How to get your financial house in order amid and after a divorce.
If divorce isn't stressful enough, many divorcees also must deal with a number of challenging financial matters. These include separating their financial lives from that of their former spouse and making sure they understand how to best manage the assets for which they're now responsible.
"For a spouse who wasn't very financially involved, there can be a real learning curve," says Marilyn Rozier, a Trust Advisor with Regions Private Wealth Management. Many recent divorcees also need to revise their insurance coverage, evaluate how the divorce affects their tax obligations and take steps to protect the financial interests of their children.
Though it may be tempting to hold off addressing financial matters after a divorce, it's generally better to deal with them sooner than later.
Get Accounts in Order
A good place for recent divorcees to start — often even before the divorce is final — is to do some financial housekeeping. They will want to gather account numbers and other details of their financial assets, such as bank, insurance and retirement accounts, for which they may be now solely responsible.
It's important to review the beneficiary designations and titling on all accounts and make sure they reflect the divorcee's current wishes. "One of the biggest things people overlook is changing their beneficiary designations," says Rozier. This is critical: Beneficiary designations generally trump a person's will, meaning a former spouse could inherit an account's proceeds if he or she wasn't removed as the beneficiary. A divorcee will also want to review any joint accounts to ensure they have been retitled to reflect sole ownership.
Build a New Financial Plan
Another key step is gaining a clear understanding of just how the assets and income a divorcee receives will cover the expenses and liabilities for which he or she is now responsible. "What are you left with and at this point, what do you need?" Rozier asks. This typically requires developing a financial plan that considers both ongoing expenses, such as mortgage payments, as well as longer-term financial goals, such as having enough money to retire comfortably.
A critical element of a solid post-divorce financial plan is ensuring that the assets retained in the settlement are invested based on the divorcee's new needs and goals. An individual's optimal asset allocation and risk exposure may change significantly due to a divorce, Rozier points out. For example, if one spouse was a particularly aggressive investor during the marriage, it may be prudent for the other spouse to shift to a more conservative asset mix post-divorce in order to reduce his or her risk exposure.
Protect the Children
Beyond the financial housekeeping and planning, many divorcees want to protect their children. Several strategies can help achieve that goal. For instance, a divorcee who depends on a former spouse for alimony or child support may want to purchase a life insurance policy on the spouse or have existing policies transferred to him- or herself as the new owner. This offers protection in case the former spouse passes away, at which point the support payments would end.
Alternatively, a divorcee can create an Irrevocable Life Insurance Trust (ILIT), which is a trust that holds life insurance policies and can offer several estate-planning benefits. The ILIT becomes the owner of the insurance policy, and a trustee oversees it. This ensures that the funds are there for the children, Rozier says.
Understand the Tax Consequences
Divorce also has tax implications. Alimony payments, for example, generally can be deducted by the spouse paying them, and are included as income by the spouse receiving them. Conversely, child support typically is not deductible by the spouse paying it, nor is it taxable to the spouse receiving it.
In addition, the assets a spouse receives in a divorce settlement may be subject to taxes. That's often the case with retirement plans, as any withdrawals from them may be taxable. A divorcee who begins withdrawing funds before he or she has hit the qualifying age may have to pay penalties. For those who were planning to use withdrawals to cover current expenses, learning that the amount of funds available may be reduced by taxes or penalties "can be a cruel realization," Rozier says.
Review the Estate Plans
When it comes to post-divorce estate planning, a key goal is often ensuring that one's assets will pass to children and grandchildren as intended. Certain types of trusts, such as living trusts or Qualified Terminal Interest Property Trusts ("QTIPs"), can help ensure that a divorcee's assets go to the intended individuals.
A trust can be particularly valuable in preserving assets for a divorcee's children if he or she remarries. In many states, if a divorcee passes away and hasn't established a trust or some other way of safeguarding the assets brought into a subsequent marriage, the new spouse will be entitled to half the estate.
Having a prenuptial agreement in any subsequent marriages after a divorce is "also a must," Rozier adds. It's not necessarily a matter of whether the new marriage lasts; rather, it is another way of ensuring that the children from the first marriage or other heirs will inherit the personal items or financial assets intended for them.
Getting divorced often involves making a number of important financial decisions. Your Regions Wealth Advisor can help craft financial and estate plans to protect the interests of those involved.
