Divorce can be a long, complicated process and it requires careful preparation. If you are facing a divorce, we encourage you to consult with an attorney, or a financial professional and do as much research as possible as it relates to your personal situation. Equipping yourself with knowledge, tools, and preparation can help to ensure that the outcome will preserve your financial future.
As you enter into this uncertain season of your life, resist the temptation to simply rely on the advice of family and friends--even if they mean well. Their advice will likely be misguided and tinged with emotion. Do they know the totality of your financial situation? The divorce laws in your state? If not, then they are not in a position to give you sound financial advice.
Let's talk about some areas that we feel are most ignored during a divorce, and ways to plan for these issues.
1. Take Inventory of the Assets you Share
A common mistake made during the divorce process is not having a complete picture of your financial situation.
The most important document you will file in a divorce proceeding is the financial disclosure statement. It lists the income, assets, expenses, and debts of each person involved in the divorce and is submitted to the court. As soon as divorce becomes undeniable, begin taking inventory and getting organized. Being unprepared can lead to unfortunate consequences.
Begin tracking your income and spending for a couple of months in order to see what you have coming in and going out on a regular basis. Collect documents going back 3 to 5 years (check to see what your state requires).
Here is a checklist to help guide you:
- Birth certificates (yours and your children's)
- Social Security Card (yours and children)
- Marriage Certificate
- Pre- or post-nuptial agreements
- Prior Divorce Judgments
- Tax Returns
- Financial Statements
- Brokerage Statements
- Retirement Account Statements
- Bank Statements
- Credit Card statements
- Real Estate Deeds
- Mortgage Statements
- Car Registrations
- Loans (Auto, Home, Personal)
- Insurance Policies (Home, Auto, Life, Health)
- List of personal property (marital and non-marital)
- Supporting documentation to prove separate ownership of personal property (i.e, inheritance or family gifts)
- List of assets and debts that were brought into the marriage
- Monthly estimated expenses (used for possible alimony or child support amounts)
- Child or Spousal Support Payments (you are either paying or receiving)
- Other related asset information that can be used to help divide assets at a later date
2. Run a Credit Report to See all Accounts that are Held Jointly
Each party on a joint account is equally held responsible for the debt. If you have a joint credit card and your ex runs up the balance but didn't pay it off - this affects your credit just the same.
Be sure to update deeds to your home and automobiles after your divorce is final.
3. Update your Beneficiaries and Legal Documents
This is one of the most important things that you can do after a divorce.
You will need to make sure that any 401(k), IRA, Roth, Annuities, Life Insurance, Long Term Care Insurance, Pensions, or other beneficiary-driven accounts have the beneficiaries updated.
Legal documents are also crucial. There are 4 documents that will need to be updated: Last Will and Testament, Living Will, Durable Financial Power of Attorney, and Durable Medical Power of Attorney.
- Through your Last Will and Testament, you declare what should happen to your estate after your death. Your executor first pays probate, funeral, and burial costs and seeks out creditors to pay from your estate. After creditors receive their payments, your remaining assets go to the people or organizations you have named in the will. Be sure to leave your assets to people who can afford the associated payments and upkeep.
- Do you have children together? Do you have children from previous marriages? If there is no will in place, you are leaving yourself open to the courts determining how your estate is handled. Updating your legal documents will be crucial in spelling out how you would like your assets to be distributed upon death.
- A Living Will should clearly communicate wishes regarding end-of-life care. Do you want pain medication, even if it might hasten death? Would you want a serious operation or medical procedure when there is only a small chance of recovery? Would you want to be kept alive after brain activity ceases? Would you want a feeding tube/ventilator? Do you consent to organ donation?
- A Financial Power of Attorney is someone who will make financial decisions on your behalf if you become incapacitated.
- In general, a Financial POA can: manage Real Estate, manage your household (pay bills, hire help, etc.), and manage your bank accounts, brokerage accounts, life insurance/annuities (but not change beneficiaries), and retirement accounts.
- In general, a Financial POA can: manage Real Estate, manage your household (pay bills, hire help, etc.), and manage your bank accounts, brokerage accounts, life insurance/annuities (but not change beneficiaries), and retirement accounts.
- A Medical Power of Attorney will make medical decisions based on your Living Will instructions.
- A Medical POA would be able to: accept or refuse treatment, access medical records, apply for benefits, hire/fire health care providers, agree to or refuse pain medications, and take legal action in the principal’s name.
- A Medical POA would be able to: accept or refuse treatment, access medical records, apply for benefits, hire/fire health care providers, agree to or refuse pain medications, and take legal action in the principal’s name.
- If your former spouse was previously listed as Power of Attorney, it might be a good idea to update those as soon as possible.
4. Calculate the Cost of your Health Insurance
One of the biggest expenses we see in divorce is health insurance.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances. These circumstances include voluntary or involuntary job loss, reduction in the hours worked, a transition between jobs, death, divorce, and other life events.
While COBRA will provide for a certain period of time if you are covered on your spouse's health insurance through work, eventually you will be responsible for this expense.
COBRA continuation coverage is often more expensive than the amount that active employees are required to pay for group health coverage since the employer usually pays part of the cost of employees' coverage and all of that cost can be charged to individuals receiving continuation coverage.
Another option is using the Marketplace or ACA plans. You have 60 days following your divorce to get coverage during what is known as a Special Enrollment Period. After the 60 days pass, you will have to wait until the regular open enrollment period to sign up for a health insurance plan. The regular enrollment period typically runs at the end of the year.
5. Overlooking the Cost of Divorce
Divorce can get expensive. I'm talking thousands of dollars expensive! Think about legal fees, filing fees, mediation, child custody, increased tax brackets when filing single, therapist bills, etc. Create a plan for how you will pay for these expenses.
- Analyze your income and monthly expenses.
- Determine how you will support yourself during and after divorce. Are you working or able to work?
- Will you receive alimony and child support?
Don't forget to envision what you want your new season of life to look like and create a new budget. For example, continued education or other means of creating an income.
6. Dream Again
Divorce is the end of one chapter and the beginning of another. Your life is not over. Take time to dive deep within yourself and determine what you desire for yourself and your children. Take good notes. Allow yourself to dream again!
If you are facing a divorce and would like to speak with me about your financial situation, please schedule a call.
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