Divorce and Your Money

Reviewed Apr 11, 2017

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Summary

Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse).

Financial planners will tell you that it’s best to make major money decisions when you’re cool and collected—and when you have plenty of time to gather all the data you need about your current assets and future needs. But that’s not how life works in a typical divorce.
 
The breakup of marriage is an emotional event, often laced with hostility and suspicion. Without the time or inclination for calm reflection, both spouses need to make decisions that can have a huge impact on their lives. Chicago-based financial advisor Cicily Maton calls the process “financial planning for two people in a crisis.”
 
But plan you must—carefully. Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse). How property is divided and who gets what post-divorce income depends in part on the laws of each state. But financial planners also have advice that makes sense no matter where you live.
 
Here are some key points to remember and pitfalls to avoid:
 
Know your needs
 
Know what you’ll need (and assume you’ll have less than before). Divorce is expensive, and not just because of lawyers’ fees. When a marriage breaks up, a husband and wife have to pay for two households instead of one. They pay more for housing and utilities, and child care costs can soar if the couple has joint custody and the kids are constantly traveling back and forth between them.
 
Maton advises analyzing your cash flow—using a computer program such as Quicken if you have one—to get a clear idea of how much you spend, and on what. Don’t get your hopes up, says Carol Ann Wilson, a financial planner based in Boulder, Colo. “Go through one year of checkbook and credit card statements,” she advises, “then ask which part you will cut out, because you can’t do it all.”
 
Don’t overlook assets
 
Track down all of the marital property. This can include far more than the obvious things like a home, jointly-held bank accounts, stocks, and mutual funds. Pensions and tax-deferred employee plans such as 401(k)s are also part of the mix to the extent that they were earned by either spouse during the marriage. So are stock options, deferred compensation, and employee stock option plans (ESOPs). Wilson says people sometimes overlook pensions or 401(k)s “just sitting at a company from a previous job.”
 
A too-costly 401(k)?
 
Know what the property is worth after taxes. “Cash is king,” says Violet Woodhouse, a financial planner and family law attorney in Newport Beach, California. As she explains, a tax-deferred plan such as a 401(k) will be worth much less than its face value when you actually get around to spending it—and paying income taxes on it.
 
Woodhouse says divorcing spouses sometimes give away too much in order to hang on to 401(k) money or future pension rights. “People need to look objectively at what they have and not get emotionally tied in to the decisions that they make,” she says. “I wouldn’t trade a dollar in my bank account and give it away to my spouse for a dollar in a 401(k).”

What are those pensions really worth?
 
It’s also crucial to pin down the present value of future pension payments that you and your spouse have earned. This job requires the skills of an actuary, though larger employers may do it for you. Be sure you know the formulas of all the plans: This is one reason why Woodhouse says you should never throw away the plan summaries an employer gives you.
 
What to do next will depend on your situation. After a brief marriage, Maton says, and if only one spouse has a pension, it usually makes sense for the spouse with the pension to keep it and give the other spouse some other asset in return. After a long marriage, staking a claim on the main wage-earner’s future pension payments may be the better idea for a spouse who has spent a lot of time out of the workforce.

This would be done through a Qualified Domestic Relations Order (QDRO). Employers often have prototype QDROs that can be used as a template for dividing up pensions and other benefits. But you and your attorney need to make sure it doesn’t leave anything out. “People have to remember,” says Wilson, “that John Smith’s company will send out a template that favors John.”
 
Lawyers aren’t therapists
 
Remember that anger only makes the lawyers rich. The toughest advice may be to keep your anger and other emotions in check in order to see your own interests clearly and not pick long and costly fights over small issues. Maton warns against using the legal and financial process to deal with your emotions. “It’s normal to be angry, it’s normal to be sad, it’s normal to be all those things,” she says. “But I almost always advise clients to have a therapist. It’s inappropriate to use your financial advisor or your lawyer as your therapist.”
 
