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Without careful planning, the things we’ve worked hard to build can quickly disappear.
By Erin Kelsey — Written on Aug 20, 2020
Divorce can be a trying experience, both emotionally and financially.
Striking a balance between career aspirations and personal goals can be a struggle for most people, but it’s particularly challenging for high-net-worth individuals.
Fulfilling personal relationships is difficult to maintain when there’s always more work to be done and career success often comes at a cost — particularly for women.
Loss of assets in divorce disproportionately affects women.
A recent study of business executives in Sweden — the world’s most progressive nation, when it comes to gender equality — found that women who ascend to executive levels are twice as likely to divorce within three years as their male counterparts.
While it’s difficult to pin those divorces solely on professional growth, it illustrates that bumps in responsibility come with more assets — and more to lose.
Those assets need protection when a significant life shift like divorce is in the cards. Without careful planning, the things that we’ve worked hard to build and preserve can quickly disappear.
Where will your money likely go during and after divorce?
Divorce is the dissolution of a marriage, but it can also become a battle over valuable assets, especially for high-net-worth individuals.
While nobody enters into a marriage planning to get divorced, it’s important that both partners put safeguards in place to ensure they will be protected should the relationship come to an end.
Unfortunately, many people don’t.
Here are 5 key assets to protect during a divorce that you may not realize.
1. Individual assets and expenses.
Many couples mistakenly assume each partner’s expenses will be cut in half in the event of a divorce.
The reality is that life becomes more expensive after a split, because each individual is responsible for home-related costs like rent or mortgage payments, utilities, cable, internet, and other expenses.
If one spouse has been paying the bills or managing the family finances alone, the other partner will need to evaluate their immediate needs quickly and get an accurate accounting of a post-divorce budget.
2. Debt.
Managing debt after divorce is complicated.
If you live in a community property state, any debts will be considered a joint liability, even if only one partner is named as the borrower or only one partner knows about them.
If you co-signed debt, both parties would remain liable regardless of what the divorce decree says. So if one spouse defaults after the divorce, both parties will take a credit rating hit.
3. Child support.
The courts will determine which child support obligations fall upon each party after the divorce is finalized.
While it’s important to advocate for yourself as a parent in these circumstances, you have to make sure that the financial needs of your children are not compromised in the process.
The court will play a role in determining exactly what those needs are. The amount of support owed by noncustodial parents is based on state child support guidelines.
4. Taxes.
Different assets and types of financial accounts will come with different tax obligations. For example, 401(k) plans and IRA accounts will be taxed at ordinary income tax rates when distributions occur during retirement.
It’s important to consider tax obligations when deciding how to split up assets and when determining the value of illiquid assets, such as real estate or private business interests.
5. Inflation.
Don’t underestimate the long-term impact of inflation when considering the exact costs of your post-divorce financial expenses in your settlement negotiations.
College expenses, for instance, typically rise at a rate of five percent each year, meaning you could be paying much more for tuition at the end of a decade than at the beginning.
Similarly, when inflation reduces the value of alimony payments, the recipient may be able to request a modification to the amount owed.
Shared lives usually involve shared expenses. Protecting individual assets, even at the beginning of a marriage, can eliminate some of the difficulty that accompanies the end of a union.
What can you do to protect your assets during the divorce process?
You don’t have to be a wealth-management expert to keep your assets protected in a divorce.
Beyond going into a divorce with your eyes wide open about the potential financial problems you could face, you can take these three important steps.
1. Review your insurance.
Review your health plan, auto, renters, or homeowners insurance, and any other plans to make sure that you have the coverage you need and aren’t overpaying.
You might also consider insuring the divorce settlement as necessary with death and disability insurance to protect against a loss of income for you or your children.
After the divorce, you probably won’t be able to rely on your former spouse’s employer-sponsored benefits. You’ll need to make sure you can afford a new plan if you rely on your spouse for health benefits.
2. Check on your estate plan.
Meet with an estate lawyer to revise your will, trust agreements, and your powers of attorney. Those checkpoints are especially essential if your children are minors.
Furthermore, look into amending the beneficiary designation on your retirement accounts.
These documents should always be updated after the dissolution of a marriage or at the beginning of any significant life change.
3. Get clarity on your and your ex-spouse’s general financial responsibilities.
When possible, we recommend that you take assets that have lower tax obligations during the settlement while segregating all financial accounts and debts as much as possible.
Change the names on house deeds, car title certificates, stocks and bonds, and other asset documents.
The more you can understand exactly which expenses and assets belong to you, the easier it will be to protect your assets.
Formulate a post-divorce plan that keeps you secure as you start the next chapter of your life.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, and there are no assurances that any predicted results will actually occur.
Erin Kelsey is a financial planner at Pekin Hardy Strauss Wealth Management. She works with clients across the firm, helping individuals and families articulate and plan for their financial goals.