Top financial concerns in a divorce and how to plan for them


What you need to know to maintain your financial and emotional well-being during and after a divorce.


Divorce is often messy and emotional.

Anyone going through a marital breakup can be forgiven for wanting to temporarily set aside thoughts about wills, trusts and retirement for another time.

However, professionals say it’s a chapter in life when people involved need to deal with both their emotional and financial well-being.

The process takes time and requires patience, says Robert Stern, an ultra-high-net-worth specialist at RBC Wealth Management–U.S. 

He says many divorcing couples find it difficult to make good financial decisions in the midst of emotional turmoil.

His advice: “If you don’t know what to do, don’t do anything”—at least not until you’ve surrounded yourself with professionals who can help. For your finances, that includes a financial advisor, accountant and attorney who will work together in your best interests.

Start with a checklist

Once you’ve assembled your team of financial professionals (which should be separate from that of your soon-to-be ex-spouse), Stern recommends having a framework in place that will help provide clarity.

Most financial advisors will provide a checklist of asset and investment topics to cover during a divorce. It starts with the basics of gathering information such as Social Security numbers and assessing the complete financial situation of the couple, from income and expenses to assets and liabilities, employee benefits, insurance policies and credit reports.

“We start with a budget worksheet and usually get a good tax accountant on board right away to look at the tax implications of separating assets and the fact that moving from a couple to a single taxpayer means each may be in a higher tax bracket,” Stern says.

One issue that weighs heavily on divorces is the end of trust between spouses, which unfortunately extends to financial trust. Although spouses have a legal duty to be forthcoming about their assets during a divorce, sometimes assets can be hidden.

“It can be difficult to prove that someone has hidden assets and very expensive to hire a forensic accountant,” says Stern. “Often the only person who will win is the attorney.”

His recommendation? “It’s better to make sure you are able to sustain a comfortable lifestyle and let the rest go if you can,” he says.

Primary residence is a common topic

The first decision made while splitting assets is usually around the primary residence.

“You have to separate the credit of each spouse and get the title and mortgage into one owner’s name,” Stern says. “A good attorney will make sure all your joint accounts are closed and that you establish new credit in your name only.”

Some couples end up selling their home before the divorce is final because of the tax implications. 

According to Stern, a married couple can exclude a capital gain of up to $500,000 but a single person can exclude only $250,000. As a result, he says, they may choose to sell first.

“If one spouse decides to stay in the home, the other may need to be compensated for their investment in the property,” Stern adds.

Important financial documents

Although where to live and the budget are usually the main focus during a divorce, there are other financial documents that should be dealt with immediately. That includes a determination of how health insurance will be provided and paid for if one spouse isn’t working, Stern explains. 

“It’s easy to push these things to the back burner, but it’s best to update your estate trustee right away and, even more importantly, your financial and medical power of attorney,” he says. “This is especially important if you’re in the midst of an angry divorce.”

On the other hand, changing your will and the beneficiaries on your life insurance policy and retirement accounts should be done after your divorce is final, he says, because state laws typically don’t allow you to disinherit a spouse.

If you have a joint trust with your spouse, you’ll need to negotiate how to handle the assets in the trust and create a new trust as part of the divorce.

If you have a prenuptial agreement, that can streamline the divorce proceedings but won’t eliminate disagreements over assets. 

“Prenups get disputed all the time in a divorce, and the only thing that’s completely airtight is to keep your inherited property and other assets completely separate from your spouse,” Stern says.

Looking to the future

Although immediate financial needs often take precedence in a divorce proceeding, long-term retirement planning should also be part of the process.

“Splitting retirement accounts can be extremely tricky, so it’s better to compensate with other property if possible,” Stern says.

If retirement assets are divided through a Qualified Domestic Relations Order, there should be no tax implication, he says. However, if funds are withdrawn in any other way it will be considered a taxable withdrawal with a penalty.

If you’re counting on spousal support for your future financial security, Stern recommends getting a life insurance policy on your ex-spouse as part of the divorce settlement and making sure it’s paid.

Additionally, college planning should be part of the settlement if you have children, no matter how young.

“Judges and attorneys don’t always think about future needs and sometimes spouses think, ‘Well, they’re my spouse’s kids, too, so of course they’ll pay for college,’ but if it’s not in writing, that won’t necessarily happen,” says Stern. “If they say they’ll open a special account for college, then insist it gets opened now and regularly funded.”

It’s important not to try to speed through the process, however tempting it may be.

“While almost everyone I work with at some point says, ‘I just want to be done with this,’ you should never rush; that’s just too risky,” Stern says. “You need to take a pause and realize that until your settlement is complete, you really don’t have a clear understanding of your financial picture.”

This article was originally published on Forbes WealthVoice.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

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