Resources
 
Divorce and Money: How to Make the Best Financial Decisions During Divorce, 10th ed. by Violet Woodhouse with Dale Fetherling. Nolo Press, 2011.

Financial Planning Association
www.fpanet.org
800-322-4237
The FPA website has advice on divorce-related financial planning (at the home page. click “Life Crises,” then “Getting a Divorce”). It also has an online search engine (click “Find a Planner”) designed to locate planners by speciality, such as divorce, as well as location.

The Institute for Divorce Financial Analysts
800-875-1760
www.institutedfa.com
Trains financial professionals and awards them a Certified Divorce Financial Analyst™ (CDFA™) Planner designation. A search engine to find CDFAs is at www.institutedfa.com/cdfaSearch.php 

By Tom Gray

Summary

Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse).

Financial planners will tell you that it’s best to make major money decisions when you’re cool and collected—and when you have plenty of time to gather all the data you need about your current assets and future needs. But that’s not how life works in a typical divorce.
 
The breakup of marriage is an emotional event, often laced with hostility and suspicion. Without the time or inclination for calm reflection, both spouses need to make decisions that can have a huge impact on their lives. Chicago-based financial advisor Cicily Maton calls the process “financial planning for two people in a crisis.”
 
But plan you must—carefully. Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse). How property is divided and who gets what post-divorce income depends in part on the laws of each state. But financial planners also have advice that makes sense no matter where you live.
 
Here are some key points to remember and pitfalls to avoid:
 
Know your needs
 
Know what you’ll need (and assume you’ll have less than before). Divorce is expensive, and not just because of lawyers’ fees. When a marriage breaks up, a husband and wife have to pay for two households instead of one. They pay more for housing and utilities, and child care costs can soar if the couple has joint custody and the kids are constantly traveling back and forth between them.
 
Maton advises analyzing your cash flow—using a computer program such as Quicken if you have one—to get a clear idea of how much you spend, and on what. Don’t get your hopes up, says Carol Ann Wilson, a financial planner based in Boulder, Colo. “Go through one year of checkbook and credit card statements,” she advises, “then ask which part you will cut out, because you can’t do it all.”
 
Don’t overlook assets
 
Track down all of the marital property. This can include far more than the obvious things like a home, jointly-held bank accounts, stocks, and mutual funds. Pensions and tax-deferred employee plans such as 401(k)s are also part of the mix to the extent that they were earned by either spouse during the marriage. So are stock options, deferred compensation, and employee stock option plans (ESOPs). Wilson says people sometimes overlook pensions or 401(k)s “just sitting at a company from a previous job.”
 
A too-costly 401(k)?
 
Know what the property is worth after taxes. “Cash is king,” says Violet Woodhouse, a financial planner and family law attorney in Newport Beach, California. As she explains, a tax-deferred plan such as a 401(k) will be worth much less than its face value when you actually get around to spending it—and paying income taxes on it.
 
Woodhouse says divorcing spouses sometimes give away too much in order to hang on to 401(k) money or future pension rights. “People need to look objectively at what they have and not get emotionally tied in to the decisions that they make,” she says. “I wouldn’t trade a dollar in my bank account and give it away to my spouse for a dollar in a 401(k).”

What are those pensions really worth?
 
It’s also crucial to pin down the present value of future pension payments that you and your spouse have earned. This job requires the skills of an actuary, though larger employers may do it for you. Be sure you know the formulas of all the plans: This is one reason why Woodhouse says you should never throw away the plan summaries an employer gives you.
 
What to do next will depend on your situation. After a brief marriage, Maton says, and if only one spouse has a pension, it usually makes sense for the spouse with the pension to keep it and give the other spouse some other asset in return. After a long marriage, staking a claim on the main wage-earner’s future pension payments may be the better idea for a spouse who has spent a lot of time out of the workforce.

This would be done through a Qualified Domestic Relations Order (QDRO). Employers often have prototype QDROs that can be used as a template for dividing up pensions and other benefits. But you and your attorney need to make sure it doesn’t leave anything out. “People have to remember,” says Wilson, “that John Smith’s company will send out a template that favors John.”
 
