Divorce is the one life transition in which every aspect of your life changes simultaneously – social, emotional and financial. It is all frightening, but financial fears create a special kind of stress and feelings of helplessness (and vulnerability). As I mentioned in the last post, there are five key things you need to consider when filing for divorce. The first is knowing your legal options. You may read here for a recap. The second is understanding your financial options.
I went through my divorce last year, so I get how stressful it is. In my past life, I was a CPA, so I had the advantage of being familiar with our finances and the questions I needed to ask, along with the information I needed to know. But I have spoken with many people who feel completely in the dark about where to start.
So where do you start if your partner handled all the finances and you feel like you want to wave the white flag instead of thinking about a pile of numbers?
Two approaches that don’t work are:
- Getting overwhelmed and becoming an ostrich
- Placing all the responsibility and your trust in a financial advisor
Trust is good; ignorance is very costly. While your financial professional is likely trustworthy and extremely knowledgeable, he or she can only know what you tell him or her. If you don’t know the complete picture, a financial planner can’t either and you’re not going to get the best advice. So before you go, start compiling pieces of your financial world.
Questions You Need To Ask
Ask yourself, “How acquainted am I with our finances?
Here are some questions to help focus you:
- What are your joint and individual assets including retirement accounts, equity in real estate, and investments?
- What joint debts do you have?
- Do you believe there are bank accounts in addition to the ones you know about?
- Do you or your spouse have a life insurance policy or a pension?
- What is your spouse’s salary?
- Do you know if your prior year tax return was filed?
- What assets did each of you come into the marriage with?
- Did either of you receive an inheritance after marrying?
- Is your spouse about to receive a bonus or a cash settlement in the near future?
- What liquid assets do you have today that you can access if your spouse cuts you off after you serve him or her papers? (The court will order your spouse to contribute toward household expenses while legally separated, but it can take time and money to get the court order. How will you live in the meantime?)
And another question that is so important: Do you have the passwords to all joint accounts, and who is the account owner (with the ability to change the password or cancel a card?)
Divorce is a highly charged situation and you don’t want to rely upon your spouse to be rational, so always be mindful about what you need to do to protect yourself – financially, physically and emotionally.
Why You Need A (Good) Financial Planner
Once you have gathered the available information, you are ready to meet with a financial planner. Your main goal at this meeting should be to answer: “How much do I need to live?”
As you have heard before and it is true: Your standard of living, (especially if you are a woman) is going to diminish following divorce. You need to understand by how much and what options you have.
Most planners give you a handy a spreadsheet to help you capture all your expenses and income sources. If you have children nearing college age, be sure to ask about qualifying for financial aid as a divorced parent. There are very specific rules.
Talk with your planner about the tax ramifications of receiving alimony (assuming you are eligible) versus a property settlement. (Alimony is an income source which may be helpful if you need to qualify for a loan, but it is also taxable. Property distributions, on the other hand, generally aren’t taxable but they don’t count as income. )
Generally, planners charge by the plan or the assets managed and not by the hour, so this initial meeting shouldn’t cost money (though, of course, verify how fees are generated with whomever you are meeting.) When the divorce is final and your financial settlement is clear, that is the time to get a formal financial plan.
For now, the benefits of meeting with a financial planner are to understand what you need to live, what you may have following the divorce, what the gap is (if any), and what options you have available to close the gap. Planners will consider the tax ramifications of all your options along with your childrens’ education planning. This is why a financial strategist is so important to have as part of your team.
Armed with this information, and most likely some good questions you may not have known to ask, you are ready to meet with your attorney and talk about desired outcomes. The attorney can advise you what is realistic to expect and what is not. This may influence the timing of your decision to file.
In the next post, I’ll talk about the importance of getting clear about your desired outcomes early on in the divorce process and how to communicate effectively with your attorney.
If you are in the Hartford, Connecticut area and would like referrals to financial planners, write me.