Financial Transformation Thru Divorce
About half of all marriages end in divorce.
This is a period of high emotions. Both spouses will grieve, and they will move through the grief process at different paces. Financial professionals advising one or both parties must be attentive to these emotions and understand which stage each of the parties may be dealing with at any point.
Fear is another emotion the entire family must address in the divorce process. There are many fears associated with divorce, but fear of financial insecurity and funding life-style changes are among the greatest. These fears are particularly acute when there is an imbalance of financial power between the spouses. Experienced and compassionate counseling about financial issues for the less-empowered spouse can minimize this stress, promote financial healing, reduce the concern of children and other family members, and facilitate the divorce process.
Divorcing spouses typically have mutual interests in many areas, and the family’s financial counsel must understand each member’s short- and long-term needs and interests. Documenting and frequently reviewing these mutual interests is an important tool in negotiating a financial settlement. Shared interests frequently mandate a particular outcome in certain areas.
A family must understand its financial position at the beginning of the divorce process. This involves having a comprehensive and accurate financial snapshot of assets, liabilities, cash flow and credit-worthiness. Since these elements will change with the divorce, the family must have reasonable budgets for the pre-divorce, during-divorce, and post-divorce periods. Families typically require assistance in assembling this information while they experience the emotional strain of divorce.
Equitable division of a couple’s assets and liabilities is a fundamental aspect of financial settlement in divorce. Disposition of their home is fraught with emotional, physiological, financial, and tax implications. While state law establishes guidelines for settlement, a mediated or collaborative process may produce outcomes that meet the family’s needs and objectives far better than a court may dictate.
Attorneys frequently overlook important tax considerations in divorce, merely advising their clients to seek separate advice from accountants or financial planners. Tax planning opportunities abound in the context of a divorce and should be incorporated into the financial divorce decree. Examples include:
- Apportionment of the couple’s taxable income in the year of divorce.
- Determining the custodial parent of minor children to maximize filing status opportunities, tax deductions and credits.
- Allocating tax attribute carry-overs from prior years.
- Tax aspects of the division of family businesses.
- Future income tax consequences resulting from the separation of family assets and liabilities.
The list of financial and tax considerations goes on. Wills and trusts must be written or amended. Beneficiary designations on retirement plans and insurance policies must be changed. Creative uses of life insurance should be considered to help secure the financial security of one or more members of the family.
The spring of remarriage often follows the winter divorce. As blissful and healing as that might be, it can bring with it financial and tax considerations. Planning requires special considerations . New spouses may have ongoing financial responsibilities to earlier families. Estate planning issues become more complex.
Prenuptial and post-nuptial agreements are advisable, particularly where there is a disparity in wealth, potential future wealth through inheritance, or power between the parties. These decisions should be made before or soon after the remarriage. Once financial conflict arises, it may be too late to amicably negotiate a solution.
The couple will survive the legal process of divorce, but they will live with the financial reality for the rest of their lives. At SeekingNorth, we are sensitive to the important issues facing a couple in the process of divorce or planning new families.