Ten steps to take to secure your finances now
By Taeya Lauer EBS CONTRIBUTOR
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Going through a divorce can be an overwhelming experience that changes nearly every part of your life, both personal and financial, and that includes your investments and financial plans. However, with so much to deal with during the divorce process, many people need more clarity on what to focus on.
Failing to update your investment plan during and after a divorce can have a number of consequences, many of which you may not have considered. Don’t rely on your divorce attorney to help you navigate your investment planning and investment needs. Additionally, don’t assume your existing plan, or financial professionals, will work for you as a newly single person. You need to take a fresh look at your personal financial health.
You should update your investment plan not only after your divorce is final, but as soon as you know a split is likely. The most effective divorce settlements are made in conjunction with a financial advisor who can help navigate the many issues that will arise. If you are not the primary breadwinner, or the person who has managed the family finances, you need to learn new skills quickly to adequately negotiate a divorce.
Here are few things to consider right away.
1. Get clear on what you own and what you owe
Understanding the value of your assets and debts is an important first step. Do not rely on your partner to tell you what is in your marital estate. You need to gather current statements and values for all assets and debts immediately. If this is a contested divorce sometimes partners will try to block access to information and although there is a legal process to find out those details, it can take time. If you are considering a split, the first thing you should do is create an inventory of assets and debts. My best advice is to work with a professional financial advisor to help you work on this inventory as they are familiar with the many different types of investments, retirement accounts and stock compensation. A financial professional can assist you in accurately valuing what you have.
2. Understand your income
While this many seem to be an obvious statement, there are many different types of compensation from salary, to profit sharing, stock awards and health insurance benefits. If you are close to retirement you need to consider what future social security and pension payments might look like if you are no longer married. Income from investments, trusts, and family businesses count here too. Your family’s finances may be straight forward, and this might be a quick one for you. If there is any complexity, again, I recommend a conversation with a financial advisor who specializes in divorce planning to help you get clear on this topic. Especially if you earn a smaller portion, or none, of the family income you need to get a grasp on this topic right away.
3. Get that budget in writing
Many families lack a formal budget, and this may have worked in a marriage, but once you begin a discussion on child or spousal support you will need to provide complete details of the existing budget. The next thing you will need to do is provide a projected budget for the future. If you have little ones, you will need to consider how the budget will change as they age and what you want to provide for post-secondary education. In this day and age, young adults often stay with their parents past age 18, so you should consider how that might play out as well. One of the most anxiety producing parts of divorce is not knowing how you will cover expenses during the divorce negotiation, and once it is final. The sooner you get the budget details down in writing the better your attorney will be able to represent you and advocate for you.
Now that you have clear picture of the finances, you can move on to the logistics of a potential split with your partner.
4. Who is living where?
This is a particularly tough one in the Pacific Northwest and most other metropolitan areas of the US because real estate is expensive. Renting a property is equally pricey. Often the knee jerk reaction if there are children involved is to let the primary parent stay in the family home, yet this can saddle that person with large bills they are not prepared to fund. If you have done your homework in the three steps above, you should be aware of the costs of maintaining the family home and can make an informed decision on who should remain there and how it will be funded. Or, perhaps the best option is for both parties to vacate the property? Divorce is a time of huge change and while it may not feel good to consider that option, it may make sense financially. The goal is for all parties involved to have a comfortable and safe place to live that they can afford.
5. If there are minor children involved, how will you care for them?
A final parenting plan often takes many months or years to craft, but a temporary plan should be put in place as soon as possible. The psychological and emotional effects for everyone in the family are profound. Yet if a consistent schedule for parents and children alike can start quickly, it can be a comfort for all. It is also very important to stick to the schedule as much as possible. There will be times that it feels overwhelming to parent in is this new paradigm, but consistency will create a better outcome for you and your children in the long run. Creating this temporary plan usually involves clarifying how expenses for the children will be supported, so when you get your budget down in writing, I recommend creating a section for the children that makes it clear what their needs are apart from the other costs of the marriage.
Okay, I am a wealth advisor, so let’s get back to the finances now.
