Tips for Navigating Divorce from a Financial Advisor

Divorce can feel confusing, emotionally intense, and downright overwhelming. Knowing where to begin and how to navigate each step can be challenging, especially at the start. To help you get through this, here are some essential tips on what to do—and what to avoid—when beginning your divorce journey.

Tips for Navigating Divorce

Starting and managing a divorce can feel overwhelming. Here are some crucial steps to take as you begin and progress through the process.

Get Specific About Your Future

Familiarize yourself with your state’s laws on asset division and spousal or child support. Envision how you’ll manage during the divorce and what you want your future life to look like. A financial advisor or accountant working alongside your divorce attorney can help guide you on settlement decisions that align with your goals, including a plan for retirement. They can also assist with setting a realistic post-divorce budget and investment approach.

Organize Financial Records

Collect important financial documents. These include tax returns, loan applications, wills, trusts, bank statements, brokerage statements, and credit card records. Don’t forget deeds to property, car titles, and recent pay stubs.

If you own a business, assemble recent financial statements and year-end records. Aim to gather at least three years of records to meet financial disclosure requirements.

Understand Your Debts

Debt can be a hidden pitfall in divorce. Discuss with your attorney the debts that may be your responsibility, especially on joint accounts.

Obtain a complete credit report to find any unknown debts.   Consider closing joint credit accounts to protect your financial future. Free credit reports are available annually at AnnualCreditReport.com.

Document Household Valuables

Photograph valuables like jewelry, art, antiques, and sentimental items. Divorce can sometimes lead to asset concealment, so maintaining documentation of these items can protect your interests.

Aim for an Equitable Share

Research your state’s property division laws, as you may be entitled to a portion of assets acquired during the marriage. Even if certain assets don’t interest you, they may be used for negotiation. If you supported your spouse’s education or career advancement, you might also be entitled to compensation.

Monitor Legal Costs

Track the hours and tasks your attorney performs, as they bill hourly. Preparing documents and organizing information in advance can help reduce legal costs and streamline the process.

Review Social Security Benefits

If you’re eligible for Social Security, check if claiming benefits based on your ex-spouse’s earnings history offers a higher benefit than your own. This could impact your financial stability later in life.

Change Account Registrations

As you move forward, you’ll need to adjust registrations on joint financial accounts. Consult with a financial or tax advisor to ensure all changes comply with legal requirements and in your best interest.

Update Estate Documents

Review your will, estate plan, beneficiary designations on insurance policies and retirement accounts to verify they align with your new situation.

6 Key Divorce Don’ts

As you navigate divorce, here are some important pitfalls to avoid.

Don’t Automatically Hold Onto the House

While a home may carry sentimental value, keeping it isn’t always financially wise. Managing mortgage payments, property taxes, and ongoing maintenance can strain your budget. Plus, home values aren’t guaranteed to increase. If you decide to keep the house, factor in all potential expenses to ensure it fits within your post-divorce financial plan and budget.

Don’t Overlook Tax Implications

Divorce-related decisions can trigger unexpected tax consequences. Consulting with a tax professional can help you understand the tax impact of asset divisions, spousal support, and recent changes in tax law, like the Tax Cuts and Jobs Act of 2017. Making informed choices can prevent costly surprises later.

Don’t Neglect Health Insurance

If you and your children are covered under your spouse’s health insurance, you’ll need to find alternative coverage. Explore options like COBRA to extend your current policy temporarily, or   research new health insurance through your state’s exchange under the Affordable Care Act to maintain continuous coverage.

Don’t Split Retirement Accounts Without Proper Documentation

Attempting to divide retirement accounts such as 401(k)s or IRAs without a court-approved Qualified Domestic Relations Order (QDRO) can result in taxes and penalties. Ensure all legal documentation is in place to avoid unnecessary expenses.

Don’t Roll Over All Retirement Funds if You Need Immediate Cash

If your settlement includes retirement funds and you anticipate an immediate need for expenses, consider accessing funds before rolling them over. Under a QDRO, withdrawals from a 401(k) or 403(b) may be exempt from the 10% early withdrawal penalty, even if you’re under 59½. Be prepared to pay income taxes on withdrawals, and consult with a tax advisor to understand the implications.

Don’t Overspend Out of Emotion

Spending excessively out of anger or spite can disrupt the divorce process and may even reduce your share of assets. Courts may view such spending as an advance on your marital assets, so keep expenses in check for a smoother financial transition

Bottom Line

Divorce can be a complex and emotional journey but taking thoughtful steps can help ease the process and protect your future. By following practical dos and don’ts, you can better navigate the legal, financial, and personal challenges of divorce. Remember, getting help from financial advisors, tax professionals, and lawyers can greatly improve your chances for a stable future. While it may feel overwhelming, with the right resources and guidance, you can emerge from this transition stronger and more prepared for the next chapter.

Sources:

https://www.fidelity.com/learning-center/life-events/divorce-tips

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.