Navigating the Financial Aspects of a Divorce
February 8, 2023
Vivian Tianyue Hu, Managing Director
Divorce can be challenging and emotionally and financially stressful, but with the proper planning and support, it doesn’t have to be devastating. With planning, you can navigate the complexities of divorce and create a strategy to help you move forward with confidence and peace of mind.
Start the Planning Early
Procrastination is not a plan. Seeking financial advice after your divorce decree is final is often too late to avail yourself of some of the best strategies. Be proactive. The best time to seek financial advice surrounding a divorce is in the early stages of marriage or before you engage a divorce attorney.
A financial planner can help you organize and evaluate your assets and liabilities. They’ll prepare alternative financial scenarios for potential divorce settlement outcomes, with further analysis explaining any strategy’s financial consequences. A well-organized financial statement and comprehensive analysis of your most desired settlement outcomes will be invaluable in helping your attorney get the most equitable settlement. Most importantly, it will help you optimize your financial goals and lifestyle after the divorce.
Decide on the Jurisdiction to File
Many international couples qualify to file for divorce in more than one jurisdiction. Different jurisdictions have different rules on how to divide properties; post-nuptial agreements are recognized, recognition of trusts, custody issues, etc. For example, the English court has broad discretion to make financial court orders on pre-marriage assets that are fair to both spouses’ needs. Countries sometimes have different jurisdictions on the federal basis and state (U.S.)/canton (Switzerland) basis. The length and cost of a divorce in other jurisdictions also vary. Some jurisdictions, such as California, have more strict discovery techniques and disclosure obligations, while some European countries have less stringent procedures in practice.
It is important to consult legal and financial professionals with expertise in different jurisdictions to weigh the pros and cons before making any decisions.
Your Attorney Might Not Be the Go-to Expert for Your Financial Matters
It’s important to note that your divorce attorney is an expert in the legal process, not necessarily in financial and tax planning. While it’s essential to have an attorney to represent your best interests for you during the legal process, it’s also vital to have a financial professional to address the complex financial impacts of a divorce. For example:
- What will your retirement cash flow be as a single adult? How will the retirement accounts be divided?
- What is a realistic post-divorce budget?
- Will you be able to afford and maintain the marital home, and even if you could, is it the most financially sound course of action?
- Will the divorce influence your tax (i.e., who claims children as dependents for U.S. tax)?
- What are the tax implications of selling your marital home and dividing the jointly owned assets?
You’ll need to sit down with your financial advisor to discuss these questions, gain clarity on the complex financial impact of a divorce, and define a roadmap to move on.
An Equal 50/50 Split Might Not Be Equal
An equal split does not always mean an equitable division. Suppose one spouse gets the home or an asset that appreciates slowly or even depreciates (e.g., cars, furniture, high-end apparel), and the other spouse gets income-producing assets such as securities or rental properties. The income-producing assets and the marital home might have the same market value at the time of the divorce, but after a few years, their values may be drastically different, and that gap will likely widen over time.
Evaluating the short-term and long-term effects of various asset split scenarios will help you determine the most equitable and fair divorce settlement.
Comprehensively Review Insurance Policies
An insurance update is critical; primary/second home, automobile, health, life, and umbrella insurance policies – must be reviewed and possibly increased or decreased. Certain policies should be added or dropped depending upon individual circumstances. For example, alimony and child support will stop after the payer spouse is deceased; therefore, a risk protection measure might be to add life insurance on the payer spouse to protect this future income stream against the premature death of the payer. Other times there could be too much insurance. A personal umbrella policy could be reduced, there may be unneeded policies for personal property that you will sell, and there are even areas where you could self-insure certain risks. Always review the beneficiaries and primary owners of all existing insurance policies before a final divorce settlement.
Create a Practical Post-divorce Budget
Your personal finances are likely to be very different post-divorce. Spending habits likely need to adjust. Divorce is an opportunity to review unnecessary financial obligations and to re-arrange financial priorities. A divorce settlement must align with your long-term post-divorce financial goals. Gaining a clear view of your income and expenses will ensure that you can still achieve your optimal lifestyle and retirement goals. Divorce at mid-life is particularly daunting, as there is little time to rebuild your investment portfolio and retirement nest egg. A sound, comprehensive financial plan is crucial in clearing the clouds of uncertainty.
Disclosures and Definitions
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to the accuracy, completeness, or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth or the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.