By: Sharon L. Klein
6 Tips for Stay-at-Home Parents after Divorce
For stay-at-home parents who relied on their spouse financially, divorce can be scary. As the groundhog emerges from hibernation, it may be time for stay-at-home parents to step out of their ex-spouse’s financial shadow and start to take charge of their own financial lives. Here are 6 key strategies designed to empower them in that process.
1. Hire New Advisors
It can be important to extricate from advisors hired during the marriage by an ex-spouse and assemble a new independent team dedicated to representing the stay-at-home parent’s best interests. A trusted team of professionals, which typically includes a matrimonial attorney, a trusts and estates attorney and a financial advisor, can make the divorce process less daunting.
It can be especially critical for stay-at-home parents who have not had financial experience to engage skilled advisors to educate them and guide the decision-making process, especially in dealing with complex assets and/or business valuations. Income tax traps can loom if one only considers the value of property to be divided and not the basis – some assets may have a low basis that can generate a nasty surprise capital gains tax when sold. Many stay-at-home parents have an emotional attachment to the marital home and are determined to have it awarded to them, without having carefully considered whether they can afford to maintain it. The loss of the deduction for state and local taxes (SALT) can significantly increase the cost of maintaining the home. It is key to carefully analyze cash flow available to pay taxes, mortgage and maintenance expenses, and consider whether the spouse staying can qualify for a mortgage if the home needs to be refinanced.
2. Get Organized
As a preliminary step, stay-at-home parents should get a firm grasp on the marital balance sheet and their cash flow needs to get a full picture of their finances before starting the divorce process, especially if they have been uninvolved in handling the couple’s finances. Assembling and reviewing financial documents (bank statements, investment accounts, retirement accounts, tax returns, etc.) with a financial advisor will often be key in understanding current income, expenses, assets, and debts.
3. Review Current and Future Expenses – Including for Children
An important step in the divorce process is projecting how a proposed settlement can sustain a stay-at-home parent’s lifestyle, whether they’re receiving a lump-sum payment or regular payments. This includes accounting for additional expenses for children, such as summer camp, college tuition and future education funding, hobbies, etc. No matter how wealthy a couple, it is important to review options and planning techniques to pay for education and other pursuits most efficiently – and, very importantly, to have those obligations clearly spelled out in a divorce decree or settlement agreement.
Many stay-at-home parents have been out of the workforce for an extended time caring for children, often making it difficult to reenter the workforce, and even if they do, will frequently earn less than the breadwinner spouse. Post-divorce income decline for women can be particularly harsh, which is especially problematic since women have longer life expectancies. Parents in this position can be dependent on an ex-spouse for financial support.
Attorneys will often be best positioned to negotiate for their clients when armed with a trusted financial advisor’s sophisticated projections to demonstrate the settlement options needed to give a nonworking spouse peace of mind – including through challenging investment landscapes and economic times. Optimizing a divorce settlement result usually requires performing this type of intensive diligence before finalizing any decisions. Particularly if a lump sum settlement/alimony are likely to be the only major cash inflows, the spouse receiving those funds must have a thoughtful long-term plan in place designed to ensure that the settlement proceeds will sustain a lifestyle.
4. Open Individual Bank Accounts and Focus on Credit
Stay-at-home parents should open accounts in their individual names, so they have cash available. They might also need to establish or improve credit; even stay-at-home parents from wealthy families might never have had a credit card in their own names. If a stay-at-home parent does not have a credit card account in their name only, they should consider opening one and making small monthly purchases that are paid in full every month to start building their credit history. Custom credit/financing can provide a reliable source of funding for unforeseen expenses and purchases, including marketable securities-backed lines of credit, which may be an especially valuable option to help preserve an underlying portfolio instead of selling at a time of crisis. Bridge financing to help with a purchase may be another option to consider.
5. Review Existing Prenuptial Agreements
If stay-at-home parents have an existing prenuptial agreement, they should carefully review the agreement with an attorney to see what rights – and obligations – are incorporated.
6. Ensure Settlements Obligations are Secured
Stay-at-home parents frequently rely on their ex-spouse’s alimony and child support obligations after divorce. Often, life insurance plays an integral role to secure those settlement obligations in the event of the ex-spouse’s untimely death. Utilizing an Irrevocable Life Insurance Trust (ILIT) can be an advantageous way to purchase and maintain life insurance. An ILIT is an irrevocable trust designed to hold ownership of an insurance policy. The primary benefit of using an ILIT is that, upon the death of the insured, policy proceeds pass to heirs free of estate taxes.
Once a policy is purchased, it is key to ensure that premiums are being paid in a timely fashion to prevent a policy lapse. Ensuring the beneficiary spouse either receives confirmations of payments or notifications if premium payments are missed can be important to confirm that the policy remains in good standing. Failure to maintain a policy can leave the ex-spouse’s estate liable to pay the entire amount of the insurance proceeds – but full recovery might not be possible if the estate has insufficient assets.
Divorce is usually a highly emotional and stressful time; for stay-at-home parents the stress can be magnified. Those who most often emerge from the financial shadows positioned for success have built a team of professional advisors to champion their interests. With solid financial analytics, education and support from a trusted financial advisor, the counsel of a matrimonial attorney, trusts & estates attorney and accountant, the team can be armed to represent clients most effectively.
Sharon L. Klein, Executive Vice President and Head of National Matrimonial Advisory Practice, Wilmington Trust, was selected by Forbes as one of the Top 40 Women Wealth Advisors in the U.S. in 2022 and featured on Crain’s inaugural list of the Most Notable Women in Financial Advice in 2020. Beginning her career as a trusts and estates attorney, Sharon is a Fellow of the American College of Trust and Estate Counsel and has been inducted into the Estate Planning Hall of Fame. www.wilmingtontrust.com/divorce
This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust does not provide tax, legal or accounting advice. Professional advice always requires consideration of individual circumstances. Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation.