2023 Divorce Financial Planning Guide

2023 Divorce Financial Planning Guide

For more than 25 years, Sand Hill’s Divorce Financial Planning team has partnered with family law professionals to help clients navigate the complex financial aspects of the marital dissolution process. Our singular goal has been ensuring that both clients and their professional team are armed with the necessary information to make critical, life-altering decisions. At Sand Hill, we utilize a team approach in all stages of our work, partnering with the full divorce legal team and other professionals involved in the dissolution process. From our experience, the following guide highlights the most common financial considerations that regularly arise during the marital dissolution process. Utilize the links below to jump directly to any topic of particular interest.  

To learn more about Sand Hill’s Divorce Financial Planning service offering and to meet our specialized team of professionals, include your name below to view and share our digital divorce brochure.

PRE-SEPARATION HOMEWORK

Comprehensive List of All Financial Assets

An important step in preparing for the dissolution process is the compilation of a complete inventory of the family’s assets and liabilities and, if known, whether each asset and liability was accumulated during the marriage, prior to the marriage or due to inheritance.  Assets can include real estate, investment accounts, cars, boats, and collections like artwork. Liabilities, or debts, can include mortgages, car loans and credit card balances to name a few. It is important to make a list of all items, regardless of who owns it or if the value is unknown or outdated. The focus here should be on creating the comprehensive list, not whether the values and ownership status are accurate.

Household & Community Expenses

During the preparation phase, you should document all income and expenses generated by the household during the marriage, as that information will be needed later when the Income and Expense Declaration is filed with the court.  While the income sources can be found on tax returns and employment agreements, expenses are rarely found in one easy, organized and central location. Making a list of the primary payment sources (checking accounts, credit cards and ATM cards) for your household expenses and exploring if those financial institutions offer a way to summarize the information would be a good first step.  Many credit card companies offer annual summary reports that organize purchases by categories, so sourcing these reports can help expedite the data gathering.  Once the information is obtained, you have the option to hand over the raw data your financial professional or your attorney’s team for compilation. Alternatively,  you can spend some time organizing the data further by listing how often the expenses occur (weekly, monthly, annually) and who generated each expense (children, joint, spouse A, spouse B, or business).  Your legal or financial professional will have an income and expense worksheet to help you manage the process more efficiently. Keep in mind that when expenses for children and the family business become commingled with household expenses, this detailed categorization process can prove to be quite daunting. If your situation is complex, outsourcing this step to your professional team might be the best solution.

Current & Future Income Sources

Understanding what each party receives separately and what the community receives as current income through investments, earned income or other sources is also important.  This will lay the foundation for determining what assets could generate income for both parties in the future.  Employment agreements, recent paycheck summaries and the last three years of tax returns will provide your team with a sense of the income sources that have supported the community expenses in recent times.  All this information will ultimately be needed for your legal disclosure documents but will also be useful for possible child and spousal support estimates, as well as important inputs for future cash flow projections. 

Accessing Prior Years’ Tax Returns

Tax returns are vital documents in the divorce process as they act as a window into the community income, expenses, assets and liabilities. The tax return is a compilation of taxable activity over a calendar year, which if reviewed over the last three- or five-year period, should give a reasonable sense of the community’s financial make-up. If tax documents are not easily accessible, the IRS (and other pay services) will provide copies of past returns.

When prepared accurately, a tax return will detail the sources of community earned income as well as the assets and liabilities that generated additional income, gains, losses or expenses during the tax year.  This information is necessary not only for the court filing but also for deriving child and spousal support and possibly a lump sum buy-out of spousal support. While the tax return does not capture all of the household’s financial information, it does provide your financial professional and legal team with a solid base to begin compiling a community property balance sheet, a document that the ultimate settlement agreement will rely upon when dividing assets between spouses. 

While tax returns divulge a great deal of financial information, it is just as important to understand what they do not provide.  Tax returns do not reveal any information about accounts, assets or liabilities that have not generated any taxable activity in that particular calendar year.  Some assets, like ownership in a private company, restricted stock or stock options may not generate a taxable event for years, and therefore would not appear on a tax return. And while highly unlikely, a tax return would not include any domestic or offshore assets that were intentionally excluded as part of a tax avoidance scheme.

Prioritizing Your Goals & Creating an Action Plan

In addition to the more tangible steps of information gathering, creating goals for the divorce process itself may sound odd but could be the most important and impactful preparation you can accomplish. It may seem at the outset that the divorce process will be straightforward and will require simply diligently working through established steps until an ultimate settlement is reached; however, for better or for worse, the dissolution process is far more nuanced and fluid than most expect.  When it comes to negotiating how community income, assets and liabilities will be split and whether or not some items will be traded, having personal goals that are prioritized by importance in relation to your long term goals will help ensure that you and your professional team stay the course and know what battles are worth fighting and what compromises are worth making. 

