Last Updated: August 17, 2009
It's not a certainty, but the odds exist that your spouse and you may get divorced some day. And should that happen, you'll have to figure out what to do with your divorce settlement.
Not all divorce settlements are the same. Some come in the form of alimony installment payments for a certain period of time and some come in the form of a lump sum. Some involve retirement accounts, some may involve real estate or both. But no matter the form, it's wise to discuss your options with a financial planner long before signing any divorce settlement papers. You want to evaluate which options might work best for you.
"Often the emotions surrounding divorce make it difficult to think clearly and strategically," said FPA member, Susan McCants, CFP®, of Abacus Planning Group, Inc.
Others agree. "Divorce is an extraordinarily stressful event for all parties involved, and the heightened emotions often result in settlements that are less than optimal for one or both parties," FPA member, Darlene Murphy, CFP®, Sudbury Wealth Management, said in a recent release.
That said, here are several considerations and blunders to avoid.
Don't be the "non-financial" spouse. According to Murphy, far too often wives become the "non-financial" spouse. You can prevent this situation by having, at minimum, knowledge of the family assets, what their value is and where they are, Murphy wrote. "Know, too, the approximate family income and be familiar with your joint tax return," she wrote. "Get to know your key financial professionals (accountant, insurance agent, investment adviser), even if you don't go to every meeting. It's okay to be the non-financial spouse, but don't keep your head completely in the sand."
Far too often, women will use "back-of-the-envelope" calculations to value assets during divorce proceedings. Instead, you might consider using professional, independent appraisals of potentially valuable items like art collections, jewelry, real estate, and closely-held businesses as part of building an annual balance. That way you won't have to guess about the value of such assets should divorce become a reality. "Knowledge is power," Murphy wrote. "Do not guess."
Prelude to divorce. According to Murphy, letting assets 'disappear' during the pre-divorce period is a common blunder. "Sometimes, when one party makes the decision to divorce the other spouse, it comes as a shock," she wrote. "However, the shocked spouse often looks back and recognizes a trail of financial clues a mile long. The spouse who is plotting the surprise divorce will sometimes begin to funnel joint assets into separate accounts. When this happens, assets that might otherwise get divided often disappear. Tracking down those hidden assets can be expensive and difficult. If your marriage is on rocky ground, be mindful of any sudden change in financial habits by your spouse and ask questions.
For her part, McCants suggests that you take the time to gather necessary financial information like income tax returns and account statements long before the sparks begin to fly.
Be logical. According to McCants, it's important to take a logical approach to evaluating income and expenses. "Too often women choose to keep their residence as part of their settlement, realizing too late that they have insufficient cash flow to maintain the home or have traded a more secure retirement for the residence," McCants said.
For her part, Murphy noted that couples often war over two major items: custody of children and who gets the house. "Custody of minor children is of paramount importance," she wrote. "The house, however, may not be. It needs to be looked at objectively: it is another marital asset, with a value and an annual cost attached to it as well. Don't end up house-rich and cash-poor."
In addition, McCants said you should avoid signing settlement paperwork prematurely without first obtaining necessary qualified domestic relations orders.
Don't forget taxes. According to Murphy, you should consider the tax implications of selling or distributing assets. "Before committing to selling anything, or taking funds out of a retirement or pension plan, be sure you know the tax effects and/or penalties involved, and base your numbers on net amounts," she wrote.
Manage your risks. Another common blunder according to Murphy is this: Not insuring alimony and child support, or other settlement obligations. "You finally have a deal and one party is to pay the other, over a period of time," she wrote. "What happens if that party dies or becomes disabled? Life and disability insurance can be critical components of a good divorce settlement."
Update your estate. In the aftermath of the divorce, McCants recommends you confirm that the paperwork required to implement the agreement, such as life insurance ownership changes or company retirement plan and IRA beneficiary designation changes, was submitted and processed properly.
Murphy also noted that you should change your wills, health care proxies and guardianship documents to reflect your new life and updated wishes. Company retirement plans and IRAs tend to get overlooked.
Hire a financial planner and team of professionals. No doubt, you'll need a team of financial professionals to help you with your financial situation before and after the divorce becomes final. Find a financial planner.