By the time you have decided to tell your spouse you want a divorce, I have little doubt you have experienced your share of heartbreak. No one embarks on this journey on a whim because unraveling a marriage is not easy. So if you have decided this is the right move for you, I want to commend you for thinking ahead and educating yourself on how to financially prepare for divorce.
As a holistic financial planner, I sometimes get referrals from busy divorce attorneys who believe their clients could use help evaluating their financial situations, analyzing proposed settlements, and making decisions. And that’s smart because life-changing events, such as divorce, stir up powerful emotions, so it is vital to have someone on your side to offer perspective. So, below I will share some of my high-level tips and walk you through the steps you can take when financially preparing for divorce.
Divorce and Finances
The tricky thing about divorce and finances is that, generally speaking, it doesn’t matter who is at fault. The divorce process itself is expensive, and rash decisions can cost you over time. So although your grievances and emotions are real, you must separate your feelings from any decisions about money, or you risk destroying your financial future.
The best thing you can do to financially prepare for a divorce is to carefully consider what your financial life will be like after you announce your intentions and once the divorce is finalized. That will put you in a much stronger position and help you avoid wasting precious resources on battles that do not improve your legal or financial situation. It will also empower you to come to discussions with a rational mindset, ready to analyze proposals and make informed decisions that can improve your outcomes.
Financially Preparing for Divorce
The following steps provide a deeper look at how to financially prepare for a divorce. But since every couple has a unique approach to managing money, you may not be able to follow these steps in order. Therefore, feel free to jump around, handling things as your situation evolves and more information comes to light. That said, item number one must be your top priority.
1) Take Any Necessary Steps to Protect Yourself
If you suspect your spouse will react badly to the news that you want a divorce and might pull some underhanded stunts, take some protective measures ahead of time. Put aside cash in a separate account or apply for a credit card in your name only.
You will have to disclose these accounts during the divorce proceedings, but it is good to have some short-term liquidity in case your spouse drains your bank accounts or removes your name from your joint credit line.
Of course, your physical safety is paramount. Don’t make a big announcement if you believe your spouse might hurt you when you reveal that you want a divorce. Just leave and sort out the details later.
2) Gather What You Know About Your Financial Situation
Pull together a list of your personal and marital assets, income streams, liabilities, credit reports, etc. Note who owns what and where you might have or develop cash flow concerns, credit score issues, or insurance coverage problems. The possibilities are endless, but here are a few things this list could include:
- Personal and business-related checking and savings accounts
- Retirement accounts
- Investment accounts and stock certificates
- Health savings accounts
- Tangible assets like your house, cars, boat, expensive jewelry, or art
- Life insurance policies (including whole-life policies, annuities, or long-term care plans)
- Employer benefits like healthcare or supplementary insurance
- Credit card debt
- Business loans
- Student loans
- Rental income
- Business income
- Current spousal support
The goal is to figure out what you do and don’t know so you can fill in the gaps and understand what it takes to fund your lifestyle. Then you can compare this information to what you think it will take to finance your life post-divorce.
However, every couple has their own way of dealing with money. In many families, one spouse takes primary responsibility for the finances, which can leave the other spouse in the dark, so this step may need to wait.
3) Create an Individual Financial Plan and Budget
No matter how you look at it, you are going through a significant change, and your life will not be the same after the settlement. An individual financial plan and budget will help you understand the impact so you can make intelligent decisions.
For example, in most cases, any wealth generated during the marriage is split in half, regardless of whether you live in a common law or community property state. The judge will even issue a qualified domestic relations order (QDRO) to divide your retirement plan benefits. So, everything will change – your income, health insurance, life insurance, lifestyle, and estate plans.
So, assume this will be the case and focus on how you plan to live. For instance, you will likely set up a separate household, and whatever income and expenses you generate will be yours alone. If you gave up your job to raise kids or do charity work, you might need to quickly find your way back into the workforce to make ends meet, even if you get spousal or child support.
