Divorce can be one of the most stressful events in a person’s life. Both spouses inevitably feel the pull of powerful emotions.
In addition, spouses typically experience a sense of insecurity that is largely driven by the prospect of future financial uncertainty. Such insecurity may be exacerbated by advice from well-meaning family, friends, and legal counsel that unintentionally results in a more hostile and costly environment.
Good news! One way to minimize stress and uncertainty is to engage in the financial planning process before, during, and after a divorce. Both parties will benefit by an equitable solution that is based on facts…rather than emotions.
Where does one start? Here’s a simple approach.
First. Make a complete list of all assets, liabilities, and responsibilities…such as children and parents. Include assets of all types, business and personal.
Second. Keeping in mind that not all assets are created equal, evaluate each asset in light of its potential benefit to both parties and their individual needs. Consider liquidity, tax implications, income potential, and possible emotional ties to certain assets. For example, it may make sense for the spouse with the lower tax bracket to receive assets that generate higher taxable income.
Third. Assess the liabilities of both spouses and obtain credit reports. It may be beneficial to close joint lines of credit and refinance mortgages (lock in low rates) prior to formal proceedings.
Fourth. Carefully analyze the cash flow implications of spousal and/or child support for both parties after the divorce. This analysis should be undertaken in a way that accounts for income tax consequences.
Fifth. Prepare post-divorce financial plans for both spouses. These plans should contain the essential elements of any good financial plan with the goals of properly addressing estate planning, investment (income), retirement, tax, and risk management needs.
Make sure all documents, including wills, trusts, powers of attorney, and beneficiary designations, are up to date. If you plan to remarry, revisit this process in detail as that date approaches.
Last but Not Least. Add a financial planning professional to your team. Remember that decisions based on a rational and solid plan are preferable to those driven by emotion and without the facts.