6. Set a date of separation
Many couples overlook this step, and it can create real conflict down the road. The date of separation is sort of a line in the sand to delineate when you stopped functioning as a married couple. This is important in establishing the value of the marital estate and ultimately what will be divided between you. If you can agree to a specific date of separation, it may be possible to accumulate assets after that time that will not be split with your partner. Another key issue is whether or not you are sharing in the appreciation of your assets as the divorce process goes on. Finally, if your partner adds more debt to the pile, are you responsible for that? There are many pros and cons to setting a date of separation, and I think it is important to talk with both your attorney and a financial advisor to make this critical decision.
7. Create a new investment or wealth plan that highlights your personal goals
While this may seem like an overwhelming time to think of your financial future, the ultimate outcome of your divorce settlement will be much better if you know what you are aiming for. There are many creative ways to split assets and income, so if you know what is important to you three, five, and ten years in the future you are more likely to be able to support your vision. It can also be very empowering to think deeply about your future at a time when the present may feel less than ideal. Without an investment plan at times, divorce settlements are more about simply balancing the accounts than optimizing the outcome. Decisions can be made that will affect your investment plans for years to come, it makes sense to have some guideposts to follow.
8. Make a plan to manage the investments and retirement plans
If you have not been involved in investment management during your marriage, it is time to step up and pay attention. In the best case scenario, you and your partner will agree on what to do with the investment and retirement accounts during the divorce proceedings. What if the stock market tanks? What if interest rates rise quickly? What happens if your certificates of deposit (CDs) or bonds reach their maturity date before you’ve finished negotiating? You may not be able to control some of the accounts during divorce, but it would be great to understand what you will have access to. Given this can be a time of conflict, do not assume that it is acceptable for you to make changes to accounts, or that your partner will continue to do what is in your best interest. Try to make a temporary investment management plan while the divorce is being negotiated that everyone can feel good about.
10. Pay attention to those credit cards and any HELOC balances
If there are no other agreements in place and a date of separation has not been established, you could be responsible for any new debts your partner takes on. Sometimes during the divorce process, people behave differently than when they were planning to remain married. Do not assume that your soon to be ex-spouse will not use the credit cards or incur debt on a home equity line of credit because they didn’t do this during the marriage. This can be a time when everyone is stretched thin and these open credit lines may be accessed without your knowledge. If you truly want to protect yourself, make sure you establish a date of separation and change your credit cards into your name only. You can also ask the bank to freeze or close a HELOC. But careful with this one, if you need to sell properties you may want to access these lines of credit to spruce them up before listing. Again, please talk this through with your attorney and financial advisor.
11. Don’t overlook tax outcomes
Starting with the fact that you don’t have to file as married filing jointly during your divorce process, there are important tax decisions to make that can save or cost you a lot. How the income is structured creates different tax outcomes for both partners. Embedded capital gains or losses in investment accounts are hidden benefits or costs to accepting assets. If stock compensation is part of your income, the taxes there are very complex. Finally, if the family home is sold when you are a couple, the capital gains exemption is twice as high then if you sell as a single person. Make sure you consult with a tax advisor or financial advisor on these topics. The level of knowledge divorce attorneys have on this topic varies widely, so do not expect them to create a plan that addresses tax issues.
Divorce is hard in the best of circumstances. However, it will also be a time of great personal growth. Although the marriage did not work out as you envisioned, you have a new opportunity to reimagine your life. You get another chance to create a path for yourself and your children, if you have them. Maybe, through all the emotions you experience, you can find a spark of excitement and feel hope in the possibilities.
Now is the time to make a plan for the life you want. Going through a divorce is never easy, but it’s essential that you make the time to update your investment plan and tackle the myriad of financial decisions that you face. I am available to assist you as you step through the divorce process and would be happy to partner with you during this time of change. I can be reached for consultation at (206) 832-1659 or taeya@shoretosummitwm.com.
Taeya Lauer is a Partner at Shore to Summit Wealth Management. She currently works and lives near the Seattle, WA office.
Wells Fargo Advisors Financial Network does not provide legal or tax advice.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Shore to Summit Wealth Management is a separate entity from WFAFN.
