I Do, I Did, I’m Done
by Lindsay Guido, CFP®
Financial planning is a powerful tool, helping individuals and families make well-informed decisions while navigating life’s often expensive milestones. Common goals of financial planning are funding retirement or children’s college educations. But our complicated lives are dotted with sometimes unplanned events that can turn the world upside down. In these cases, minimizing the bad is as important as optimizing the good. So, in tough times, thoughtful and objective planning is essential to regain financial footing and bring the future into focus.
One relatively common unplanned event is divorce. A predictable surge of divorce filings occurs at the beginning of each year from couples who waited out the holidays or made it a New Year’s resolution. First-marriage divorces are estimated at between 30% to 40%, with the risk of divorce thought to increase in subsequent marriages. So-called “gray divorces” for people over 50 are also on the rise. Those making the break this year will need a strong support network: not of just friends and family, but also from a professional team including an attorney, accountant, and financial planner.
Each of these professionals offers a wealth of knowledge useful in setting realistic expectations and crafting equitable outcomes. While an attorney will address pressing issues such as the division of assets and custody arrangements, a financial planner can bring structure to the future with a collaboratively crafted, long-term plan. This approach considers tax implications from asset transfers, the feasibility of each individual’s preferred residence, insurance needs, the development of a post-divorce household budget, and a reappraisal of future financial goals and lifestyle aspirations.
We can learn the value of this methodology from celebrities like Kim Kardashian, who was rumored to have worked with a financial planner to prepare an exit plan for splitting assets fairly in advance of her divorce from Kanye West in 2021.
Tom Brady and Giselle Bündchen used a holistic approach to their divorce, including the foresight of using a prenuptial agreement, mediators for privacy, and an ongoing focus on best outcomes for their children. Their example of handling the process strategically and purposefully – outside a courtroom – provides a model for how any couple can work together to achieve similar results.
Three Phases for Financial Planning
Like any financial planning project, the first step focuses on understanding and gathering information about current financial conditions of all individuals involved. This includes liquid assets (such as retirement and savings accounts, investments, and whole life insurance policies), illiquid assets (like vacation homes, automobiles, or collectibles), and sources of income (Social Security benefits, corporate pensions, or other executive compensation arrangements). The financial planner will help determine these financial instruments’ worth and whether they may be includable in the marital estate.
This initial phase also may suggest steps to protect creditworthiness and resources to cover day-to-day expenses. Before a divorce decree is finalized, debts incurred by either partner can impact the standing of both, and each partner maintains equal access to joint accounts. Defensive steps may include converting joint holdings to individual ones for savings, investments, and credit cards.
The second phase delves deeper into budgeting and cash flow for daily living and includes education for what to expect from post-divorce life. The financial planner can assist in analyzing possible settlement options for an equitable division of assets including homes, business interests, and retirement accounts. This is the time to reassess risk exposure and insurance needs to protect loved ones in case of unexpected developments, such as the death or disability of the individual who pays child support or alimony.
After the divorce is final, the third step is determining what needs to be retitled. Wills, trusts, and other estate planning documents will need updating along with beneficiary designations for retirement accounts and life insurance policies. Credit can be built or rebuilt as investments and other financial strategies are adjusted to fit new goals and a redefined life.
Potentially Unequal Skill Sets
Responsibilities in a marriage are sometimes not shared equally, with one partner designated as the financial manager who makes money decisions, accumulates financial knowledge, and establishes relationships with bankers and investment professionals. This leaves the less-experienced spouse at a disadvantage. In the event of a divorce, this spouse will be well-served to improve financial literacy and build a team of separate advisors to define financial needs and priorities.
Considering the Long Run
While relationships with divorce attorneys may (or may not) be brief, the need for sound financial planning lasts a lifetime. Conifer Bay Capital can assist a divorcing client and the attorneys by creating an awareness of options, and an analysis of the true value of assets and how divorce decisions impact his or her finances. We perform administrative tasks, develop a budget, and consolidate investment strategies while considering tax consequences of asset transfers and maintenance income. We can adjust any plan as conditions require. We are a resource for ensuring that our clients understand their current and future situations, which is particularly important for less-moneyed spouses (common for stay-at-home parents) or those who were previously uninvolved with the family finances.
Each family’s circumstances are unique, and the decisions made in this critical, transitional moment will affect the lives of everyone involved for years to come. The reality of divorce is often complicated, emotional, and exhausting. But the upside to navigating the divorce process with customized financial planning is personal reinvention, reinvestment, and a reset of priorities with easier budgeting and financial control. Beyond these difficult days, a next adventure awaits.
