For better or worse, divorce forces you to make a fresh start. Getting divorced requires you to revisit plans that you might have thought were set for life. Sometimes divorce requires you to make relatively minor adjustments to your budget, estate plans and insurance plans. In other cases, divorce creates such a radical shift that you need to start from scratch and build new plans that reflect your new life. Like the legal divorce process itself, the process of adjusting your plans for the future is highly personal and can be emotionally difficult. Working with advisors who are sensitive to the challenges of divorce is key.
DIVORCE AND YOUR FINANCIAL PLANS
We don’t have to tell you that divorce can affect your financial plans in many ways. Even couples who maintained separate finances may take a financial hit in divorce. Anticipating some of the real costs and effects of the divorce can help you and your advisors strategize to help you hold onto as much wealth as possible.
Some of the factors that will be part of post-divorce financial planning include:
- The cost of the divorce itself. A straightforward and amicable divorce involving no minor children may cost you less than $10,000, but more complex cases involving custody or other disputes can rack up much higher costs as things drag on. Have a plan for where you’re going to pull the money from to pay those fees.
- Alimony and/or child support. Will you be paying support? Or receiving support from your ex? Either way, that’s a big conversation to have with your financial advisors. You’ll want to talk about things like how the support affects your monthly budget, what the tax implications might be, how things will change in the future when support ends, and so on.
- Financial assets you take from the marriage. Any real property or other assets that you will own solely post-divorce needs to be considered in your financial planning process. The same goes for any money you receive from the sale of shared assets.
- Tax implications. Your filing status might change after divorce, and you’ll want to speak to tax advisors about how your eligibility for certain tax benefits will change as well. In some cases, getting divorced can move a taxpayer into a different tax bracket and affect their tax rate.
- Investments and retirement accounts. Untangling shared investments and shared retirement assets can be one of the most complicated and potentially contentious financial tasks in a divorce. Once you and your attorneys finalize plans for who gets what, your financial advisors can help you identify next steps to get your individual investments and retirement savings plans on track. You may also want to choose new beneficiaries for investment and retirement accounts.
- Estate planning. Typically, in most jurisdictions, your will becomes null and void upon the divorce settlement. Trusts, however may not be canceled. Assuming you no longer wish for your ex-spouse to be your beneficiary, trustee, health care proxy, or the executor of your estate, your estate plans will must be reviewed and updated after divorce. If you maintain a good relationship with your now former spouse, you might wish to keep them named in certain estate planning documents but be removed from others. In any case, go over everything in your estate plans is an imperative. From a financial planning perspective, one important consideration is the question of estate taxes. If you died while married, your spouse could inherit your assets without paying estate taxes thanks to the unlimited marital deduction. Whoever inherited their estate would ultimately be responsible for taxes on your shared estate. Once you’re divorced, all assets bequeathed through your will count toward the value of your estate and may incur Federal or State estate or inheritance taxes. If you and your spouse had done any strategic estate planning around using the unlimited marital deduction, it’s a good time to revisit those plans and make sure your new estate executor is prepared for any estate taxes.
DIVORCE AND YOUR INSURANCE PLANS
Getting divorced could mean making changes to every single insurance policy you currently have, and potentially even exploring new types of insurance or new policies. Now’s an opportunity to make sure you’re well protected in the next phase of your life.
Insurance policies that may need consideration include:
- Health insurance. Things can get a little tricky if both spouses have been receiving health care through one person’s employer. The non-employee spouse may elect to use COBRA to extend their coverage for up to three years. (The downside is that COBRA is expensive. Who has to pay the premium may be something that’s decided during divorce proceedings.) Eventually, the spouse whose coverage ends will need to enroll in their own health insurance plan through a job or through the Marketplace. Getting your own health insurance coverage can be a lot to navigate, especially if that was something your spouse always took care of and you’re not sure where to start.
- Car and home insurance. If you’re both covered by the same car insurance policy and plan to move to separate residences after divorce, you’ll each need to get separate policies. Homeowners insurance should reflect the ownership of the home. As long as you both own the house, both your names should be on the insurance policy. Update the policy once the house sells or a new deed is created to take one spouse off the title.
- Long-term care insurance. If you haven’t considered long-term care insurance before, you may want to now. Maybe you’ll remarry someday and your next spouse will take care of you at home if you have health problems. Or, maybe you’ll live alone and staying in your home will require you to pay for some help from nurses and aides. Having long-term care insurance can cover some of those costs.
- Life insurance. Dividing up the value of a joint life insurance policy is something you’ll have to figure out with your attorneys, but you may also need to make new life insurance arrangements. There’s a lot to consider, especially if you have minor children. In some cases, it even makes sense for one person to keep paying their ex’s life insurance policy, especially if they rely on their ex’s financial support and would need replacement income if the ex died. Your financial advisors can help guide you and identify issues and solutions.
GOING THROUGH A DIVORCE? CONTACT SACHETTA FOR HELP WITH FINANCIAL PLANNING
Sachetta’s wealth management advisors understand the upheaval that divorce can create, not only emotionally but financially and logistically too. We’ve walked many divorcing clients through the process of rebuilding their financial, estate and insurance plans for their new reality. Let’s tackle that planning now so you can focus on enjoying the next phase of your life, instead of being stressed about myriad of changes. We’re happy to answer any questions you may have—Contact us today!
Before joining Sachetta, Stephen Ahern co-founded and served as President of Wealth Management Advisors, LLC. For over thirty-five years, Stephen has provided individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients. His clients have included key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. As an established personal financial planner, Stephen has delivered numerous presentations on financial, investment, retirement and tax planning to corporations and professional groups. He has also written articles on investment, education and estate planning.