The best way to create your priority list is to envision what an ideal post-divorce life looks like and walk it back to the present.  Ask yourself how involved you can realistically be with your ex-spouse in the future and how much you will need to rely on the financial security of your investment assets after divorce.  Depending on your answer to these and other questions about what is important in your future, each goal will likely place a different personal value on the community assets you decide to retain and if applicable, what spousal support arrangement will be best suited to your needs long-term.  Beginning the dissolution process with clear goals of what you would like to accomplish will help ensure your team focuses their energy on the most important decisions while avoiding costly and unproductive time on matters with little long term significance to you. 

For more information on best practices pertaining to goal setting in the divorce process, see Five Essential Steps in Divorce to Avoid Financial Regret. 

BUILDING YOUR PROFESSIONAL TEAM

Your Legal Representation Options  

At Sand Hill, most of the clients we support through the divorce process have decided to dissolve their marriage in the traditional manner, which is with both spouses hiring their own experienced family law attorney. Even if the relationship with your spouse is amicable and it is your joint goal that it remains that way, the divorce process can be overwhelming.  There are several issues that need to be resolved including the division of property, spousal support, child custody and child support. In addition to helping with all of the necessary paperwork that must be filed with the court, an objective attorney, with the help of a knowledgeable financial planner, can help guide you to a fair and equitable division of assets when your emotions may be running high. And if the negotiation process around any of these issues becomes contentious and you are unable to come to a resolution, your attorney will be by your side to represent you in family court to help you receive the most optimal settlement terms possible.

Another way to approach divorce is the do-it-yourself method. It is typically pursued in the hopes it will allow the couple to save legal fees, keep their matters private, and save time. However, the dissolution of a marriage can be filled with many potential pitfalls and not having professional expertise on your side could result in a multitude of consequences, such as: an unfavorable settlement agreement, significant tax ramifications resulting from a poorly constructed property settlement, hidden assets by one or both parties, and unchecked influence of one party over the other. If there are any complexities with the financial assets, then hiring professional legal, and often financial help can be critical to ensuring your best interests are looked after.

Additionally, two forms of alternative dispute resolution in the divorce process that are becoming increasingly popular are mediation and collaboration. Mediation is considered a more cost-effective, time-efficient, and amicable path to divorce. A neutral mediator works with both spouses to reach an agreement on every component of their divorce. The mediator does not advocate for either side and should not be relied upon as a source of personal legal advice. Therefore, the agreed upon division of assets could be tilted toward one party over the other. It is recommended that each party retain their own attorney and financial professionals to consult throughout the mediation process and to review the final settlement agreement prior to execution. Another form of alternative dispute resolution is collaboration. Collaborative divorce can be thought of as a team approach where the divorcing couple engages professionals from the legal, financial, and mental health fields to work together to reach a divorce settlement. Collaborative divorce is considered successful when solutions are agreed upon that meet the needs of both parties.

Arbitration can be used as another path to divorce, though it is not as widely utilized as it requires both parties to hand over decision-making control to a third-party arbitrator. During the arbitration process, the neutral arbitrator meets with both parties without legal counsel present and then decides the final settlement, which is considered binding in many states including California. 

The Need for a Financial Advisor and Forensic Accountant

Engaging both a financial advisor and a forensic accountant on your divorce professional team will help to ensure all financial assets are fully understood, accounted for accurately and distributed in the settlement agreement in an equitable manner. In some divorce proceedings, the roles may somewhat overlap, but when used effectively, they serve different purposes like custody of kids divorce financial planner.

Your family law attorney may recommend a forensic accountant to join your team once the basic framework of the dissolution is understood and it is apparent the division of assets will involve unique financial complexities. Forensic accountants explore comingled separate and community property that require clarity or ownership tracing as well as unclear or questionable private business valuations that need validation. Additionally, they can be involved in a case when there is a high likelihood that expert testimony will be needed if the case goes to court. 

Alternatively, a financial advisor is generally involved in every step of the process. In the early stages, the financial advisor helps the divorce team understand the intricacies of any complex financial assets, as well as organize and understand the financial data under consideration for division. Importantly, the expertise of the financial advisor becomes vital during the negotiation stage of the divorce process where future cash flow projections are critical to fully understand the long-term risks and financial impact of various settlement agreement proposals. Finally, financial advisors are generally available post-settlement to help transition the assets in accordance with the settlement agreement as well as serve in a long-term advisory role to ensure long-term success. Sand Hill welcomes the opportunity to transition the divorce planning relationship to a lasting advisory relationship at the conclusion of the marital dissolution process.

To learn more, see our article The Role of the Financial Advisor and Forensic Accountant on Your Divorce Team.

FINANCIAL CONSIDERATIONS DURING THE DIVORCE PROCESS

What is Community Property Versus Separate Property?

Some states, including California, are considered community property states. If there is no pre- or post-nuptial agreement to the contrary, assets accumulated by either party during the marriage are considered equally owned by both. Alternatively, any assets or debt accumulated prior to the marriage or received during the marriage as a gift, inheritance, or proceeds from sale of a separate property asset are by nature considered separate property in community property states. Your family law attorney, based on your state and local laws, will clarify the nature of your assets.

The Power of the Community Property Worksheet

The Community Property Worksheet is a working document that your financial advisor can ideally help generate to provide a comprehensive inventory of all assets and debts that have been accumulated during the marriage. It can be a powerful tool that helps to streamline the process to determine how property will be divided between parties. The pre-separation homework that has already been completed will become the foundation for this worksheet.

Often, assets and debts cannot always be divided equally. Additionally, and importantly, a 50/50 division of property is usually only a starting point for negotiation, even in community property states. The community property worksheet gives you and your attorney the ability to test a variety of scenarios by assigning specific assets and debts to one party or the other, showing any imbalance in the total division proposed. In order to determine an equitable division and often to reach a compromise, the worksheet will also include any equalization payment due to one party from the other. Separate property should also be organized within the community property worksheet and defined as separate property to ensure the division of marital property does not leave one party in an unequitable economic position after settlement.

Keeping the Family Home

A major decision that often creates emotional distress is whether one party should keep the family home in a divorce.  While there are many factors to consider, we have found there are three main questions to ask yourself to help reach the best decision for you and your family.

1. What exactly am I accepting when I agree to keep the home? – The decision to keep the family home is the equivalent of buying the home as is with your half of the community assets. You are agreeing to the current appraised value and the ongoing expenses of property taxes and any deferred maintenance. If there is a mortgage, you will also be taking on that debt, which could require you to refinance, removing the ex-spouse from both the title and the mortgage if there is one.

2. What are the tax implications now and in the future? – When receiving the home in a settlement, you will be responsible for the future property taxes and capital gains tax that may be generated if you sell the home.  The capital gains tax will be calculated on the difference between the future sales price and the original purchase price you and your ex-spouse paid, less improvement costs, selling costs and your personal real estate tax exclusion (currently $250,000), assuming you meet the ownership and use criteria. Selling the home jointly before the divorce is finalized, or shortly after, could allow you each to utilize your personal real estate tax exclusion for a total of $500,000, assuming other requirements are met1. If there are plans to keep the home now and sell it in only a few years, the tax differential of selling as the sole owner should be fully understood before any final decisions are made.

3. How will keeping the home impact the long-term sustainability of my assets? – Understand that keeping the primary family home, which is not an income generating asset, will likely require you to trade away other income producing or liquid assets to equalize the final division of community property.  Depending on the home’s value, the size of your remaining liquid asset base and other income sources, you may not have the adequate cash flow to support the home on your own.  The financial professional working in tandem with your family law attorney should help you run cash flow projection scenarios to better understand what is sustainable. Sand Hill does this work with clients going through the divorce process and it has proven to be a valuable step in the negotiating process.

The decision to accept the family home as part of a divorce settlement very often requires confronting layers of emotional complexity. It can also have a major impact on your financial future and freedom.  We recommend taking the time to explore the potential impact of your home options — retaining it versus selling it and replacing with another residence — so you can make a decision you feel good about both now and in the future.

Spousal Support (Alimony) vs. Lump Sum Settlement

Spousal support, also known as alimony, is generally awarded to the non-wage-earner or lower wage-earner spouse. While it varies depending on the jurisdiction, generally it is intended to help only for as long as is needed for the supported spouse to get back on their feet or receive job training necessary to become self-supporting.

Support payments are generally based on multiple factors including need, ability to pay, length of the marriage, cost of living (or lifestyle), age and health of both parties. In California, the preliminary payment amounts for both spousal support and child support are calculated using software that incorporates these factors; however, courts have broad discretion when awarding spousal support —whether it’s awarded at all and the payment amount— whereas child support payments are based on more rigid guidelines.  And unlike spousal support, in California, the requirement to pay support for minor children cannot be waived. Just as it is critical to determine what level of spousal support will allow you to maintain your lifestyle, it is critical to understand if your spousal support agreement contains a modification provision.  This would allow the payor to petition the court for a review if there is a material change in circumstances such a job loss, significant income reduction, or retirement. Any of these could spark a reduction or termination of spousal support.

This element of uncertainty can be a determining factor when considering waiving the right to spousal support in exchange for a lump sum settlement or support buyout — which is simply a larger share of the marital asset division in lieu of an ongoing payment stream. Circumstances where this might be the best fit include:

• If there is any doubt about the supporting spouse’s finances or ability to meet obligations in future years.

• If any ongoing friction between the parties will be a source of stress. A lump sum allows the spouses to cut ties from one another sooner. If spousal support is to be paid as a stream of payments, the spouses need to exchange financial information every year to true-up payments.

• There are sufficient liquid assets to allow one party to pay the lump sum amount to the other.

The long-term impact of a lump sum settlement versus the more traditional recurring income stream of spousal support can be better understood through the use of cash flow analysis, as explained below.

Cash Flow Planning & What-If Scenario Testing

Cash flow planning, which is a projection of the cash that will flow in and out of your investment portfolio on an annual basis over time, can be extremely useful when used during the settlement negotiation process. It can help you and your professional team to better understand the impact of your options, highlighting any immediate or long-term financial consequences of a settlement proposal. Monte Carlo simulation software is, in our view, the ideal tool to use for this purpose as it helps assign a probability of success to thousands of different scenarios based on certain risk factors and other criteria including time horizon, investment asset values and portfolio growth assumptions. The results reveal a range of potential outcomes based on your short-term and long-term goals. Proper cash flow planning during the divorce process can help identify the most beneficial assets and income sources needed to maintain your lifestyle post-settlement. It is important to consider not only the community assets that will be divided during the divorce process, but also the impact of future income from spousal support, pensions, and Social Security. Making projections about how your expenses can change over time due to inflation, home maintenance, or even changing health care needs is also critically important to the planning process.

Once a detailed cash flow plan is developed, it can be used as a roadmap during negotiations. As a settlement offer is considered or a counteroffer formulated, what-if scenario testing using Monte Carlo analysis can help streamline this step. The allocation of assets and liabilities, spousal support payments for many years versus a lump sum settlement, whether to keep the family home or not, child support and equalization payments are just a few of the major data points that feed into the what-if scenario testing. Once the full financial picture is created using the broader cash flow plan, the items up for negotiation are tested against future cash flow needs to quickly determine what likely will or will not work for your particular situation.

Understanding Equity Compensation

Compensation in the form of company stock is a common tool companies use to attract and retain talent. Restricted stock units (RSUs), non-qualified stock options (NQOs), incentive stock options (ISOs), employee stock purchase plans (ESPP) and performance stock units (PSUs) are some of the most common forms of equity compensation in use today. Each of these types of equity have very different tax implications and some may not be easily divisible. In addition, each company’s stock administration policies can vary regarding how the non-employee spouse can receive or control their allocated portion of the equity compensation. In some cases, shares of stock and options can be re-titled in the name of the non-employee, but often they cannot, requiring all future transactions to be initiated by the employee ex-spouse. In that instance, tax reporting will need to be allocated appropriately due to sales being reported under one party but attributed to the other.

Another layer of complexity arises if one spouse was already working at the company prior to marriage. An analysis of separate versus marital property for any unexercised or unsold equity will likely be required.  Needless to say, equity compensation can be a complicated component of the divorce negotiation, so it is important that your professional team fully understands the limitations imposed by each underlying company. To learn more about the various types of equity compensation, visit The Sand Hill Blog. 

Don’t Ignore the Cost Basis of Securities

Cost basis is the original purchase price of an investment and it is important to understand for a couple of reasons.  First, it helps determine whether an investment is profitable.  Second, it determines the tax consequences when an investment is sold.  The difference between the purchase price and sale price of an asset is used to calculate a capital gain or loss which can be a big driver of your tax bill every year. For this reason, having the cost basis information of the assets that are to be divided is critical. If there is only one purchase of a particular security, it can be easier to track the cost basis than the more likely scenario of multiple purchases of the same security over many years. The original purchase plus all subsequent purchases add to the cost basis. And securities purchased early in a marriage are likely to have appreciated considerably, so they could have significant tax consequences upon future sale.  Understanding the after-tax value of securities should be carefully considered during the negotiation process so that there are no tax surprises later.  To learn more about the intricacies associated with the cost basis of securities, see our article All About That Basis. 

How to Address Private Investments

Private investments such as hedge funds, venture funds and private equity differ from the more traditional stocks, bonds, and mutual funds as they are not traded or valued on a daily basis.  Recordkeeping and performance reporting are also significantly opaque.  These investments may involve future capital calls (a commitment to fund an investment that has not yet been met) that would require immediate cash outflows. As such, private investments should be treated with care when negotiating how to split marital assets. Additionally, just because these types of investments are generally illiquid (i.e. cannot be sold for cash proceeds in a timely manner), that does not mean these investments have no worth. Therefore, it is essential to fully understand the structure of each asset under consideration.

The settlement agreement should also address how to divide private investments, taking into account the specific restrictions on liquidity and retitling for each investment. You may be required to redeem some, or even all of your share in the investment.  There are also some private investments where it may not be possible to divide the asset.  Instead, the investment company will keep the asset in an administrative trust, providing both parties with the necessary capital statements and tax reports over the life of the investment.  With private investments, it is important to have a clear understanding of market value, liquidity, life of the investment, future capital calls and cost basis before any final decisions are made. 

Dividing Retirement Accounts

In long-term marriages, retirement assets can often be a significant source of wealth. They can also represent a combination of both separate and community property assets, which may result in an uneven division. Before a settlement agreement is signed, be sure that all retirement assets have been accounted for and their division is clear to both parties.

Retirement assets subject to division may include not only IRAs, but employer sponsored 401(k) accounts and pensions, or for educators and government employees, 403(b) and 457(b) accounts. If executed properly, the division of all types of retirement account is a non-taxable event.  IRAs are divided in a manner known as a transfer incident to divorce, which is stipulated in the Marital Settlement Agreement. Employer sponsored accounts are divided by a Qualified Domestic Relations Order.  In both instances, an account must be established to receive the assets that are to be divided, typically a Rollover IRA if one doesn’t already exist for the recipient. Once the transfer is made, the account owner is responsible for paying the tax and any early withdrawal penalties on future distributions. 

What is a QDRO? 

A Qualified Domestic Relations Order, or QDRO, is a legal document that addresses the division of qualified retirement plans, such as 401(k)s, 403(b)s, pension plans and profit-sharing plans. As mentioned above, IRAs held at a brokerage firm or bank can be divided with a court certified marital settlement agreement, but qualified plans cannot be divided without a QDRO. Generally, if your existing legal counsel does not regularly draft QDROs once a settlement is reached, the drafting is often outsourced to a third-party attorney who specializes in these documents.

Using a simple example, Spouse A and Spouse B have employer sponsored 401(k) plans that they need to divide. Spouse A’s 401(k) balance is $50,000 and Spouse B’s 401(k) balance is $100,000. The QDRO may be drafted to divide both accounts, transferring the allotted portion to the other party’s existing plan. Alternatively, the QDRO may direct the larger plan (in this case, Spouse B) to carve off the equalizing portion and transfer those funds to Spouse A’s plan. The drafting attorney will explain the pros and cons of the various options but involving only one plan administrator is typically more time and cost effective than involving both.

If liquidity is needed for either spouse, a QDRO may be utilized to withdraw from a qualified plan, avoiding the 10% early withdrawal penalty that is normally triggered when the participant is under age 59½. If Spouse A needed liquidity, they could opt to take the equalization from Spouse B’s 401(k) as a cash distribution. The 10% early withdrawal penalty would be avoided, though Spouse A would still be subject to ordinary income tax on the withdrawn amount. In addition, per Internal Revenue Code Section (72)(t)(2)(c), the plan administrator is required to automatically withhold 20% for income taxes on the withdrawal. If the QDRO instructs the administrator to transfer the funds directly into an IRA Rollover, the 20% automatic tax withholding is avoided. Importantly, once the funds are received into an IRA, any future withdrawals would once again be subject to the 10% early withdrawal penalty if a subsequent withdrawal is made before age 59½. 

The Role of Life & Disability Insurance  

Life insurance is often first put into place in a meaningful way when children are born. The reasons for first obtaining life insurance — to provide income and financial stability for the surviving family — may continue beyond the dissolution of the marriage but with some modifications. Existing whole life and/or term policies should be reviewed carefully given the change in circumstances so that adjustments can be made accordingly. It may also be wise to simply replace existing policies with new ones that are a better fit assuming the health screening required in the life insurance application process is not a concern. 

Before a settlement agreement is signed, evaluate life insurance policy death benefits and duration of coverage to determine if they can be used effectively to help secure court ordered spousal and/or child support obligations. It is also best to have stipulated in the divorce decree which party is responsible for paying the premiums on the life insurance policies and how to prevent a default and lapse in coverage if that party stops paying.

Similar to life insurance, disability insurance may be a requirement for the spouse paying support.  Disability insurance provides replacement income during employment for either a short- or long-term disability. Disability insurance policies differ regarding the extent of the disability, the length of the elimination period and benefit period, as well as the cap on gross monthly earnings.  For more information on disability insurance, please see our article Long-Term Disability Insurance: Don’t Overlook This Employee Benefit. 

POST-SETTLEMENT STEPS

Asset Division, Reconciliation & Retitling 

Once settlement is reached and the marital separation agreement (MSA) is finalized, the arduous task of implementing the asset division is up next. This process is typically handled by the now divorced individuals, with legal counsel minimally involved, with the exception of helping to re-title real property. Retitling of assets, opening new accounts to receive divided assets, transferring assets and reconciling to confirm that the divisions occurred accurately – these are just a few of the many steps that must be addressed. If assets were held in one party’s name, this will involve coordinating with the former spouse to ensure they are moving the process forward on their end. For retirement assets such as IRAs and Roth IRAs, these accounts can be divided as long as the language included in the MSA is acceptable by the account custodian— which is why it is a good practice to allow your financial advisor to review the asset division portion of the MSA prior to finalization. For retirement assets that are categorized as qualified plans (for example, 401(k)s, 403(b)s, pensions and profit-sharing plans), these can only be divided once the QDRO document is finalized and provided to the plan administrator. Lastly, if a change of ownership on existing life insurance policies was included in the settlement, the carriers must be contacted to request those changes. At Sand Hill, we help manage this stage — division, reconciliation and re-titling — in the divorce process, allowing our clients to focus on taking the next steps into their new life. 

Updating Beneficiary Designations

One final step on the post-settlement checklist is to review the beneficiary designations on all investment accounts, life insurance policies and retirement plans. Addressing beneficiary designations is an often-overlooked aspect of the division that can create unintended consequences that are near impossible to unwind if an ex-spouse continues to be listed as the primary beneficiary long after the divorce is finalized. Spouses typically name each other as beneficiaries when accounts are established, but once the marriage is over it is imperative that these documents are reviewed with fresh eyes.  Post-divorce, most individuals prefer naming children, other family, friends or even charitable organizations —not their ex-spouse unless it was stipulated as part of the settlement agreement. Importantly, if the desire is to name minor children as retirement account beneficiaries, please see The Proper Way to Name a Minor as Your IRA Beneficiary to ensure you are titling the designation(s) correctly.  

LIFE BEYOND DIVORCE: REBUILDING YOUR NEW FINANCIAL LANDSCAPE 

After settlement is reached, there will come a point when interactions between you and your family law attorney will taper off.  However, there are still many important details to address that you can either accomplish on your own or with the help of a financial advisor.  At Sand Hill, our Wealth Managers work diligently with our clients to address the important details that can be forgotten when everyone is anxious to move on.  We help prioritize and streamline the rebuilding of your new financial landscape and make introductions in the professional community where appropriate.  Our goal is to construct a path forward for our clients, affording them the time and ability to focus on the next stage of their journey. 

Resetting Your Estate & Tax Needs 

When the settlement agreement is certified by the court, it is important to carefully review the full document with your financial professional.  This is also an opportune time to re-establish your estate plan, setting yourself up to move forward in your new life.  A full estate plan for many includes the creation of a revocable living trust and will, as well as updating durable powers of attorney for financial matters and healthcare.  For real estate and taxable investment accounts, you should retitle these to your new revocable living trust.  For retirement accounts, your estate planning attorney will provide guidance on how to update the beneficiary designations to fit with the parameters of your trust language. For more information on steps to take once an estate plan is complete, see Sand Hill’s article You Established a Trust! But Did You Properly Fund It?

There may also be the need to source a new tax professional if there is a desire to move away from the accountant who previously handled the joint tax returns. Finding a capable CPA at this juncture is critical, especially if that professional will be involved in reviewing future tax returns of the ex-spouse, to ensure spousal support is adequately paid and other requirements of the settlement are met. 

Implementing Your Investment Portfolio 

Once the asset division is complete, it is important at this stage to re-evaluate your investment portfolio.  You want to align your portfolio to address your new circumstances, as your personal goals, liquidity needs, and risk/return profile may differ significantly from the parameters previously utilized when you were one-half of a married couple.  At Sand Hill, we incorporate a variety of factors into our recommendations, allowing us to guide our clients to the suitable mix of stocks, bonds and other assets that will allow them to meet their long-term goals. After moving forward from a hard-fought settlement, it is of the utmost importance to make sure those assets are invested appropriately so you can maintain the lifestyle you desire. Working with a financial professional that fully understands your goals, risk tolerance, timeline and cash flow needs will provide lasting peace of mind that the final settlement you agreed to will support your needs now and in the future. 

