Divorce Financial Checklist
Today I'd like to talk to those of you who are working through a divorce, thinking about one, or having just survived one. First of all, I commend you for your bravery. Deciding your marriage is over is one of the hardest things to admit. In fact, it's so hard, many people just stay married to avoid coming to terms with it. So if you're contemplating it, in the middle of it, or working on rebuilding your life, you have my respect and my support.
I'm a big believer that marriage is hard. My parents have been married for 46 years, and I've seen them actively work to maintain their relationship with each other over the years. It hasn't always been smooth sailing, no marriage is, but they have both continued to be interested in being friends and partners with each other. So if you're in a rough spot, and it's hard to see your way out of the pothole you're standing in, I highly recommend counseling for you, your partner, and both of you as a couple, before embarking on the difficult path that is divorce.
Of course, if your mental or physical safety, or the safety of your children is at risk, please seek help from your local support system, men's or women's shelter, or the police. Many local civic organizations can safely connect you to a shelter without arousing suspicion. For instance, my local YMCA is a safe place to go and speak to someone about getting help escaping a dangerous relationship. There is also a national hotline for domestic violence, www.thehotline.org, or 800-799-SAFE(7233). Keep in mind that internet usage can be tracked, so clear your browser for your safety after you go to their website, and phone call history is logged in your phone, and while you can delete individual phone calls from your history, they will still show up on your bill. If your spouse has access to that bill, you might want to use someone else's phone to make the call. So if you think your safety or the safety of your children is at risk, please seek help from the police, a shelter, the hotline, or a friend.
I just want to say, before we get much deeper into this that I'm not a lawyer or a psychologist, and I'm not going to be handing out professional advice in either category. Make sure you consult with a lawyer before making any serious decisions. Most family lawyers will meet with you for a free consultation, just so you know what your options are before you make any moves. And I also recommend that no matter which path you choose, having a good psychologist or counselor in your corner is worth every penny. Some health insurance plans even cover a certain number of visits in a year, because mental health is so important. So make sure you see someone regularly as you're making this huge life transition.
Today, we're just going to scratch the surface with one simple step you can take, no matter where you are in the process. Creating a checklist of financial things you need to think about before, during, and after a divorce.
#1 - Cash
You will need money. Divorce is expensive. Living on your own during and after divorce is expensive. So make sure you have a revenue source, like a job, or a loan from Mom and Dad, or savings in the bank that you can use to pay for lawyers, an apartment, the mortgage if you plan to stay in your house, and all the bills you'll have to pay. The average length of a divorce proceedings in the US is about a year. Some are shorter, especially those where both parties are on the same page and want to move on quickly, or where there aren't children or lots of assets to divide. Some are a lot longer, for obvious reasons. Figure out where the money is going to come from so that you have this planned out in advance.
#2 - Savings
You and your spouse (hopefully) have savings in the form of cash accounts (Checking/Savings/Money Market), retirement accounts (401k, 403b, IRA, etc), and maybe even brokerage accounts where you own stocks and bonds. You'll need to figure out which accounts are owned by which individual, who is likely to get them after the split, and how joint accounts will be divided. If you're the stay at home spouse and your working spouse has a 401k or other retirement plan, it's pretty common to split that in half. That kind of transaction is referred to as a QDRO (pronounced "Quad-roh"), which stands for Qualified Domestic Relation Order, and it's just a legal term for the transferring of retirement assets from one person to another. Your lawyer will draft the paperwork to make this happen after the divorce has been agreed upon.
If you've been married for more than 10 years and your spouse was the main earning spouse, and if you choose not to remarry, you get half of your ex-spouse's Social Security payout in your retirement years. Your ex-spouse still gets 100% of their SS money, but you are entitled to half if your marriage was more than 10 years and you don't remarry. Your ex doesn't have to do anything, you just go to the SS office when you're ready to take your distributions, show them the marriage and divorce certificates that demonstrate your eligibility, and you'll get your benefits from Uncle Sam.
#3 - Real Property and non-liquid Assets
This covers things like your house and everything in it, your vehicles, a vacation home, an RV, etc. The current value of each of these items will be taken into account when deciding who gets what.
#4 - Inheritance or Business interests
If you or your spouse is entitled to inheritance from their family or a business ownership, these items may come into play if, for instance, your spouse wants to keep the house and has to buy you out of it, but can't right now. An agreement for part of the value of an inheritance or business interest could make up the difference in this bucket.
#5 - Pre-Marital Assets
If you owned property or assets before you were married, these are considered pre-marital items, and they are usually off the table during a divorce. They can come into play, however, if, like I mentioned in the previous item, you or your spouse has to buy out the other partner and doesn't have the cash to do so. These types of accounts can help make up the difference if necessary.
#6 - Debt
Usually debt is owned jointly, and so it will be split between the parties. Of course, pre-marital debt is similar to pre-marital assets. The parties can agree that it's not the responsibility of the non-indebted spouse since the debt was incurred before the marriage. States vary on how they treat debt, so this is an important question for your lawyer if you or your spouse, or both of you collectively have debt that needs to be paid back.
#7 - Daycare, school expenses and college
If you have children, you'll need to have a conversation about how their education will be financed. You may or may not agree during the divorce process on college if your children are young now, but it's better to have a plan in place ahead of time if you can, so your children aren't wondering whether they'll be on the hook for tuition or not.
This list is clearly void of the obvious child support and alimony, otherwise known as spousal support. I didn't cover these in any detail because they are the two most common data points in a divorce negotiation. Your lawyer will be able to tell you what your state's child support numbers are, and there are often free calculators by state available online so that you can estimate what your child support responsibility or income will be, based on you and your spouse's income, and how many nights the children will stay with each parent over the course of a year.
Wrap-Up:
As I said in the beginning, this isn't legal advice, and it's always important to have a discussion with a family lawyer who specializes in divorce before you make the leap. These are just a few items to think about before, or during your divorce process. If you or your spouse is a high earner, or a high net worth individual, it may be appropriate to hire a financial planner who specializes in divorce finances, such as a financial divorce coach or a Certified Divorce Financial Analyst, otherwise known as a CDFA, in addition to your lawyer, so that you have a financial professional in your corner to thoroughly evaluate your financial situation before you sign anything.
If you've already finished your divorce, it's important to set yourself up for success going forward. I highly recommend hiring a fee-only financial planner to be sure you're on the right track, now that it's just you making all the financial decisions for your future. This is especially important if you got a large settlement and you've never managed the family's finances before, or if you were the stay at home parent and don't have anything saved for your retirement. These aren't the only circumstances where a financial planner would be of benefit to you, so talk to one before you make any big decisions. Most planners offer a free consultation, so you're not obligated to pay them to ask some basic questions and find out what your options are. You'll need someone to walk beside you through all this new territory, and a fee-only financial planner will help you get all your ducks in a row to prepare and execute your next chapter of life.
As always, don't hesitate to reach out to me with any questions you may have. You can email me at Lee@ LuminaryWealth.com, or connect with me on LinkedIn or Facebook.
Keep saving, and have a great day.