Ten financial areas you may need to brush up on if getting divorced.
By Noah Rosenfarb (New York)
In most marriages, one spouse takes the primary role in handling family finances. Their role may not involve paying bills and balancing the checkbook but they control retirement planning, savings, investments, insurance, borrowings, and often spending.
During a divorce, the spouse that did not actively participate in this role — let’s call them the Dependent Spouse or “DS” — has a lot to learn in a short amount of time. Most haven’t been informed about most of the financial aspects of their marriage. They may not even know how much money their spouse truly earns, or if they have enough saved for retirement, or whether they have the right mix of stocks and bonds, or whether they have enough insurance — health, disability income, long-term care or life insurance. The dependent spouse needs help to navigate this financial maze.
Here are 10 areas (in no particular order) that we explore with clients during the divorce process:
1. Risk Tolerance – The goal of any financial advisor is to learn their client’s risk tolerance and provide their client with recommendations that potentially generate the greatest returns based on acceptable risks. A fundamental financial theory is that higher risks potentially yield higher returns. However, our clients have a risk tolerance much lower than their married peers — so the returns they can expect will generally be lower than average.
Most wealth managers that typically work with business owners and high-net worth clients frequently recommend moderate and aggressive investments commensurate with their client’s risk profile. Our approach is different because we cater to newly divorced dependent spouses that need to conserve their wealth. We often say that if we could double our client’s assets, their life might not change substantially, but if their wealth were cut in half — their world would be upside down.
2. Asset Allocation – Oftentimes, at the conclusion of the divorce, our clients receive stocks and bonds that their spouse purchased during the marriage. In addition to determining the extent of any income taxes due upon the sale of these assets, it is imperative to compare the type of stocks and bonds received to the appropriate “asset allocation” for the individual. As described above, what once may have been the right mix of assets for the marriage may not be the right mix for the newly divorced.
3. Retirement Plans – Individuals that have not reached age 59½ or older generally cannot make withdrawals from retirement plans without penalty. And, if an NCS is not in the workforce, they will not have enough “earned income” to be eligible to fund tax-advantaged plans. Therefore, the NCS must develop a plan to help maximize tax benefits through other retirement vehicles.
4. Real Estate – Deciding if the marital home is “too expensive” is a decision that includes a combination of emotional and financial factors. Examining the finances alone can lead to a poor decision — one that impacts both parents and children. Financial planners may overlook the non-financial aspects of their plans. Further, an appropriate financial plan for an NCS must include an analysis of the existing mortgage (if one exists) to determine if the home is efficiently leveraged. A cash-out refinancing may create more post-tax income both now and in the future by utilizing tax advantages associated with the tax deductibility of mortgage interest.
5. Life Insurance – Generally the spouse obligated to pay alimony and/or child support is required to maintain life insurance. However the determination as to the type and quantity of life insurance the NCS should obtain is highly dependent on the needs of the NCS (see #10). Too often financial planners are eager to recommend life insurance when it may not be the best product to accomplish long-term goals.
6. Coordination of Advice – An NCS will generally seek advice from more than one source. It’s likely they will discuss their finances with: a close friend or relative, an estate attorney (see #10), an accountant, a financial planner, a stockbroker, and/or an insurance salesman. Different people with varying experience and areas of expertise are bound to make suggestions that clash with other’s advice. With today’s account aggregator technology (Internet-based software that collects real-time information from banks, brokerage accounts, insurance companies, and more), it is easy to provide a clear and current financial picture to all professionals. This helps coordinate advice, avoiding confusion and poor decisions.
7. Long-Term Care (“LTC”) Insurance – The statistics regarding LTC expenses are shocking. Rising costs and increasing life expectancy serve to make many wonder what they should do to prepare. In response to this uncertainty, insurance companies have designed product after product to protect against many unknowns. An NCS should evaluate the costs and benefits of various LTC insurance for themselves, and, often, their parents. Since most companies offer discounts to married couples when both obtain coverage, spouses should apply for LTC before their divorce is finalized.
8. Health Insurance – If needed, unemployed NCSs may utilize COBRA for 36 months from the date of divorce. In some cases, this may not be the best option. There are newer types of medical alternatives, such as “HDHP” (high deductible health plans) and “HSA” (Health Savings Accounts) that may be more appropriate for some NCSs.
9. Budgeting – The historical marital lifestyle and/or Case Information Statement is a good starting point to develop a post-divorce NCS budget. Frequently, the standard of living once enjoyed by the parties is no longer available, and the NCS must evaluate which expenses should be minimized or eliminated. Making this adjustment can be very difficult, and a balance must be found between sacrifice and overindulgence.
10. Estate Planning – An NCS faces the question of “what will happen with my assets when I die?” While everyone should have a Will (completed by the time they get divorced), an individual’s estate plan can/should change over time. Developing an estate plan should not be a one-time event — it needs to be reviewed periodically to help ensure that goals can be a complished as efficiently as possible.
At the conclusion of the divorce process, an NCS faces a breadth of new challenges. The responsibility of managing assets and income can be overwhelming — irrespective of whether the financial settlement can sustain the historical lifestyle. Involving an honest and trustworthy advisor can help ease the burden of this new responsibility.
Noah B. Rosenfarb, CPA is Managing Director at Freedom Divorce Advisors where he provides sophisticated tax and financial advice to affluent divorced women. Mr. Rosenfarb integrates life planning with financial planning to ensure clients experience the maximum benefits of affluence post-divorce. His holistic approach increases the probability of leading a life that is filled with prosperity – the kind that is measured more by personal happiness than merely by currency.
Reprint with permission.