Discover tips for financially preparing to leave your spouse and budgeting for your new life. EP Wealth financial advisors provide insights on divorce planning.
How Do I Financially Prepare to Leave My Spouse?
Divorce is one of the most emotionally fraught events in a person’s life. It can also be one of the costliest. While each divorce is distinct, understanding the financial implications, gathering the necessary documentation and discussing goals for your new life with a divorce financial planner can aid in preparing for this significant life change.
This guide will walk you through 11 considerations to help you manage the financial aspects of leaving your spouse.
1. Know the Financial Implications of Separation
If you have a joint account with your spouse, know that your financial institutions and advisors are not bound by confidentiality regarding your requests. You might consider opening an individual account, updating your password information and notifying relevant parties (like creditors, estate planners or tax authorities) about your change in financial arrangements.
Seeking legal advice early in the process can provide clarity on matters like property division, spousal support and child custody.
2. Assess Your Current Financial Situation
The narrative of your marriage's financial well-being is woven into your financial records. Collecting these documents may be labor-intensive, so begin as early as you can.
Gather Financial Documentation
Some of the documents to review include:- Checking and savings statements from the past year
- Your most current retirement account statement
- Investment account statements from the past year
- Mortgage, auto and personal loans from the past year
- Credit card statements from the past year
- Recent pay stubs
- Three years’ worth of tax returns
- A list of debts and assets brought into the marriage
- A list of debts and assets accumulated during the marriage
3. Understand Your Joint Finances
It’s easier to make informed choices with a clear picture of your assets and liabilities.
Consider Shared Debts and Liabilities
Shared debts and liabilities may include:
- Mortgages
- Car loans
- Credit cards
Consider Joint Assets and Their Implications
Jointly owned assets may include:
- Properties
- Investments
- Retirement accounts
Knowing the value and ownership structure of each asset becomes useful for the division of property.
4. Create a Budget for Your New Life
Creating a budget can potentially help you regain financial independence, adapt to changes in household income and expenses and build a stable foundation for your post-divorce path.
Consider How You’ll Adjust to a Single Income
Start by creating an emergency fund to help you adjust to living on a single income. Create a plan that addresses immediate must-haves and outlines a realistic strategy for long-term financial stability.
Estimate Short-Term Living Expenses Post-Separation
While you may not have every detail of your next steps planned out, you can start by tracking:
- Housing costs
- Utilities
- Food
- Clothing
- Transportation
- Childcare
Plan for Long-term Ongoing Expenses
Consider what you pay for:
- Entertainment
- After-school activities for the kids
- Vacations
- Appliances and home furnishings
Also, price out planned future expenses like your next car or college tuition.
5. Establish Individual Financial Accounts
Opening your own financial accounts can be an empowering first step to disentangle your finances from your spouse.
Open Separate Bank and Credit Accounts
Open individual bank and credit accounts to gain sole control over your financial resources. Choose a reputable institution that offers convenient ways to deposit and retrieve money. Then, be sure to update your direct deposits and automatic payments.
Build Individual Credit
Building and maintaining individual credit is crucial for financial autonomy, enabling you to qualify for loans and increase your purchasing power.
6. Seek Professional Assistance
There’s no shortage of well-meaning advice when you’re going through a divorce. There is no one-size-fits-all solution and divorce laws vary considerably from state to state. Before you move money or make any new financial moves, it’s worth consulting a credible source of information.
Understand the Legal Process and Potential Costs
Beyond attorney fees, you may have to pay fees for document preparation, court filings, expert witnesses or evaluations. Planning for these nuanced costs is a comprehensive approach.
Consult a Divorce Attorney
Licensed divorce attorneys can help you understand and protect your rights as you make important decisions regarding the division of assets and potential support agreements.
Work With a Financial Advisor or Certified Divorce Financial Analyst (CDFA®)
In addition to legal assistance, consider working with a financial advisor or a Certified Divorce Financial Analyst (CDFA®).
The professionals at EP Wealth can guide you through the financial complexities of divorce and help you make informed decisions about:
- Property characterization and asset valuation
- Taxes, investments and retirement accounts
- Asset and debt division
- Estate planning
- Everyday budgeting
- Planning for future financial goals
7. Protect Your Assets and Prepare for the Division of Property
Dividing assets can be one of the more difficult parts of a divorce. Generally, couples go for a 50-50 split, though this isn’t always the case. Working with a professional provides access to impartial counsel, which you may find valuable during this process.
Take Steps to Safeguard Individual Assets
Certain jurisdictions may allow postnuptial agreements, which define property rights, division of assets, alimony, spousal support or the handling of debts acquired during the marriage. Additionally, you’ll want to maintain clear and accurate records of any financial transactions taken during the divorce process.
Prepare for Negotiations on Asset Division
Ownership, assessed value and sentimental value can all play into asset division decisions. Attorneys can look back through three years of bank statements to determine whether there might be any such surprises.
