Divorcing your Finances
By: Wendy Wan Turk
No one enters into a marriage expecting it to fail. Still, more than 22 percent of first marriages end in divorce within five years, and 53 percent of marriages dissolve by the 20-year mark, according to 2011-2015 data from the government's National Survey of Family Growth. Separation and divorce are emotionally difficult events, but it is possible to have a healthy breakup, and especially important to tactfully divorce your finances. Here are six things not to do in the midst of your divorce.
Go For the Jugular
Oftentimes, divorces are emotionally charged, especially given the acrimony that may lead to divorce in the first place. This may not always be the case, and there are many couples I've met where the split is amicable and honestly, a long time coming. When divorces are amicable and the couple has agreed to most provisions of the divorce, aside from making it a legal finality, mediation may be a viable solution.
In California, mediation prices can range from $110-$190/hr., so if using mediation through the entire divorce process, the total may be around $5000-$9000. There is also the option for collaborative divorce, where, with the help of a collaborative lawyer, you and your spouse can negotiate a separation agreement without going to court. On the other hand, the average divorce with no children is $17,500, with $13,800 of that cost in attorney's fees. The average cost for divorce with children is $26,300, with $22,200 in attorney's fees.
Act on emotions
Divorce with children can be incredibly disruptive, so I see parents do what they can to limit the damage a divorce can inflict on their family, but these emotions can lead to stupid financial decisions. Sometimes, these financial decisions include keeping a house that is unaffordable, or "treating" yourself and your children to pricey events, vacations, or other unneeded things.
While the divorce process can be grueling, taking on average 15 months to complete in California, it may seem nice to divert your, and your children's, attention by taking a trip or buying a great new thing, be it a new toy, electronic gadget, clothes, etc. I've also met couples where it seems both parties try to spend as much money as possible during divorce proceedings so the other person won't have anything left. While divorce is an end to a marriage, it isn't a life ending, but rather a beginning of a new chapter in life. When spending becomes so short-sighted, it leaves the newly-divorced person with little foundation to move on with life.
The biggest emotional spending mistake I've seen when couples get divorced is when one of the spouses wants to keep the family house but must buy the other spouse out of their share. To do so, this will often include liquation of all other assets (like retirement accounts, savings), borrowing money from family, refinancing into a huge mortgage, and other financially crippling decisions. While it may be the family home during the marriage, this house may end up becoming a great source of financial stress 5-10 years down the road when there is no extra cash flow because of an expensive mortgage or home fixes, lack of retirement savings, and lack of emergency funds.
Hide the Money
During divorce proceedings, both parties will need to provide asset lists, including all retirement accounts, real property, and pension plans. I've seen spouses try to make money moves before they file for divorce or during the proceedings, all in an effort to keep what they perceive is theirs. This is a quick way to make a divorce contentious; since, California is a community property state, any assets earned during the marriage belong to both parties.
Unfortunately, this is also when all the skeletons start coming out of the closet. Some people may try to hide money and assets from their spouse, but there also may be hidden debts-credit cards taken into both spouses' names, back taxes, family loans. Again, because California is a community property state, these debts will belong to both spouses as well.
If there is reason to suspect "hidden" or manipulated money, I have recommended a forensic accountant whose job is to track where money is coming from, where it is going, and how these anomalies can affect a divorce proceeding. Also, keep in mind that the final year of marriage, you will be taxed as a married couple so what one spouse does will still affect the other.
Assume My Work, My Money
You've worked for years, building up your retirement accounts and you may even be receiving a pension when you retire. All of this, if acquired during the marriage, may be subject to a Qualified Domestic Relations Order (QDRO) where your accounts may be split as part of your divorce proceedings. Typically this means your retirement account may not be wholly yours. A "Qualified Domestic Relation Order" (QDRO) is a court order that creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements. This means that an ex-spouse may have rights to claim part of a retirement account, or pension benefits as decided by court proceedings. The amount will vary based on multiple factors, such as length of marriage, amount of assets for each party, specific details of the marriage, etc.
For Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and other defined contribution accounts, a QDRO as part of a divorce decree will allow the account to move into an IRA without taxes and penalties, but may be subject to both the taxes and penalties if the account is cashed out. For pensions and other Defined Benefit plans, the plan would need to calculate how much each spouse would be allowed, and may offer the option to either roll over the cash in the plan, or receive a pension upon the employee's retirement.
Also, don't forget Social Security benefits. If you are divorced, but your marriage lasted 10 years or longer, you can receive benefits on your ex-spouse's record (even if they have remarried) if you are unmarried, you are age 62 or older, your ex-spouse is entitled to Social Security retirement or disability benefits, and the benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your ex-spouse's work.
Wait to make changes to important accounts and documents
Once a divorce is finalized, it may seem like all the work is done, and you're ready to move on, but there are still some loose ends and important changes to make as soon as possible, but often people forget.
Amend the estate plan-change important documents, such as a Will, a Power of Attorney, and a Health Care Directive. If necessary, create separate Revocable Trusts to receive any assets once they have been divided. Change beneficiaries on retirement accounts and life insurance. In the state of California, it's mandatory to name a spouse as the beneficiary of your retirement accounts, unless the spouse specifically waives their rights. Post-divorce, anyone can be named as beneficiary, so make sure the beneficiary designation is properly documented for your IRAs, 401(k)s, life insurance, and annuities.
Remove any names or close joint accounts. Make sure there are no joint bank accounts, credit cards, mortgages, or any other liability that is no longer yours. And make sure to claim what's yours. If there is a QDRO to split a 401(k), IRA, or a pension benefit, it's easiest to transfer or rollover the money as soon as possible, so the accounts are not forgotten and you have full control of them.
Divorce can be complicated and life-changing, but by keeping in mind that there is a life after divorce, starting a newly-single life on secure financial footing is fundamental. The original life plan and financial plan may have been scrapped, but creating a new roadmap can ease the stress of transition.
Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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