Given this reality, you must make careful decisions about the expenses you agree to take on in your settlement, such as keeping the marital home. “Buying out” your spouse may sound appealing, but before you do so, it is vital to explore essential questions such as:
- How will you pay for the acquisition? If there is a mortgage on the home or if you will obtain a new one, it would be wise to consult a mortgage professional before agreeing to a settlement. You must carefully consider how you structure your income and assets to ensure you qualify for any changes to your loan.
- What will happen to your cash flow if you take on the expense of servicing a mortgage and running a home yourself?
- How will the expense of keeping the house affect your ability to acquire enough wealth to fund your retirement?
- What if you don’t keep the house? Can you still afford to live in the same area, or will you need to move?
As I mentioned earlier, this is when attorneys sometimes enlist my help. They are busy and want to settle quickly, but they know you are about to make some financial decisions that could be damaging if you don’t have enough information. Taking a step back and reviewing what is true for you before making settlement decisions is critical. Creating a financial plan and budget will help you understand how each choice will affect your life so you can avoid putting yourself in a compromising position.
4) Build Your Trusted Support Team
Getting divorced is hard. You will need trusted people to guide you through the process and help you get to the other side with your finances intact. So, ask around for referrals and start interviewing candidates for the following roles:
Divorce Attorney – Temporary Hire
Find someone familiar with the laws in your region who can walk you through the legalities of getting divorced and help you reach a fair divorce settlement. The right legal professional will depend on your situation.
If possible, it is best to avoid expensive litigation. It is costly, and both parties might lose because it reduces any assets you might split. If you believe you can reach an amicable agreement, consider working with a lawyer who practices collaborative law or even a mediator who can devise an acceptable resolution that benefits both parties.
Certified Public Accountant – Ongoing Team Member
Remember when I mentioned that everything about your financial life would change? Well, your tax situation will also shift.
When you get divorced, you can no longer file a joint return. If you have kids, only one person can claim them as dependents. And, of course, depending on your financial situation, there may be many other nuances to consider.
So find someone who can explain the tax implications and help you navigate them. Even if you have always done your taxes personally, this is one of those times when it is best to consult a professional.
Financial Advisor – Ongoing Team Member
A good financial advisor will help you develop a financial plan – a complete picture of your current financial situation and your short- and long-term goals. That will empower you to analyze proposed settlements through this lens to understand how they will impact your life.
You can hire a fee-based financial advisor to work with you on an ad hoc basis or set up a more long-term relationship. Either way, look for someone with the appropriate training, such as the CFPⓇ designation, so you can be sure they are committed to putting your best interests first.
Estate Attorney – Temporary Hire
You will need to update your estate plans. For instance, if you and your spouse had a trust, you will need a separate one, and you will likely wish to change your will, update any power of attorney decisions, and so on. The process is straightforward but must be on your list of to-dos.
Therapist – Ongoing Team Member
Navigating a divorce can significantly affect your mental health. Your life will temporarily become a series of uncomfortable meetings, negotiations, and tough decisions.
It would be useful to have someone with whom you can privately vent. A therapist will help you deal with your feelings, so you avoid going on an embarrassing (and potentially expensive) rant at the attorney’s office.
5) Question Any Advice That Could Weaken Your Position
When you are going through a divorce, everyone will offer well-meaning advice. But, sometimes, taking that advice could damage your situation in the long run.
For example, someone may suggest you explore how to hide money before a divorce. Although it might be good to squirrel away some cash to get you through the first few months, make no mistake – any assets in your possession will eventually be revealed. And if you do something illegal, it could seriously backfire.
That said, taking advantage of opportunities is entirely acceptable. For instance, if your business just suffered a loss and you want to get a divorce, consider moving quickly while your income is lower. Any settlement will depend on your income, so entering negotiations when you are already at a low could work out better for you in the long run.
So take any recommendations under advisement, but please consult a qualified legal professional before moving forward.
The Bottom Line on How to Financially Prepare for Divorce
It is wise to prepare for divorce before taking action. Pulling together everything you need to move forward with confidence will take time. Consider your safety first, collect everything you know about your situation, and start building a team. It is going to be rough, but you’ve got this.