Life Stages Planning: Divorce
Divorce is not something that anyone hopes for or expects to be a part of their story. Because of that, planning for divorce is not a reality, nor should it be. However, when divorce is a certainty in anyone’s situation and it is clear that your states can no longer be united, preparation and preparedness can help keep things civil.
On top of being emotionally charged, divorce can be a logistical minefield. The unraveling of assets can be rife with confusion, frustration, and even more heartache. There's nothing pleasant about going from everlasting to nevermore, but there are ways to minimize the strain on both of your lives. Below are some pieces of advice for anyone that is in (or around) the life stage of divorce.
THE COST OF DISPUTES
While often overlooked, divorce can be an expensive process to go through. To avoid hurting the future finances of both ex-spouses, try keeping things civil and play nice (if possible). Nasty disputes often create worse financial consequences for both parties as good lawyers don't come cheap.
Because marriage is legally binding, assets become legally binding to each spouse once the knot is tied. Once the divorce is finalized, it is important that you take care of certain estate planning changes that need to be made. Therefore, to make sure that your estate is in order after divorce, we recommend reviewing the following items.
UPDATE WILLS & TRUSTS
If you established a will and/or trust with your ex-spouse while you were married, it is critically important that you now update or re-establish each of those estate planning documents. While it may seem like a lot of work and hassle, the last thing that you want is to keep those documents as is and then your ex-spouse receives certain things after your passing that you had intended for others.
POWER OF ATTORNEY (POA)
A financial power of attorney (POA) is “a document appointing someone else to have the authority to manage your financial affairs on your behalf.” POAs come into play when an individual is incapacitated. After you got married, you may have assigned your spouse or someone else as your POA. In either case, now that you are divorced, it is important to update your POA. If your POA was your spouse (which we normally do not recommend for our married clients), you should certainly update and change that. If your POA was listed as someone that maybe was more associated with your spouse, we’d recommend that you also update your POA to be someone that you want.
Also, make sure to cover all of your bases of POA, such as durable, health, legal, and financial.
RETITLE ANY JOINTLY HELD ACCOUNTS
During different life stages, certain titling on accounts makes sense given your situation. When you were single, some of your accounts were titled a certain way. Once you got married, you most likely retitled most of your accounts so that they became joint with your spouse.
Now that divorce is a reality, we recommend that you retitle any jointly held accounts. This is an important piece of estate planning that is often overlooked. Make sure to not just consider bank accounts, brokerage accounts, etc., but also property deeds.
QUIT CLAIM DEED
A Quit Claim Deed is used to retitle real estate property. This is something that would be needed if one ex-spouse is giving their interest in real property to the other ex-spouse.
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)
A Qualified Domestic Relations Order (QDRO) is a legal document used to divide assets. For any divorce where assets are going to be divided, this will absolutely be needed. In most cases, the QDRO is used for separating retirement accounts by recognizing joint marital ownership in the plan.
ALIMONY AND CHILD SUPPORT
Alimony is a court provision that requires one ex-spouse to pay financial support to the other ex-spouse after a divorce. Similarly, child support is also a court provision where one ex-spouse is required to pay financial support to the other ex-spouse after a divorce. However, child support money is supposed to be used solely for the care of the child. The important difference when it comes to financial planning is how taxes apply to each. Alimony is tax-deductible to the payer ex-spouse and taxable as income to the beneficiary ex-spouse. In contrast, child support is not tax-deductible and is not included as taxable income for either ex-spouse.
Before your divorce, you most likely listed your spouse as beneficiary to most of your assets. Once your divorce is finalized, you will want to update your beneficiary lists to put someone else as primary beneficiary. After you list someone as primary, you may also want to update your contingent beneficiaries. Make sure to do this for everything you own, such as bank accounts, investments, retirement plans, property, life insurance, and other assets.
REVIEW FINANCIAL PLAN
After your divorce is finalized, it is important that both ex-spouses review and update their financial plan. In reality, it may be the case that an entirely new financial plan will need to be created. While both ex-spouses were married, their financial plan most likely focused on shared goals and some individual goals. However, after divorce, both ex-spouses have very different financial situations and will need to review/re-create a new financial plan.
REEVALUATE NEEDS AND OBJECTIVES
Each ex-spouse is now going from a joint household income and asset base to a single income and asset base which is most likely half the size as before. Needs and objectives are certainly going to change because of this. Each individual will now have a financial plan that is based around a reduced household income. This is important to note because it can affect the current standard of living, future retirement needs, and more. The next reality is that each individual now has less assets available to reach their goals across the board. Even if the goals have changed, it is important to reevaluate one’s needs due to this fact. Finally, when thinking about divorce planning, it is crucial to quantify the impact on retirement and Social Security. By showing the new projections, each individual ex-spouse will have a better idea of how to prioritize their needs and objectives in this new life stage.
UNINTENDED CONSEQUENCES OF GETTING REMARRIED
It is also important to note a couple of unintended consequences of getting remarried. First, once you get remarried, you will lose half of your ex-spouse’s Social Security benefit. This is important to keep in mind when thinking through your financial plan. Second, after remarrying, there may be a potential reduction in alimony and child support. With all things considered and depending on each situation, getting remarried does have the potential for financial impacts.
ALTERED LIFE INSURANCE NEEDS
Depending on the life insurance policies that you maintained during your marriage, once you get divorced, it will make sense to reevaluate your new life insurance needs. When you get divorced, you may need different coverage than you had when married; and you may actually be able to save money. This is an important piece to your financial plan that should not be overlooked.
YOUR FIRST STEP
If you’re feeling overwhelmed or unprepared for the many financial considerations of marriage, chatting with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the many milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized, set up your free introductory phone call online today!
If you have further questions: