How to Protect Your Money in Divorce
Divorce is devastating. Not only are you broken hearted, but without careful planning you can also wind up broke. The stakes are higher still if you're in the 50+ club when you part ways. Increasingly, divorce is a reality for the grey-hair set.
“I am seeing couples divorce in their 70s. They do not have the advantage of building up their retirement. They have to live on what they already have socked away,” says Tracy Stewart, a certified public accountant who specializes in divorce.
Protecting yourself in a divorce is a priority.
“Control the divorce process, and don't let it control you. That means building a team and being the driving force, as opposed to relying on your attorney to do it for you. You need a real game plan with goals, and a clear vision of what you will fight for and what you can live without. Your financial advisor should be a resource to validate what your attorney proposes. Don't rush to the finish line – even though it's very natural to want the process to be over quickly. Preserving your financial future requires patience and a thorough review,” says Gregory Boyle, vice president investments, Lighthouse Wealth Management.
Understand the financial impact of divorce. A good advisor will demonstrate a variety of scenarios based on budget analysis and budget versus expenses and cash flow. “We find the outcomes often surprise our clients. Things are going to change financially after a divorce. Be prepared to adapt, as well as aggressive in standing up for yourself. Think twice, and then a third time, before accepting the advice: 'This is a good deal, you should take it,'” says Boyle.
One of the best ways to protect yourself is with a prenuptial agreement. Most prenuptial agreements provide that all appreciation, regardless of its active or passive nature, remains separate and that minor contributions of marital property or income does not taint an otherwise separate asset, explains Caroline Krauss-Browne, the matrimonial vice practice group leader at the law firm of Blank Rome. “An artfully drawn prenuptial agreement can also protect against invasive and expensive financial discovery and appraisals.”
Be sure that the prenuptial agreement is signed by both parties and notarized. “I have seen a situation where a pre-nup was signed by both parties prior to marriage but not properly notarized. The couple divorced and the pre-nup did not hold up in court, resulting in a messy battle for assets lasting years,” says Laura Malinowski, a certified financial planner with Ballou Plum Wealth Advisors.
A pre-nup can be a lifeboat, but if you didn't do one before you said I do, what then? If there is no prenuptial agreement, it is imperative that a spouse segregates separate property and, if possible, allows someone else to manage it. “Do not discard financial documents, including tax returns and bank, brokerage and other financial statements. The burden of proving a separate property claim rests on the proponent of the claim. Courts assume that every asset owned by either party, individually or jointly, is marital unless a separate property claim is proven,” says Krauss-Browne.
Establish a separation date so that future income or assets are not deemed marital, advises Leslie Barbara, a partner and co-head of Davidoff Hutcher & Citron’s matrimonial and family law practice.
Don't however, move or change the nature of assets in anticipation of divorce, all of that may be traced in discovery and shows bad faith, says divorce attorney Lubov Stark.
Safeguard your credit
Close joint accounts so you won't be responsible for your ex-spouse's spending spree. Pull a credit report so you can see what accounts you have jointly, advises Adrian Nazari, CEO of Credit Sesame. Remove each other as authorized users on credit cards and bank accounts.
If you're in the process of getting a divorce and your ex wants to file for bankruptcy, know that you don't have to file for bankruptcy together. “Just make sure you have a clear understanding of what property/possessions will be treated as part of the bankruptcy estate,” says Nazari.
Have the person who is keeping the home refinance it in their own name. This way, if you don't keep the home, you're not on the hook if your ex doesn't pay the mortgage. The same thing goes for car loans and any other loans you have jointly.
Get the facts
Knowledge is power. When splitting taxable and tax-deferred assets, there are a lot of planning opportunities to work through. If you thing your ex-spouse is doing you a favor by giving you all the tax-deferred retirement accounts, you may be in for a surprise when you start withdrawing from these accounts and have to pay ordinary tax on the distributions. “When receiving taxable accounts, make sure you have cost basis information so you know the tax impact,” says Malinowski.
Keep in mind that for Social Security benefits, the current law allows you to collect spousal benefits if you were married at least 10 years, are not married now, and both you and your ex-spouse are age 62, points out Malinowski.
Be proactive. If you're a nonworking spouse, as you prepare for divorce, make a move to establish your own credit history in case you later need a car loan or mortgage, says AARP consumer expert Sid Kircheimer.
Figure out what your living expenses are going to be. Do not estimate, be accurate. Factor in any change in lifestyle, will you rent instead of own? Are you hoping to keep the house, but can you really afford it? If you need to get a job, can you? Assess your employment skills if you have been out of the marketplace, says Stewart.
Do learn how to take care of your own finances before you become single. It will help you understand the implications of your upcoming property settlement discussions, it will help allay some fears. “Fear is not a good place from which to negotiate, it clouds reason,” says Stewart.
Make the most of a tough situation. A collaborative divorce is non-confrontational, and you each are represented by attorneys who have been specially trained to not make it so. “It's the best way to go. The faster you agree, the sooner it is over, and at minimal expense. To do otherwise and pursue a confrontational approach or try to hide or divert assets, will probably cost you in the long run. Subversive actions will likely not be perceived in your favor and much will have been spent having attorneys, not to mention private investigators and forensic accounts prove things one way or the other,” says Rosemary Frank, a certified divorce financial expert. “Agree to agree and don't spend any more than necessary on professional fees for the divorce process.”
When all is said and done, be sure to update beneficiary designations on any insurance policies and retirement accounts, as well as revising your will.
Divorce is painful enough on the psyche, don't let it also be a financial fiasco.