As a wealth advisor, I've helped a few clients through divorces. Some are amicable and peaceful and others are complicated and stressful, but all of them are incredibly tough on the people involved. In any situation involving divorce, I feel that my role is to make the situation as seamless as possible from a financial perspective by ensuring that all the big-picture bases are covered.
Today, I want to share part of my process with you. Whether you're preparing for a divorce or know someone who is, there are several key issues that you'll need to address as you prepare to part ways.
Getting started: Aim for amicable
I know that this can be easier said than done in some circumstances, but I often advise people going through a divorce to try to keep it amicable. That means:
Hang up the boxing gloves!
Keep emotions out of your decision-making. Try to be as rational and clear-headed as possible.
Never use the kids as pawns. When thinking about decisions relating to your children, do your best to represent them, and remember that no matter what is happening, they have a lot of emotion invested in this situation as well.
Remember that the more you fight, the more the lawyers win and less of the pie to divide. By focusing on coming to terms as quickly as possible, you'll make both yourself and your former spouse better off.
Don't be vindictive. I've seen how hard this can be when there are hurt feelings, but remember it's better for you to move the process forward rather than giving in to the impulse to fight.
These are not always easy aims to achieve, but keep in mind that closing one chapter gives you the opportunity to pursue the next one. A divorce is an end, but it's also a new beginning. Keeping it cordial can help you reach that fresh start.
In most cases, pain is unavoidable for one or both parties, but being bitter and harboring negativity is not healthy. Hopefully, time will heal all wounds. If you can mentally speed up the process, you will live a happier life.
Your immediate needs: Income, health insurance, and custody
While there are big picture issues that you'll need to tackle over time, it can be easiest to start by focusing on the things that matter right now. Generally speaking, these include covering your everyday expenses, making sure you have health insurance coverage, and, if applicable, discussing custody of your children.
One often confusing aspect of a divorce is the financial planning. Whether both spouses work or one stays home, it can be hard to assess what assets are where and how income should be shared in the short and long term. I recommend doing an expense analysis to help you focus on the numbers rather than the emotions and to make the conversation easier. You can use my Expense Analysis Worksheet to help get you started.
Many insurance plans offer COBRA coverage for divorced spouses, which can buy the relevant spouse some time to purchase a new plan or arrange coverage through their own employer. Families on an individual plan might face more complications, so I'd recommend a prompt call to your insurer to sort this out. Looking ahead to your post-divorce life, remember that health insurance can always be included as part of a settlement to ensure consistent and reliable coverage for a former spouse and your children. For more information, take a look at this primer on Health Insurance and Divorce.
Speaking of children, you'll need to discuss a custody arrangement for both the short- and long-term. This can be one of the toughest issues divorcing couples face, but for the sake of the children's peace of mind, I would strongly urge you to set any differences aside to focus on a reasonable and feasible plan. As I've told clients, this is an important opportunity to demonstrate to your children how you'd want them to handle such a difficult situation. For best results, focus on the issues and leave your emotions at the door.
Moving forward: Assets, estate planning, and tax
Once divorce proceedings are under way, it's important to address what to do with your assets, estate plans, and tax filings for the year of the divorce. If you live in a community property state, some of your decisions will depend on the applicable rules, while others are largely left to the discretion of the couple. Either way, I encourage you to speak to a qualified and compassionate attorney or arbitrator who is able to help you and your spouse wade through this process with the minimum amount of fanfare.
The key asset most couples deal with is the family home. As an advisor, it's hard to offer advice on this as the best outcome really depends on the situation. You'll also want to discuss how to handle bank accounts, investment accounts, and retirement accounts, as well as other property or valuables. When dealing with assets it's also important to address liabilities: who will take responsibility for credit card or other debts? I recommend putting together a list of assets and a list of liabilities to help foster a conversation that stays on track and covers all the necessary bases.
Again, you can use my Expense Analysis Worksheet to help you get a clear picture of your financial situation.
Your estate plans will also likely change as a result of your divorce. You may need to designate new beneficiaries to your insurance policies, IRAs, and 401(k)s, and rework your will to account for your new status. For some, a new trust might need to be set up. Also, to the extent that you still have shared responsibilities with your former spouse -- especially any children -- it's important to try to coordinate these activities to the extent possible. That way, you can ensure that both parties will be comfortable with your estate plans should both of you pass away.
Finally, you may need to coordinate your tax filing status for the year of your divorce, including head of household and dependency issues. Speaking with a qualified tax advisor can help you to manage these questions and the process as a whole. For more about what you might want to cover in addressing the financial aspects of your divorce, you can also take a look at this Pre-Divorce Checklist.
Looking ahead: Remarriage and moving on
While a divorce and its aftermath might feel like an eternity, most people are able to pick up, move on, and even remarry. While that's often the furthest thing from the mind of anyone in the process, remarriage can have a measurable impact on your Social Security benefits if you were married for longer than ten years.
For someone in their 30s or 40s, it might not matter much, but it can be a significant issue for someone in their 50s or 60s. That's why you should be cognizant of these issues, and why you should always be sure to bring up a past marriage with a new advisor, especially if you haven't remarried yet. Take a look at the Divorce and Social Security primer for more information.
No two divorces are the same. As an advisor, I try to bring a methodical focus on the important issues and a lot of compassion to the table. Whether or not you have an advisor, remember that you can do the same for yourself. It's a tough time, but with the right support and a good plan, you can get through it -- and move on to a new beginning.