HOLLAND: Financial planning for a divorce

-A A +A

By Bradley D. Holland

When you’re preparing for a divorce, it’s crucial to review your budget and expenses. After separating, most ex-spouses will try to maintain their former lifestyles, only now the same income will need to cover two separate households. How do you manage cash flow appropriately to meet your and your ex-spouse’s individual circumstances?

The goal is to arrive at a fair solution. But remember, ‘fair’ is a relative term and depends on the circumstances. In some cases, it may mean assets are divided 50-50 and in others it could be 70-30.


Asset division

Since you may need to liquidate an asset after the divorce is final to cover your expenses, you should be aware of any extra costs associated with the asset. Your advisor will begin by examining all your marital assets, to get a clear picture of their characteristics, such as tax basis,  surrender charges, and termination fees.

In addition, it’s important to consider your liabilities, such as mortgages and credit card debt, or even contingent ones such as any pending lawsuits. Your financial planner can help you to evaluate certain restrictions that may apply if an asset must be unwound. For instance, a fractional share in a business may lose most of its saleable value. Or, a spouse who is not licensed cannot operate half of a professional practice. One creative solution might be for one spouse to maintain the business, while the other party receives additional cash as compensation.


Changing circumstances

When planning for a divorce, you will also need to get a clear grasp of what the future is likely to hold. Cash-flow projections can help provide some confidence that a divorce settlement will remain fair and viable in the years to come. Some possible eventualities to bear in mind include:

  • How retirement will affect cash flow, including alimony payments.
  • How a change in career might affect overall income.
  • How disability could affect one or both households. Divorce settlements may rarely include a requirement for an income-earning spouse to have disability income insurance. Life insurance is more common, although in fact disability is a more likely occurrence than death.
  • How the rising future value of some assets could affect your overall financial picture.


Protecting children

As a breadwinner, you may be concerned about what will happen to your joint assets after a divorce, and how that will affect the legacy you leave your children. For example, if your spouse remarries, those assets that were received in the divorce settlement might be transferred to someone other than your own kids. In fact, some spouses find it difficult to see their funds are being used to support a partner or future spouse. There are many workable solutions that can place restrictions on how an ex-spouse receives payments from a divorce settlement. You, your advisors and your attorney can discuss alternatives that may mitigate how the settlement is paid to an ex-spouse.

Another concern, for many different reasons, is how a child will receive assets that you want them to have after a divorce. From an estate-planning aspect, it may not be preferable to leave an outright gift to your kids, since they too could end up getting divorced—and losing the money. A trust is often a method of safeguarding your children’s rights. You may use life insurance to create a death benefit that can be used to provide a guaranteed a source of income for your children after your death. If you do, it’s crucial to specify how funds will be distributed to your heirs, and by whom to ensure that your children receive the intended benefit.


Hidden assets

Unfortunately, some spouses go to great lengths to spend as much money as they can before their joint wealth becomes divided. There are many ways that assets can be retitled or hidden.

What can you do to prevent that type of deception? Above all, it’s important to carefully review all bank or brokerage statements and question any large, unusual withdrawals. Can your spouse prove he or she sustained an investment loss, with a tax deduction to match? Do you notice any substantial amounts of missing cash? By the time a divorce is pending, it will be harder to practice damage control.

Accordingly, married couples should pay close attention to finances from the beginning. That includes taking full ownership of online accounts by learning each other’s user names and passwords and properly titling joint assets.


Bradley D. Holland is the owner of Holland Financial Group and an investment advisory representative of Lincoln Financial Securities Corporation. He can be reached at 800-774-1806.