Quick: Name the most stressful life experiences. If you said death of a spouse/family member or close friend you would be close as these were ranked first and third respectively by a recent study.[i] Actually, divorce was ranked the second most stressful experience.
Very understandable when we realize that divorce causes not only significant lifestyle disruption but financial disruption as well. Actually when it comes to divorce, “… what people don’t know can cause much greater fear and stress than what they do know,” says Susan Pease Gadoua, LCSW and renowned author of several books on divorce. [ii]
When unpleasant events such as divorce occur, our practice strives to help clients be as informed as possible. With this in mind, below are some commonly asked questions as they relate to your financial well-being during this most trying event.
Mediator or attorney: One of the first questions is whether to retain independent counsel or to use a mediator. Mediation is intended to help spouses come to agreement without lawyers. A mediator can save considerable attorney fees and reduce both stress and uncertainty. That said, at times it may be preferable to have attorneys actually participate in the mediation process. Key factors to consider include the financial complexity and how amicable the separation. Bottom line, keep in mind that if you use a mediator you can still obtain separate council if you feel you need separate advice. [iii]
Separation of assets: Figuring out the split on separate property assets can pose some daunting challenges. How this is addressed can vary by state depending on whether you are in a community property state or an equitable division state. In some, separate property (gifts, inheritance, property owned before marriage) will not be divided between the spouses; in other states separate property may be comingled. Typically the assets are valued on the date of trial (not at separation) unless it is a personal service business. Certainly the issue can be complicated when one or both spouses continue to work in the family business.
Separation of debt: In general, that which is incurred before separation by either party is presumed community debt and any debt incurred after the separation is the responsibility of the individual who incurs the debt.
Financial assets: This is a complicated area where you will need to work closely with your attorney and financial advisor. Below are some questions you may want to explore during this process.
- Which assets are near and dear to you?
- Do you want to stay in the house?
- Can you support yourself with your current income and assets?
- Do you own a family business? If so, how will the business be valued at separation?
- Also important is to remember that pre-tax accounts (such as 401(k)s and IRAs) are not as valuable as after-tax.
- Finally, an investment’s value may not be strictly limited to its prevailing market value. For example, income generating assets such as real estate may be worth more.
Children: This can be one of the most emotional decisions during the divorce process. Child custody can be awarded to one or both parents. Child support typically has state guidelines for determining the amount of support.
Insurance: Alimony and child support payments are only as secure as a spouse’s ability to pay. If that ability changes either through disability or death, insurance can play a vital role in continuing those payments. A myriad of insurance issues may need to be addressed:
- Disability, Life and Long-Term Care Insurance: It is important to review the adequacy of current coverage’s in light of the changing financial picture and potential increase in living expenses that separate households can impose.
- Beneficiaries: Existing life insurance contracts, both individual as well as employer sponsored plans, may need to be reviewed. Also important is to be aware of health plans that may terminate due to divorce and plan for replacement accordingly.
- Home & Auto: An ownership change to your home will require changes with your insurance. This may be a good time to review any other endorsements you may have included in your policy; a big ticket item may be jewelry.
- Premiums: It is a top priority to continue paying all insurance premiums. Legal counsel can typically advise as to which you can cancel. Especially if all bills are going to one address, it will be important to make certain all are tracked and paid when due.
Living expenses: These can be dramatically affected by divorce as they usually increase yet are often underestimated. Best advice is to start with your current outlays by category and either update with factual information or make educated guesses about how much will change. Also a good idea to review and update living expenses at least quarterly.
Social security: For those who have been married for more than 10 years, you may be able to qualify for social security benefits based on your spouse. You can read more at https://www.ssa.gov/planners/retire/divspouse.html.
Bottom line, even if done amicably, divorce can be disruptive and unpleasant. The best way to manage the stress involved is to be as knowledgeable as possible. This list, while not exhaustive, can help identify key considerations. Be sure to work closely and openly with your legal counsel and financial advisor so that they can guide you through this difficult process.
Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them. Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.
This information is not considered a recommendation to buy or sell any investment or insurance, is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.
Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named the industry’s most qualified Financial Advisor through Research magazine’s Hall of Fame in 2010.
Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.
Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara.
For more information, visit www.kwmwealthadvisory.com or call (866) 467-8981. Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. KWM Wealth Advisory is a separate entity from WFAFN.
1 “ Top 10 Life Stressors” by Tina Ranieri, Atlanta Holistic Health Examiner March 3, 2011
2 “Where Are You on the Divorce Stress Scale? Understanding Your Stress Can Help You Prevent Illness.” Psychology Today reprint of Contemplating Divorce published on July 30, 2012 by Susan Pease Gadoua, L.C.S.W. in Contemplating Divorce
3 Wells Fargo Advisors Financial Network does not offer legal advice.