Anyone who’s been through one knows that there is nothing simple or dispassionate about divorce, even in the most amicable of splits.
The process is pricey, and the longer the marriage, the deeper the divide of assets. The complexities of divorce late in life have historically left one spouse in a financial situation that is either too complex to manage alone or borders on poverty.
Besides the cars, TVs, and furniture, there are the financial assets and debt, health care and insurance, and whatever cash might be left over. Then there are the tax implications of early withdrawals and divisions, the after-divorce maintenance issues—homes are money pits—and the life-as-one conundrum.
“Divorce wreaks havoc on everybody,” says Pat Mullaly, an Investools® Coach. “It’s amazing what people do to each other during divorce.”
That’s the high cost of emotions. Like drinking and driving, no one makes good decisions when they’re under the influence—and in this case, you might be so desperate or angry that you will do anything to either get out of the marriage or ruin the individual on the other side. But that’s no way to break up a decades-long chunk of your life.
“Outside of the emotions and the falling out of love, divorce is mostly financial decisions,” Mullaly says. “And once that’s all said and done, next are the decisions of how to maintain what is left and what financial choices to make going forward.”
The ground rules are simple enough:
- Be organized.
- Know and copy statements of all assets, including car registrations, property deeds, brokerage accounts, insurance policies, wills, trusts, tax returns, and year-end statements.
- Copy records of separate assets, inheritance or family gifts, as well as hobby or side businesses that have value or generate income.
- Get a credit report.
- Create a day-to-day lifestyle budget.
Not All 50-50 Splits are Equal
Dividing net-worth possessions—where one spouse gets the house, and the other gets the monetary equivalent of assets between savings accounts, brokerage accounts, retirement accounts, and the like—is not always what it appears.
The overall raw numbers may work out on paper, but the real costs of liquid vs. illiquid assets are what matters. The expenses of owning a home—including the mortgage, insurance and property taxes, utility bills, and maintenance—could leave homeowners in far worse financial positions. A home is a paper asset with slow-growing appreciation that could be considerably tougher than stocks to liquidate should cash flow become an issue, particularly after child support and alimony run out.
Family portfolios that include alternate assets such as hedge funds and private equity could look liquid but may actually be contractually tied up.
The Tax Man Cometh
When all the messy dividing is done, the IRS is waiting for its take. The culprit is appreciation—and the capital gains—in any assets such as stocks, real estate, and mutual fund accounts.
Prepare for the After Life
Budget, budget, budget. Subtracting an income from the financial mix is a prescription for disaster if you haven’t painstakingly considered expenses versus income and liquid assets.
That includes the here and after, meaning what lifestyle costs will run immediately and into the future as well as retirement. Retirement accounts are tricky and raise any number of tax-related issues when it comes to early distributions. Depending on the type of account, you can transfer funds through a Qualified Domestic Relations Order, but you’ll still face income taxes.
If you’ve been married nine years and 11 months, you’ll want to stick it out that extra month to collect Social Security benefits on your ex’s record.
Accelerate the Process
The longer you draw out the divorce, the more it will cost in attorney fees. That’s as certain as death and taxes. And remember this: divorce attorneys are not, generally, certified financial planners or therapists, and they can be very expensive emissaries.