Divorce: The Financial Essentials
The emotions involved when splitting up are overwhelming. Loss, fear, anger, loneliness...the list goes on and on. It's no wonder divorce is on most lists of the top stressful events in life.
While a time of big emotional upheaval is the worst time to make financial decisions about investing, moving, selling, or buying real estate, it is the time to make practical reorganization and housekeeping moves that are essential to your future financial wellbeing.
Ignoring or overlooking these key issues are among the most common mistakes I see. They are totally avoidable and often extremely costly to the divorced woman.
Why do these come up over and over again? I think it is partly due to the ingrained culture of money in the US that has us used to the idea that men take care of the finances - or, more importantly, that women don’t. Women are "shushed" about money by their own mothers, friends, and sisters long before their partners or husbands come along, making it all-too-easy to fall into the trap of thinking that someone else will take care of those things.
We’ve come a long way. It’s time to find your inner Wonder Woman and take care of your own business. Believe me, you will feel amazingly empowered when you've gotten these steps done.
Update your estate plan, wills, and trusts.
This includes all the trustee choices in your Living Trust and Healthcare and Financial Powers. You probably don’t want your former spouse to be the one deciding whether to pull the plug in case of a medical crisis. You certainly don’t want your ex to decide what to do with your assets if you pass prematurely. Plus, you don't want your ex (and extended family and kids from other relationships) to be in-line to inherit your worldly goods as he or she would have pre-split.
If you have kids, this is key. I’ve seen many horror stories of one parent dying and the remaining spouse intentionally or unintentionally disinheriting the kids by remarrying and/or co-mingling funds with the next love of his life. And when he dies...well, just think about how that worked out for Cinderella. Nail down the plan to get assets to your kids and other loved ones as soon as possible.
Yes, it will cost money. You can negotiate a payment plan if need be, but this step is necessary.
Update ownership titles to accounts, insurance policies, and retirement account beneficiary designations.
The most frustrating scenario in my business is when we find that someone didn’t remove their ex from the beneficiary list of an insurance policy, and instead of that money going to their new spouse or kids, it goes to the ex. I had a client who owned the policy on her ex-husband and kept up the premium payments just to collect on his death decades later. She who owns the policy makes the rules, so it’s your business to know who owns the policy on you and your partner.
This list of accounts includes, but is not limited to: your IRA, your IRRA, your insurance policy on yourself, and your company retirement, pension, 401K, or 403B. If you have not spread your accounts all over the financial world, this task is much easier. Most financial companies have websites that allow you to find documents to do these updates, or live chats to ask for help. My clients know we will provide them with everything they need to update their accounts.
Update emergency contact lists.
Yes, those annoying lists that we have to update once a year for our companies, medical providers, and school-age children. Don’t wait; Murphy’s Law shows that ignoring it is the best way to have an emergency occur before your next annual update.
[Related: When Should You Hire an Attorney?]
Consolidate your new financial identity.
If you have joint card accounts, this includes getting credit cards issued in your single name and closing those old joint accounts. Update your status with the IRS, your medical insurance providers, and your credit cards. This also means filling out a new W-4 with your employer.
Remember that your income and all other tax issues will change when you file, and you need to have the right amount withheld. Medical insurance may be as simple as a form, but can be much more complicated if you are on your ex’s COBRA and need to make a plan choice. You need a reliable insurance expert, which is often provided through your employer if they offer health insurance. This has a short time clock; you'll want to address it quickly, as COBRA is very expensive.
Create your own financial team.
You need a team that includes your tax advisor, your certified financial planner, and your estate lawyer. They are most effective working together with your best interests at heart. Be sure you have chosen people who have a fiduciary duty to you.
Your team can assist by giving you data and collaborating with you to make decisions about what to spend, what to save, how to manage your cash flow, and tax planning. Find this group by asking friends and loved ones who they have used, and interview people.
These people are essentially applying to work for you. Don’t be shy about asking to meet to discuss your questions. Pay attention to how you feel. If you leave feeling uncertain or that your questions were not answered to your satisfaction, then you may need to keep looking.
Craft a spending plan for your new reality.
While some people call these budgets, we prefer "spending plans." That's really what its function is for you. You want to know what you can spend and what you might want to conserve while you establish your new household and its expenses.
This is an ongoing process that is similar to the process we undertake when people retire. While you think you know how your money will be spent, that may or may not be your actual experience. Your CFP can help coach you to adjust along the way.
Ensure your immediate financial future is safe.
What do you want to do for the rest of your life financially? Where do you see yourself in five or ten years? What do you want retirement to look like for you? These are questions that can wait until you feel ready to address the long-term, and six or twelve months can pass before you are emotionally ready sink your teeth into this process.
In the meantime, you want to have your certified financial planner review what you have invested at the time of the split, if just to ensure that there aren’t any potential “time bombs” that may develop while you and your ex have your eyes off the investing ball. A well-organized portfolio should be perfectly fine to run on its own for the ensuing year as you gather your emotional strength to plan longer-term.
As director, Debra Curry brings the experience of more than twenty-five years in the financial services industry to the Yosemite Capital Management team. She specializes in understanding, analyzing, evaluating, and working to model a client’s entire financial situation. Her expertise flows from her experience in designing complex financial solutions for corporate executives, families, and trusts with multifaceted situations. Furthermore, her focus on providing retirement income solutions has made her an expert in the retirement community.
Have more questions? Follow up with the expert herself.
Yosemite Capital Management
Director of Investment Strategies; "Debra brings the experience of more than 25 years in the financial services industry to the Yosemite (YCM) team. She specializes in understanding, analyzing, evaluating, and then working to model a client’s entire financial situation. She is the founder of Empowered Ladies of Orange County, a community of women with the goal of educating and empowering all members to develop skills and become more deliberate with their own financial and personal goals.... Continue Reading
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