Five Essential Steps in Divorce to Avoid Financial Regret
By Jeffrey Abadie, CFP®
John F. Kennedy once said, “Let us never negotiate out of fear. But let us never fear to negotiate.” For those going through the dissolution of a marriage, the quote highlights an important principle that can help navigate the process of divorce. While this article is focused on the financial side, we realize that the interpersonal and family issues that overlay every marital dissolution must be worked through while the “business” of the marriage is being settled. Divorce is complex – both emotionally and financially – and unique to each couple. There are some essential steps to follow that will put you in a better position to negotiate effectively and consistently within your priorities, and help assure that you will make sound decisions and avoid future financial regret.
Begin by building your professional advisory team. There are many instances in life where we hire professionals for both advice and to help facilitate major transactions; a divorce is among them. If you have children, complex asset holdings, or if one party is dependent on the other as the family breadwinner, a family practice attorney can be critical to achieving a balanced and appropriate settlement. It is completely rational to try to limit the costs associated with the process; however, it is probably unwise to shoulder the full burden of making potentially life-altering decisions on your own. It may be the most important and consequential legal and financial transition that you will ever navigate. Your family law attorney can also refer you to other professionals such a CPA and/or a financial advisor with divorce planning experience, who may be necessary to reach the best settlement on all fronts. Being clear on your priorities will set the tone and the process. Clients with a strong team are generally better informed and prepared.
Take time to get fully up to speed on your family financials. While couples generally “divide and conquer” the household responsibilities during marriage, often one spouse becomes somewhat removed from the management of the household’s financials or more significant financial and investment decisions. Unfortunately, this will likely disadvantage that spouse during and potentially after the divorce process. The act of gathering account statements, tax returns, and data on income and expenses is necessary for the declaration portion of the divorce filing. That process provides a good opportunity for you to work with your financial professional to become more familiar with your financial picture. It is important that you clearly understand the community and any separate property assets and liabilities – and the associated risks – so that you can make informed decisions during the negotiation process. A financial planner can help you compile the data, test different elements (for example whether it makes sense to keep the family home), and develop cash flow projections that will help you envision your future life.
Determine and prioritize your goals for the divorce process. In order to articulate clear priorities, understanding your financial circumstance will help you to establish and prioritize your goals for the financial settlement. It is important early in the process for you to ensure that your goals in the divorce are aligned with your long-term best interests. Navigating a divorce is a complex and labored process, thanks to the interplay between the emotional evolution and our inability to read the future. Setting your sights on achieving a quick marital settlement, even within six months, can be counterproductive. While it is reasonable to look for ways to move the process along expeditiously, your long-term financial security is more important than the calendar. Dissolving a marriage is relatively easy; achieving a balanced settlement is more difficult. Parties who try to use the settlement to exact punishment for poor behavior, perceived injustice, or deep hurt during the marriage, will bear a high cost. Being as rational, settled and informed as possible will help you take a strong stance and avoid unnecessary cost. Think of this foundational process as your chance to focus on your priorities. If you do so, you will be able to evaluate proposals and negotiate your settlement agreement with the support of an informed, aligned team.
Ensure you understand the proposed settlement agreement. Individuals with a good team of engaged professionals advocating for them and a clear understanding of the financial landscape, will be poised to make good, timely, and information-based decisions, which are essential for a fair settlement agreement. If you find you do not fully understand the risks and opportunities represented by settlement proposals, pause and get further help. A small but important example of controlling a potential future risk is purchasing life insurance on the spouse responsible for child, spousal or family support, especially when it is critical to the security of the recipients. The best-negotiated support settlement ensures that those payments continue regardless of the circumstances. Do not rush (or be rushed) into a settlement, despite the long and sometimes exhausting process, if you have not vetted it with your professional team. Recognize that in the best negotiations each party feels they have given up something.
Finish up and move forward. “Mopping up” after a settlement has been reached takes time and care. It is important to make sure that all of the agreed-upon divisions happen correctly. Some assets and liabilities are easily divided and retitled while others are more difficult. For example, qualified retirement accounts and pensions cannot be split until the agreement is finally signed. Frequently, a specific court order, Qualified Domestic Relations Order (or QDRO), must be completed as well. Once the divisions and transfers are finalized, your financial foundation is in place, and your post-divorce planning can occur in earnest. That includes looking back at all you have learned about yourself and your financial circumstances during this process. Your risk tolerance may have evolved and your vision for your family will be clearer than ever. Your financial advisor can help you translate your re-set goals into a financial and investment strategy suitable to your needs and vision. Your advisor can also help you get started with your new team: an estate planning attorney, accountant and insurance agent.
There is little doubt that navigating the end of a marriage is among the most difficult processes you will face. Building your sense of financial independence with the support of your wider network of family, friends and professional team will help you through this difficult transition and position you to successfully launch your new life.
The content of this article is for general informational purposes only. It is not to be considered legal advice and is not a complete description of the considerations involved in the divorce process.
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