Mortgage Refinancing

As mentioned previously in Keeping the Family Home, post-settlement, there are two necessary tasks to complete if you retain the marital home: you will need to update the title of the home (to remove your ex-spouse) and refinance any existing mortgages into your sole name. When one party is removed from the title of a property, any jointly held mortgages must also be refinanced to remove their name from the lien. The settlement agreement will likely provide a timeframe in which this must take place. 

Health Insurance & COBRA 

Post-settlement, each party will most likely be responsible for obtaining their own health insurance. Health insurance changes for minor children may also be required and should be specified in the settlement agreement. If you were previously on your ex-spouse’s health insurance plan, you may, as a California resident, have the option of staying on COBRA for three years following the divorce. COBRA is a Federal law that allows you to temporarily retain continued health insurance coverage for a specified period of time. Be aware that under COBRA, you are obligated to pay 100% of the policy premiums. An additional 2% can be charged as an administrative fee at the discretion of the employer. If you are employed, an easy alternative to COBRA is to join your own employer sponsored plan. This can be done at any time and not simply during the open enrollment window given that divorce is considered a qualifying event. To ensure there are no surprises or lapses in coverage, we at Sand Hill work with our clients early in the dissolution process to address topics like health insurance and coordination of benefits.  We recommend contacting a health insurance consultant to discuss your options, and we are happy to make an introduction to one of our trusted partners to make that happen.

INCOME CONSIDERATIONS 

Social Security and Divorce 

Divorce does not rule out the possibility of collecting benefits on your ex-spouse’s earnings record; however, the rules around how and when to begin receiving these payments can be complex. For all the specifics, see our article Demystifying Social Security Retirement Benefits for Divorcees.

If your ex-spouse is still living, you are eligible to receive a retirement benefit if you satisfy the following set of criteria:

• The marriage lasted 10 years or longer

• Your divorce has been finalized for at least 2 years

• You are currently unmarried (it does not matter if your ex-spouse remarried)

• You are age 62 or older

• Your ex-spouse is entitled to Social Security retirement benefits

If all the above requirements are satisfied, you will be eligible for 50% of your ex-spouse’s benefit at their Full Retirement Age (FRA) as soon as you reach your FRA. You have the option to begin receiving benefits when you turn age 62, however the benefit amount will be permanently reduced from what you could receive if you wait until your FRA. It does not matter if your ex-spouse has not actually reached their FRA, or if they are still working. To better understand your specific situation including your FRA, refer to the article referenced above containing a chart from the Social Security Administration. 

Spousal Support in the Years After Divorce 

Spousal support in most states is based on the payor’s income, so a job loss or drop in earning ability can lead to a reevaluation and lowering of the support payments going forward.  An unexpected death could also bring a sudden halt to your payments so including life insurance options in the proposal discussions should be a top priority.  Spousal support can be extremely complicated when the goal is capturing income that may be unpredictable in form and timing, or if there is lack of trust between the payee and payor. While there is nothing wrong with a complicated and all-encompassing support deal, keep in mind what that complexity may cost you. Additional billable hours of preparation from your professionals each year — both tax and legal — may be required. Attorneys may need to be re-engaged more fully if disagreements arise over calculations or interpretations of the order, increasing your costs and delaying payments.  In our work with clients long after settlement agreements have been put in place, we have seen some first-hand examples of how lump sum support buyouts or relatively straight forward support payment agreements can  significantly reduce the risks associated with future cash flow uncertainty. 

The Impact of Re-Marriage

Re-marriage can have an impact on two potentially significant income sources: Social Security benefits and spousal support.

Social Security: If your ex-spouse is still living, your remarriage will nullify the spousal benefit you are entitled to based on your ex-spouse’s record. At the point of remarriage, any Social Security benefits will be based solely on your own personal record — or that of your new spouse once you reach the 10-year anniversary mark — unless your remarriage takes place after you turn 60 (or 50 if disabled) and your ex-spouse is deceased. In this instance, you can still collect the survivor benefit on your ex-spouse’s record.

Spousal Support: Many divorce settlements include stipulations for when spousal support will end as it is intended to provide a reasonable amount of time for the supported spouse to become self-supporting — not to necessarily provide an income stream for life.  One common stipulation that would terminate spousal support before the specified end date is remarriage. Even co-habitation can jeopardize these payments, so be sure to understand the terms of your settlement agreement.

Finally, and perhaps most importantly, if you do decide to marry again, pre- and post-nuptial agreements should be considered well before the remarriage occurs. 

