of a difficult circumstance. It’s an emotionally confusing season, which makes it financially challenging as well, because most married people have shared incomes, accounts and property.
As wealth management planners, we’ve helped guide people through this difficult transition. We help clients sort out their financial situation and find a path to maintain a desirable lifestyle and meet personal financial goals. So, at whatever stage your marriage is in, it’s crucial to understand your personal financial picture to minimize the anguish of figuring it out while facing possible divorce. Thinking ahead and taking essential steps early can empower you to exit divorce court in a financially positive position.
As with all things financial, the first step is to gather and organize information.
Get Financially Organized
Start with a clear financial picture of your marital net worth, income and expenses. Gather records of all the assets and liabilities you acquired throughout marriage, and prior. Include your home, mortgage, retirement accounts, insurance policies, investments, 529 accounts, credit card debt, limited liability companies, etc. Distinguish any separate property or debt before the marriage or separate property acquired during the marriage such as inheritances or gifts. Although these latter assets may be considered separate property, they can impact the division of the marital (joint) assets.
Create a file that reflects your marriage’s financial health and include copies of your:
- Marital agreement (if one exists)
- Recent federal and state tax returns
- Deed(s) to community real property
- Bank account and credit account statements
- Brokerage accounts statements
- Insurance policies
- Loan documents (mortgage, auto, personal)
- Pay stubs (yours and spouse’s)
- Shares in joint or personal business ventures
For some of these, the most recent statement is sufficient, for others you may need statements from the past year or longer. Here is a checklist of financial records you’ll want to prepare.
Outlining your present monthly income and living expenses will assist you in creating a budget that clarifies your understanding of current lifestyle needs and what you can anticipate they would be once you live in separate households. As soon as you know divorce is inevitable, begin tracking your household income and expenses. A detailed list will help build a post-divorce budget. This is crucial for your attorney, and later for the judge who’ll decide a fair split of assets and debts, and whether spousal or child support should be awarded.
If you’re already tracking your budget, it helps to have a record of past months and years. It should include household bills, food, clothing, entertainment, home maintenance, transportation, child care and anything else that you spend money on. Use any bank and credit card statements to estimate spending from past years. Project future expenses beyond the “normal monthly expenses” to include typical holiday trips, vacations and unexpected costs like replacing a household appliance.
If you have minor children, think beyond custody arrangements to consider costs for their education, tuition, health insurance, activities, and sports. Expenses can shift from child care to after-school activities and other foreseeable needs.
Enlist Sound, Competent Support
A knowledgeable, trustworthy family law attorney with whom you’re comfortable can be a great help navigating so stressful a time. Engaging a lawyer is prudent, not an inherent act of aggression. Even if you ultimately work with a mediator, a divorce attorney can help you learn the divorce process, calibrate your expectations, understand your rights, and review your settlement to ensure you are treated fairly.
If relations seem cordial, anticipate rough patches and prepare for resistance. You’ll decrease the likelihood of confrontation by gathering important paperwork and seeking legal counsel beforehand. Divorce laws vary by state, so be cautious of advice that sounds like a foregone solution. If you're unsure whether you should move money, change accounts or make any other financial moves prior to divorce, consult an attorney licensed in your state. Specific advice can only come from experts familiar with your circumstance.
Also consult with financial professionals such as CPAs and financial advisors to learn the short and long-term implications of decisions made as part of a divorce settlement. These professionals can help you understand the tax consequences of a divorce settlement, how to divide retirement plans, stock options, and other deferred compensation, as well as the implications of splitting real property interests or valuing a business. A wealth manager can bring to light things you may not think of, run various financial scenarios, and support you through the emotional layers of divorce while you also take steps to protect your credit score. If you already have a financial advisor, that person can gather some financial details for you.
Start Setting Money Aside
If the divorce is not amicable, ask your attorney about court-ordered options to prepare for potential conflicts. Try to save enough cash to cover a few months of living expenses and legal fees.
Many couples share checking and savings accounts, so it’s important to have your own. Consider opening a separate checking account and credit card once you get a go-ahead from your lawyer. Otherwise, refrain from big financial decisions. It might be tempting to get a jump on tasks such as adjusting your life insurance beneficiaries — but it's best to wait. Hold off on changing your will or insurance beneficiaries until you consult your attorney, this will ensure the best timing without jeopardizing your day in court.
Separating joint finances is tricky and much of the process depends on your state’s law — some treat all income, assets and debts as if they're part of a single pot. Emptying that pot, or dipping into it more than usual, just weeks or months before your divorce could be detrimental.
Continue using accounts — individual or joint — as usual. If you don't have money set aside for hiring a divorce attorney and related expenses, you might agree with your spouse about spending a conservative and comparable amount, to minimize mounting legal fees. If your relationship is not amicable, ask your attorney about a legal separation. This would structure how you both use money until the divorce is finalized.
Whether your divorce is amicable or adversarial, a lawyer can help you sort through the separation of your lives and finances. Even if your divorce is more about dividing debts, it’s worthwhile to consult a financial expert.