When you’re swept away by love and filled with the promise of a life partner, the mere thought of a break up or divorce feels silly. After all, it’s forever and ever, amen, right?
Unfortunately, not always. It’s not a rosy statistic — but more than 40% of marriages in the United States end in divorce. When faced with healing a broken heart and determining the next chapter of life, thinking about how to financially protect yourself in a divorce (other money matters) can make the whole process that much more stressful.
MONEY TIPS FOR COUPLES: Avoid adding your own relationship into the statistic above by checking out money tips for couples here, here and here.
In addition to finding your footing as a newly single person, you’ll have to consider how bills will be paid moving forward, says Erin Wood, the vice president of wealth planning at Carson Group. To add to the financial stress of divorce, some vengeful ex-spouses can wreak havoc in the courtroom, costing you even more.
Here are eight ways to protect your assets during the difficult experience of going through a divorce:
Legally establish the separation/divorce
Once the decision to divorce is made, it’s time to put the separation in writing and in motion, ASAP. This signals the start of your new life on your own, but it serves a purpose financially, says Jeremy Straub, the CEO of Coastal Wealth. Having this note on your financial files helps protect any money you make after that date. So, if you’re separated from your partner for six months before divorce proceedings begin, all of that income is solely yours. If you don’t make the separation legally binding, then that cash could be subject to being split down the middle. This date also applies to decisions involving child support and alimony, he adds. (More: Should you file for divorce first?)
Get a copy of your credit report and monitor activity
Regardless of whether you commingled your incomes and shared accounts during the marriage, by being legally bound you were exposed you to your partner’s actions. Even if your spouse was (and is) a trustworthy person, it doesn’t mean mistakes weren’t made. “Anything that they did to hurt their credit score could have damaged yours as well,” Straub says. This makes it essential to request a copy of your credit reports ASAP, and go through them with a fine-toothed comb. “Check your report for errors and continuously monitor to make sure the other person’s actions don’t affect your future,” he recommends.
Separate debt to financially protect your assets
Credit card companies do not care about divorce. You’re still liable for any debt your spouse racks up on jointly held accounts. It’s best to leave marriages with no debt, or only the debt that’s yours. Straub recommends that if you have the money to pay off your joint credit cards, do so and then close the accounts. “If you don’t have the funds, you can always divide the debt in half and transfer to individually held cards and then cancel the joint ones,” he says. You want to avoid keeping joint cards, even with a verbal agreement to pay, because if your partner ghosts you, you’ll be left to pay the balance.
Move half of joint bank balances to a separate account
“As soon as possible, to open up a new bank account, and transfer 50 percent of the available funds to your new account,” says Robert Gauvreau, a CPA and founder of Gauvreau & Associates. “You should also ensure that any income from employment or other applicable direct deposits are amended to be deposited into your new account.” Revoking privileges or removing all of your own cash may feel dramatic as an initial step, but in his more than 15 years in business Gauvreau has witnessed many divorcees having to pick up the pieces after their former partner drained the bank of everything. He says the leading cause of financial chaos during a divorce is when the former spouses continue to have access to a joint bank account. When you’re on the way to being unmarried, it’s best to untie all accounts ASAP.
Comb through your assets
When separating assets, some couples become overly nit-picky about who is owed what. Emotions can be heightened even more in situations where a marriage ended due to infidelity or some sort of grave disruption of trust. Though it’s not always the case, Carson Group’s Wood says that men tend to believe they’re going to get all of the assets, whereas women are often scared they won’t receive any.
As much as possible, try to set aside any feelings of guilt or retribution. Doing so will help you keep a clear, logical head and allow you to speak up for and defend what is yours. Getting a thorough and accurate understanding of what you’re entitled to requires going through all of your assets — line by line. “Usually the assets are split down the middle, but there may be assets excluded, such as inheritances or premarital assets,” Wood says.
Conduct a cash flow analysis
The day-to-day divorce details can be all consuming. But as you’re negotiating who gets what, also look ahead and do some prep work for the solo life. Doing some hands-on budget cash flow analysis will give you a sense of control over your finances. Laura Medigovich, a senior financial planner at Janney Montgomery Scott recommends adding the income streams you’ll have after your divorce and subtracting your expenses (broken down into “necessary” vs. “discretionary.”). “If there is a shortfall, you can start whittling away at the discretionary items. If there is a surplus, then breathe a big sigh of relief,” she says.
Don’t forget to account for recurring expenses that you once split with your partner. The last thing you want are any major financial shocks once you’re out on your own. Leslie Thompson, CFA, a certified divorce financial analysts, and the managing director and wealth advisor for Carson Wealth and Spectrum Management Group suggests reviewing credit card and bank statements for the past 12 months. Pay attention to big-ticket expenses like health insurance, car leases, digital media subscriptions and others. Expenses can add up quickly when you’re suddenly responsible for footing the entire bill.
Don’t relinquish control of assets or investments
Divorces never take place overnight. And if our ex-other-half decides to drag his or her feet, it can be delayed by months or even years. That’s why protecting your investments and assets (including real estate, investments, or any other assets) you are entitled to — should start as soon as the separation is in motion, says Gauvreau.
Here, again, you want to separate assets so you can keep your eye on your money. “If you relinquish control in favour of your former spouse, they could drain these resources and you could be left with nothing,” Gauvreau says. “The more you retain, the greater control you have over the process, and the greater financial certainty you will retain throughout the process.”
Create a game plan for taxes
Uncle Sam wants his invoice paid, no matter what your relationship status. Yet often couples forget to consider the tax implications of splitting up, Gauvreau says. It’s important to understand what you’re agreeing to before signing on the dotted line, otherwise, the split of assets could be less equitable than it first appears. “If one spouse were to take the principal residence, and another spouse were to take control over the retirement assets, there will be different tax implications towards the receipt of each asset, and the tax implications could be substantially different… resulting in one spouse losing much of that value to a future tax burden,” he explains.
Another tax issue to consider: Alimony. Starting in 2019, alimony is no longer tax-deductible for the person paying it, and the payments are not considered taxable income to the recipient, as long as your divorce occurred after Dec. 31, 2018. “This may seem like a good deal to the person receiving alimony because the alimony they receive is no longer taxable, but it’s very likely that they will receive less money because it’s now being taxed from the payer,” says Cathy DeWitt Dunn, a certified divorce financial analyst. She also recommends reviewing your filing status now that you’re a single person. For example, it could be beneficial to file as the “head of household.”
Bottom line: Go after what is most important to you
Medigovich encourages divorcees to do some soul searching to identify two or three key financial matters to help focus negotiations. For example, do you want the children’s college paid for by your spouse? Do you want spousal support for a certain number of years so you can go back to school and change careers or sharpen your skills? Do you want the family home? To make the best of a bad situation, come to the table with a clear idea of the things that are most valuable to you.
Breaking up is hard to do. We’re here for you:
- HerMoney Podcast: Our Girlfriend’s Financial Guide to Divorce
- How Not to Get Screwed in a Divorce
- Five Rules for Getting Divorced and Staying Financially Stable
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