Divorcing? Protect Your Finances

When a marriage ends in divorce, it’s common for both parties to experience a financial setback. Making mistakes during the breakup can worsen the financial penalty for divorcing. Here are our views on eight common mistakes to avoid if you decide to part ways:

1. Waging war

Emotions can be raw when couples split up, and that may lead to the temptation of seeking revenge. Having lawyers spend an inordinate amount of time trying to resolve a bitter marital battle, however, is costly and will cut into the eventual financial settlement. For both emotional and financial reasons, we believe it’s best to put the battles aside and work toward an amicable divorce.

2. Failing to track the money

Mistrust can be common during divorce proceedings. One area of deep mistrust revolves around money. It can be natural to wonder if a spouse has hidden assets and/or income.

Make copies of all your investment and bank account statements and review them carefully. If you have a home equity line of credit, look for any unexplained withdrawals. You’ll also want to make sure that there have been no unexplained withdrawals from any custodial accounts for your children.

When the couple owns a small business or a spouse is self-employed, the need to be diligent about assets and income may be even more important. A spouse can hire a forensic accountant to explore whether assets and income are being hidden.

3. Overlooking a settlement’s tax implications

When dividing assets, make sure you understand the potential tax consequences. For instance, let’s assume that one spouse wants to take the taxable investment accounts and the other spouse plans to take retirement accounts that represent the same nominal amount. The transfer of retirement assets to the soon-to-be ex-spouse could trigger taxes if they are not rolled into an IRA,¹ which would need to be compensated for in the settlement to help ensure an equitable division of assets.

4. Failing to update estate plans

Sometimes, couples can focus so much on splitting up assets that they don’t think about what could happen to the money in the future. When a marriage ends, make sure to review the beneficiaries on your retirement accounts and also update your will accordingly.

5. Not getting titles transferred and passwords changed

Beyond estate documents, be sure that titles are transferred for any assets previously held in both names, such as vehicles and investment accounts. For the sake of security, the former partners should also change passwords for their investment accounts, social media and email.

6. Not requiring insurance verification

Divorce settlements sometimes include a requirement that a former spouse purchase a life insurance policy that names the ex-husband or ex-wife as the beneficiary. If that’s the case, the beneficiary should ask for regular confirmation from the insurance company that the premiums are being paid and that the beneficiary hasn’t been changed.

7. Behaving badly

It's generally best not to say things in the heat of the moment that you will regret later. Don’t badmouth your former partner in front of your children. This will potentially make the acrimony worse and hurt your kids as well. We also suggest being circumspect with your actions and conversations to avoid negatively impacting your prospects during the divorce proceedings.

8. Failing to seek financial help

A person’s financial health can take a hit after a divorce. Well-meaning friends and family may want to give you advice about your financial life, but in most cases, resist the temptation to follow their lead. Instead, it may be beneficial to seek out a qualified financial advisor who can help you create a plan for your new life that aims to keep you on the right path to financial security.

¹ https://www.cnbc.com/select/how-401k-ira-retirement-accounts-are-divided-in-divorce/