The most important things you can do during a divorce
According to the American Psychological Association, 40% to 50% of marriages end in divorce.
So if it’s happening to you, at least know that you’re in good company. Everyone emerges from a divorce financially banged up, but once the smoke clears, you don’t want to realize that your ex-spouse came out of the marriage in excellent financial shape while you’re in ruins.
With that in mind, here are some strategies and tips to consider as you and your spouse start splitting up your assets.
Learn how much money you have.
You can’t protect what you don’t know is out there. Holly Davis, a family law attorney and partner with Kirker Davis, a law firm in Austin, Texas, says that the first thing she would recommend to anyone getting divorced is to find out what money you and your partner have.
“This means knowing the balance of everyone’s 401(k), savings plan, credit card bills, 529 accounts, everything,” Davis says. “When you know the grand total of what you own, you can then start forming an opinion about what you own and what could possibly be your financial future upon a divorce.”
Don’t hide money.
That may sound like counterintuitive advice if you feel your spouse isn’t very trustworthy.
But don’t do it, urges Damian Turco, a family law and divorce attorney who owns and manages Turco Legal PC, a law firm with four offices in Massachusetts. He says: “Hiding money in anticipation of a divorce is a generally terrible strategic mistake and may result in an escalation of contentiousness, legal fees and loss of credibility with the most important person in your divorce: the judge.”
That doesn’t mean you shouldn’t take steps to preserve your marital assets and income, Turco adds. But he says you should take those steps out in the open.
Separate your bank accounts.
If you don’t have your own checking and savings account, get them now. “Start working with your spouse to separate bank accounts. If all your money is in a joint account, you may be concerned that the other spouse will abruptly withdraw all of it. That’s a real risk and happens, although the judge won’t be happy with it unless there’s a legitimate reason,” Turco says.
If you feel that telling your ex that you want separate accounts could mean you’re left high and dry with no money, Turco says you may want to withdraw half the money into an individual account. But immediately notify your soon-to-be ex of what you’ve done. Again, be transparent.
Create an emergency fund.
If you’ve opened a savings account, you can use that as your emergency fund. Or open a second savings account just for emergencies.
“In case you ever have to use it, you should have a savings account that is an emergency fund, a legal fund or rainy day fund that you can access and that cannot be touched by anyone else,” Davis says.
That’s a good idea even if you’re happily married, Davis adds. She also stresses that you shouldn’t keep an account like this a secret. It’s just smart for your financial health. “It’s always a good feeling to know that you have money you can access if need be, or potential lines of credit, in the event that the majority of your assets are held only in the name of your other spouse,” she says.
Hire a divorce attorney.
If you and your partner get along well, and you’re having an uncontested divorce, perhaps you won’t need a lawyer. But if emotions are running high, you may want to bring in an attorney quickly.
“If the fear is that you won’t be able to access your money or the accounts will be drained, the law protects you,” says Jen Lawrence, a certified divorce coach, specialist and financial analyst in Oakville, Ontario.
“Your lawyer can freeze any accounts at risk, or free up funds for your living and legal expenses,” she says. “If your ex has recently drained a joint account, bought major gifts for a third party, transferred money or took on significant debt, your attorney can often carve out those amounts from the settlement numbers, if they can prove your ex took those actions in anticipation of the divorce.”
Bring in a forensic accountant.
Not everyone needs a team of high-level professionals working for them to get through a divorce. But if you have a high net worth and believe your partner is hiding money from you, Lawrence says you should consider asking your attorney to work with a forensic accountant.
“A forensic accountant can reconstruct your income and asset picture based on expenses and lifestyle,” Lawrence says. “If assets are offshore or in a domestic asset trust, even if they are deemed marital, they can be very hard to access. You need to hire an attorney with a specialty in asset trusts, and even then you might not be successful.”
Make sure the paperwork is filled out correctly.
Granted, the best way to make sure the paperwork is filled out properly is to make sure you’re hiring competent professionals, such as a divorce attorney or divorce coach.
In any case, as Lawrence says, “If you are splitting a retirement or pension plan, as an example, your lawyer likely needs to file a QDRO with the courts.”
“If the proper documents are not filed,” she adds, “there is a risk that you won’t be permitted to receive your portion even if you are entitled to it under the terms of your divorce.”
If you’re relying on support, the payer should have insurance.
Ideally, if your ex is making alimony or child support payments, he or she should be insured. “It’s important to have life insurance on the payer of support since if the payer dies, their estate is on the hook for any monies owed,” Lawrence says.
It’s also a good idea for the payer to have disability insurance, Lawrence adds.
Think about your own insurance.
Do you have life insurance? Is your soon-to-be ex a beneficiary?
John Mantia, co-founder and director of finance at PARCO, a retirement planning firm in the District of Columbia, says that you should probably update your beneficiaries from your spouse to someone else, like your kids, a sibling or your parents.
“We have seen it happen many times where clients forget to change their beneficiary forms, they die, and then their family learns that an ex-spouse gets a lot of benefits that otherwise would not have gone to them,” Mantia says.
Think about taxes.
Olivia Summerhill, a certified financial planner and founder of Summerhill Wealth Management who works exclusively with affluent women, recommends considering the following as you split up wealth.
“You need to make sure you are not taking the assets that have not been taxed while the significant other gets the tax-free assets,” Summerhill says.
She offers an example of a husband receiving $875,000 in a 401(k) retirement account while the wife received $875,000 from money in a checking account and at a brokerage.
It may sound fair at first glance, but it isn’t. “The husband in this scenario is going to have to pay taxes if he withdraws the money, while the wife would not,” Summerhill says.
Remember the “extras” in child support.
If you’re going to receive child support, “make sure you add in the extracurricular activities such as camp and soccer gear,” advises Summerhill. “The little purchases and big purchases add up, and you do not want to go back to court post-divorce and try to get the costs covered. These small things to consider will protect you from the potential extra expenses.”
Of course, a good divorce attorney will also be thinking ahead on this — and hopefully both parents will be in agreement that a child’s expenses aren’t static. A child’s needs and interests are always evolving, and, of course, you have paying for college to think about. So you don’t want to underestimate child support.
Don’t let the house cloud your judgment.
Many people get emotionally attached to their home, so it’s understandable if you want it in a divorce. If your spouse doesn’t want the house, even better. Or so you would think.
You could “win” the house and later feel like you lost.
“The cost of the upkeep and yearly mortgage payments may not be as beneficial as getting a brokerage asset in the divorce settlement,” Summerhill says.
Downsizing to a more affordable home — but staying in the same school district — may be the better way to go, she says.
If you’re going through a divorce, remember the following:
— Learn how much money you have.
— Don’t hide money.
— Separate your bank accounts.
— Open a savings account.
— Hire a divorce attorney.
— Bring in a forensic accountant.
— Make sure the paperwork is filled out correctly.
— If you’re relying on support, the payer should have insurance.
— Think about your own insurance.
— Think about taxes.
— Remember the “extras” in child support.
— Don’t let the house cloud your judgment.
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Update 10/28/20: This story was published at an earlier date and has been updated with new information.