Discover tips for financially preparing to leave your spouse and budgeting for your new life. EP Wealth financial advisors provide insights on divorce planning.
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.
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.
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.
It’s easier to make informed choices with a clear picture of your assets and liabilities.
Shared debts and liabilities may include:
Jointly owned assets may include:
Knowing the value and ownership structure of each asset becomes useful for the division of property.
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.
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.
While you may not have every detail of your next steps planned out, you can start by tracking:
Consider what you pay for:
Also, price out planned future expenses like your next car or college tuition.
Opening your own financial accounts can be an empowering first step to disentangle your finances from your spouse.
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.
Building and maintaining individual credit is crucial for financial autonomy, enabling you to qualify for loans and increase your purchasing power.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
Divorces can take up to a year to finalize, so coordinating shared responsibilities may be required during the interim.
Clear communication and collaboration can help ease the financial burden of:
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.
During divorce, common unexpected surprises may include:
Open communication, transparency and professional guidance can potentially help mitigate surprises.
Ideally, your divorce emergency fund will cover three to six months of essential living expenses:
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.
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.
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.
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: