Fall is a busy time for weddings, especially here on Cape Cod. I remember some years when it seemed that every weekend my husband, Seth, and I were attending a wedding. It was always exciting, filling out the card with best wishes for the couple and their happy future ahead of them, seeing them smile at each other across a soon-to-be cut cake, and watching people of all generations lose their inhibitions on the dance floor.
We do not go to many weddings these days. Most of our friends are already married and our friends’ kids have yet to hit marriage age. Once in a blue moon, we will hear the good news that someone we know is getting married, but sadly, more often we hear about people getting divorced.
Believe it or not, the divorce rate has been steadily declining over recent decades. Scholars put the rate between 30 percent and 42 percent, significantly lower than the old adage that “half of all marriages end in divorce.” But, that is still a very high number of people who find themselves in a position they never dreamed possible on their wedding day.
Seth and I just celebrated our 17th wedding anniversary and so I have no first-hand knowledge of the difficulties associated with getting divorced, but I do not think anyone would argue with me that going through a divorce can be one of the most stressful, frightening periods of a person’s life. And because of my profession, I can tell you that a major source of that stress is due to finances.
Many people are so desperate to get out of a bad marriage that they do not consider the toll it will take on their current financial situation and their financial future. In fact, I was recently talking to a friend whose sister just got divorced. He was telling me that his sister, who has two kids, is in a tough position. She is trying to find a decent apartment to rent, now that she cannot afford to stay in the house where they have raised their kids for the last 15 years. The worst part is that she is surprised by the situation she finds herself in. She assumed that she would be able to stay in the house. Unfortunately, this is a reality that many people face when they get divorced. That is why it is so important to understand the financial repercussions of getting a divorce in order to have a plan for financial health moving forward.
Often times, with married couples, only one spouse handles the finances. And although there is nothing wrong with dividing responsibilities, we strongly encourage our married clients to both understand what their assets are, what their sources of income are and what their plan is to build and preserve their financial future. Unfortunately, Jeff and I have a number of new, recently divorced clients and we have found that because many of them let their former spouse “handle the finances” they do not have any idea of what they have or what they need to live independently. Many times, a new client will set up an appointment to meet with us for the first time just after he or she gets divorced and realizes that he or she needs help. In our opinion, it would be extremely helpful to ask for financial guidance before the divorce is final. So, this week, I am going to outline a few things to think about if you find yourself contemplating divorce.
First, take inventory of your assets (which you will be required to do anyway if you do decide to divorce). How much do you have? How much of your assets are in qualified (retirement) accounts? Each qualified account can only have one owner, either you or your spouse. How much is in your name and how much is in your spouse’s name? How much do you have in joint accounts?
If and when you divorce and your assets are divided, they should not be valued at their current dollar value only. It is important to determine which assets provide short term security, and which provide long term security, so that your immediate financial needs are met, as well as your long-term financial needs. This can be very difficult, and can require a much deeper understanding of an asset’s tax implications, its liquidity and more. Having a financial advisor to help you navigate this can be extremely valuable.
Another thing to understand is the importance of something called a Qualified Domestic Relations Order (QDRO). Assets are either qualified or nonqualified. And often times, one spouse, typically the main bread-winner, has more significant qualified accounts that have accumulated through employer-sponsored retirement plans. Generally, a QDRO is a court issued order submitted to a custodian to divide a qualified account pursuant to a divorce agreement. Without such an order, the division of a qualified account would be a taxable event and could subject the owner to additional penalties, if the owner is under 59 ½ years old. When an account is divided pursuant to a QDRO, it maintains its tax classification. The spouse that receives the account (either partially or in full) becomes the new owner and is responsible for paying income taxes when he or she takes distributions (unless it is a Roth).
Next, after understanding what assets you have, take a look at your sources of income, both current and future. Are you both employed? If one of you is not currently employed, are you employable? Will you be receiving child support? Will you be receiving alimony (which, by the way is taxable income)? Do either of you have a pension? Are you or will you both be eligible for Social Security?
The Social Security Administration explains that if you are divorced, but your marriage lasted 10 years or longer, you can receive benefits on your ex-spouse’s record (even if he or she has remarried). In order to receive those benefits, you must remain unmarried (if you remarry, you lose rights to your previous spouse’s benefits), you must have met the minimum retirement age of 62, your ex-spouse must be entitled to Social Security benefits, and the amount you would receive from your own Social Security benefits must be less than what you can receive from your ex-spouse.
Finally, think about your current expenses and how they will change if and when you divorce. For example, if a woman is divorcing her husband who is an avid golfer, she can probably scratch the country club membership from her expense budget going forward. But, more importantly, think about what it will potentially cost to run two households with the same amount of combined income. (This question is even more crucial for those who have children living at home and who may be spending time with both parents.) Calculate what you need for income in order to maintain your current lifestyle and consider what changes you can make to be sure you have what you need. Understanding your current financial situation and your future financial needs is essential when preparing for any potential divorce negotiations.
Divorce is often a messy process, but with planning, the stress related to any potential financial consequences can be alleviated.
As Jeff always says, be vigilant and stay alert, because you deserve more.