THE ROLE OF SAND HILL’S DIVORCE FINANCIAL PLANNING TEAM 

Over Sand Hill’s nearly three decades specializing in divorce financial planning, we have developed a robust team with deep expertise in this field. We have experience consulting throughout the divorce process and are often involved in the coordination of the post-settlement landscape, providing hands-on support to make sure our clients receive all of the assets that are owed to them as part of the settlement agreement. Additionally, we have built fulfilling and long-term relationships with clients who came to us during the divorce process and have chosen to later engage Sand Hill as their long-term advisor at the conclusion of their case. Our passion for this work is based on our shared experiences guiding clients through one of the most difficult life situations, and later witnessing clients thrive in their newly established, post-settlement life. Our mission is to empower our clients so they can take control of their financial future. 

For more information about Sand Hill’s divorce financial planning offering, click here. Continue reading to meet our divorce financial planning team. Any member of our team may be contacted directly to help answer initial questions or to coordinate a consultation meeting. To learn more about Sand Hill, visit us at www.sandhillglobaladvisors.com. 

Jeff Abadie, CFP® | Senior Wealth Manager

With nearly 20 years of experience, Jeff helps high net worth individuals and families navigate the financial complexities of life. He understands the impact major life events like divorce can have emotionally and financially. Jeff has worked with many of the Bay Area’s leading family law attorneys, helping individuals navigate the financial complexities of the marital dissolution process, including pre- and post-nuptial planning, cash flow management, community property division and investment implementation. An empathetic listener, Jeff has a gift for putting things in perspective, guiding people through these challenges, and empowering them to plan for long-term happiness and success. Jeff currently serves as Vice President of the Board of Directors for Overcoming Barriers, a non-profit organization offering support and solutions to families and children in conflict. To learn more about Jeff’s background and experience, read his full biography HERE. Jeff can be reached directly at jabadie@sandhillglobaladvisors.com, 650-854-9150 or 415-291-9999. 

Janet Hoffmann, CFA, CFP® | Senior Wealth Manager

With over 20 years of experience, Janet strives to be a trusted advisor to all her clients, and takes earning that trust very seriously. A member of a unique group of dual-certified professionals having obtained both the CFA designation and CFP® certification, Janet provides a specialized depth of insight. She focuses on providing wealth management to women, especially those going through a major transition such as divorce, as well as helping clients implement unique portfolio customizations, such as socially responsible investing. She also has experience as an entrepreneur, having started her own investment practice in 2010 which she sold to Sand Hill in late 2019. Janet is as approachable as she is knowledgeable and takes a comprehensive, forward-thinking approach to financial planning. She combines attention to detail with a genuine desire to understand the “big picture” for each client so she can help them reach their individual goals. To learn more about Janet’s background and experience, read her full biography HERE. Janet can be reached directly at jhoffmann@sandhillglobaladvisors.com or 415-291-9999. 

Kristin Sun, CFP®, CDFA® | Senior Wealth Manager

Kristin is passionate about helping her clients achieve financial peace of mind. With more than 17 years of wealth management experience, she takes a hands-on approach to analyzing and proactively stress testing cash flow needs, thinking through inputs, outcomes, and life events, such as supporting a loved one, facing a liquidity event, marriage and divorce. Her ability to take a deep dive into the details lends perfectly to her specialization in divorce financial planning. As a Certified Divorce Financial Analyst®, Kristin guides clients through the complexities of the marital dissolution process and acts as a resource to their legal team on the intricacies of their financial landscape. She has focused her career on helping clients through major life transitions, and she finds true joy seeing her clients thrive after rebuilding their post-settlement life. To learn more about Kristin’s background and experience, read her full biography HERE. Kristin can be reached directly at ksun@sandhillglobaladvisors.com or 650-854-9150. 

Kimberleigh Williams, CFP® | Senior Wealth Manager

Based on her own personal experiences, Kimberleigh has always had a deep passion for empowering women around finance. She knows firsthand the meaningful victories that both men and women can experience when taking charge of their financial life and tapping into the kind of expert guidance she provides her clients in wealth management, estate planning, and customized portfolio management. Kimberleigh sees her educational background in psychology as a strong resource in helping her relate personally to clients who are transitioning through major life changes such as divorce, retirement, or the loss of a spouse, parent, or other loved one. Kimberleigh finds deep personal satisfaction in helping clients successfully navigate change and prides herself on being a resource every step of the way to help them ensure they are meeting their goals and adapting their plan as needed. To learn more about Kimberleigh’s background and experience, read her full biography HERE. Kimberleigh can be reached directly at kwilliams@sandhillglobaladvisors.com or 650-854-9150.  

1 – Specific qualification information for capital gain exclusion for your primary residence can be found on the IRS website here.

Sources: Internal Revenue Service, Social Security Administration

Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.   For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
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