Understand the Implications of Asset Liquidation
In some cases, asset liquidation may be necessary for complex or equitable distributions. The tax implications of selling or dividing assets can significantly impact the long-term outcome of a settlement.
For instance, liquidated retirement accounts are fully taxable as regular income, whereas brokerage account investments are taxed at cost and favorable long-term capital gains rates.
Cash assets typically have no tax implications. Dividing the marital home holds potential tax savings, so it’s essential to consider the timing of the home sale in relation to the divorce.
8. Plan for Child Support and Alimony
Planning for child support and alimony in divorce helps you stay in legal compliance, reduce conflict, provide predictability and consider the children's well-being.
Anticipate Child Support Responsibilities or Entitlements
If children are involved, you may need to file for child support through the local court system or consider a custodial arrangement that suits the well-being of the minors. Changes in income, housing status or the child’s needs may require flexibility down the road.
To get started, you might consult a local mediator, family law attorney or local child support agency. Often overlooked, the financial expertise of a CDFA® can support a more amicable solution as well.
Understand Alimony/Spousal Support Aspects
Clear communication and negotiation, potentially through mediation, can help you reach an amicable agreement. Understanding tax implications and circumstances for modification or termination of alimony terms will help you navigate alimony payments in divorce.
9. Manage Joint Responsibilities During the Transition
Divorces can take up to a year to finalize, so coordinating shared responsibilities may be required during the interim.
Coordinate Shared Responsibilities
Clear communication and collaboration can help ease the financial burden of:
- Mortgage payments
- Utilities and credit or loan payments
- Childcare expenses
- Health insurance
- Taxes
Communicate Strategies for Financial Obligations
You might consider holding joint financial review meetings, maintaining a shared financial document, or establishing a routine communication plan to take care of business while minimizing disruption of your daily lives.
10. Prepare for Unexpected Expenses
During divorce, common unexpected surprises may include:
- Hidden assets and undisclosed debts
- Changes in income or employment
- Tax consequences
- Challenges with health insurance
- Custody issues
- Discrepancies in property valuation
- Legal costs
Open communication, transparency and professional guidance can potentially help mitigate surprises.
Build Emergency Funds and Savings
Ideally, your divorce emergency fund will cover three to six months of essential living expenses:
- Mortgage or rent and utility payments
- Food, personal care, and transportation costs
- Minimum debt payments and insurance premiums
- Educational expenses and childcare costs
Review Insurance and Estate Planning Options
Your health, life and property insurance needs may change with divorce, so it’s a good idea to review your policies. But before making any changes, be sure you consult your legal advocate, as premature adjustments can put you in contempt of court in some cases.
Additionally, you may need to adjust your estate plan, including wills, trusts, and healthcare proxies in due time.
11. Build a Support System
While financial preparation is essential, emotional support is equally vital during a separation. Emotional resilience, fostered by a supportive network, can not only aid in coping with the challenges of divorce but also enhance negotiation skills and long-term financial well-being.
Don’t Overlook the Role of Emotional Support
Lean on friends, family or support groups to help navigate the emotional challenges of divorce. You never know who might show up for dinner, make you laugh when you need it most or offer to watch the kids while you meet with your financial planner.
Emotional support can be a bulwark against impulsive choices, stress and negative emotions that inevitably arise at one point or another. With greater resilience, you may find clarity of mind to negotiate better and stay on track with your goals, no matter what life throws your way.
Consider Consulting a Professional to Get Through This
Professional mental health support is more than just “another divorce expense.” It can also be beneficial in managing stress, developing healthy coping strategies, fostering effective communication, and maintaining your overall well-being.
Preparing financially to part ways with your spouse involves a comprehensive assessment of your current financial situation, an understanding of your rights and obligations and professional guidance.
By taking proactive steps to safeguard your financial interests, create a realistic budget and build a support system, you can navigate this challenging time with greater confidence and control over your financial future. Remember, seeking the assistance of financial professionals—like an EP Wealth advisor—can provide valuable insights and guidance tailored to your specific situation.
DISCLOSURES:
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success and does not ensure that the client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct t or implied results of projections being represented here will be met or sustained.
- The information presented is general in nature and should be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the reading of personalized investment advice or is intended to supplement professional individualized advice.
- The Certified Divorce Financial Analysts (“CDFA®”) that are employed by EP Wealth Advisors, LLC are not practicing attorneys, accountants, tax professionals, or legal experts. All assessments and subsequent recommendations are limited and are performed exclusively under the guise of financial planning. An attorney must be retained in order to professionally and accurately assess legal options and/or to provide counsel. We also recommend consulting a CPA, accountant, or tax professional.
- Hiring or working with a CDFA® does not guarantee or ensure that a client or prospective client will experience encouraging or favorable results.
- The information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment, tax, or legal advice nor is it intended to supplement professional individualized advice by the appropriate professional(s).
- The decision to work with a CDFA® professional will differ amongst clients and depend on the individual circumstances of each respective client. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC and/or a CDFA® will satisfy your divorce service needs. Services offered by other professionals may align more with your specific needs.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings/checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
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