Lawyers aren’t therapists
 
Remember that anger only makes the lawyers rich. The toughest advice may be to keep your anger and other emotions in check in order to see your own interests clearly and not pick long and costly fights over small issues. Maton warns against using the legal and financial process to deal with your emotions. “It’s normal to be angry, it’s normal to be sad, it’s normal to be all those things,” she says. “But I almost always advise clients to have a therapist. It’s inappropriate to use your financial advisor or your lawyer as your therapist.”
 
Resources
 
Divorce and Money: How to Make the Best Financial Decisions During Divorce, 10th ed. by Violet Woodhouse with Dale Fetherling. Nolo Press, 2011.

Financial Planning Association
www.fpanet.org
800-322-4237
The FPA website has advice on divorce-related financial planning (at the home page. click “Life Crises,” then “Getting a Divorce”). It also has an online search engine (click “Find a Planner”) designed to locate planners by speciality, such as divorce, as well as location.

The Institute for Divorce Financial Analysts
800-875-1760
www.institutedfa.com
Trains financial professionals and awards them a Certified Divorce Financial Analyst™ (CDFA™) Planner designation. A search engine to find CDFAs is at www.institutedfa.com/cdfaSearch.php 

By Tom Gray

Summary

Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse).

Financial planners will tell you that it’s best to make major money decisions when you’re cool and collected—and when you have plenty of time to gather all the data you need about your current assets and future needs. But that’s not how life works in a typical divorce.
 
The breakup of marriage is an emotional event, often laced with hostility and suspicion. Without the time or inclination for calm reflection, both spouses need to make decisions that can have a huge impact on their lives. Chicago-based financial advisor Cicily Maton calls the process “financial planning for two people in a crisis.”
 
But plan you must—carefully. Of all life events, divorce may have the greatest potential to change your financial status (usually for the worse). How property is divided and who gets what post-divorce income depends in part on the laws of each state. But financial planners also have advice that makes sense no matter where you live.
 
Here are some key points to remember and pitfalls to avoid:
 
Know your needs
 
Know what you’ll need (and assume you’ll have less than before). Divorce is expensive, and not just because of lawyers’ fees. When a marriage breaks up, a husband and wife have to pay for two households instead of one. They pay more for housing and utilities, and child care costs can soar if the couple has joint custody and the kids are constantly traveling back and forth between them.
 
Maton advises analyzing your cash flow—using a computer program such as Quicken if you have one—to get a clear idea of how much you spend, and on what. Don’t get your hopes up, says Carol Ann Wilson, a financial planner based in Boulder, Colo. “Go through one year of checkbook and credit card statements,” she advises, “then ask which part you will cut out, because you can’t do it all.”
 
Don’t overlook assets
 
Track down all of the marital property. This can include far more than the obvious things like a home, jointly-held bank accounts, stocks, and mutual funds. Pensions and tax-deferred employee plans such as 401(k)s are also part of the mix to the extent that they were earned by either spouse during the marriage. So are stock options, deferred compensation, and employee stock option plans (ESOPs). Wilson says people sometimes overlook pensions or 401(k)s “just sitting at a company from a previous job.”
 
A too-costly 401(k)?
 
Know what the property is worth after taxes. “Cash is king,” says Violet Woodhouse, a financial planner and family law attorney in Newport Beach, California. As she explains, a tax-deferred plan such as a 401(k) will be worth much less than its face value when you actually get around to spending it—and paying income taxes on it.
 
Woodhouse says divorcing spouses sometimes give away too much in order to hang on to 401(k) money or future pension rights. “People need to look objectively at what they have and not get emotionally tied in to the decisions that they make,” she says. “I wouldn’t trade a dollar in my bank account and give it away to my spouse for a dollar in a 401(k).”

What are those pensions really worth?
 
It’s also crucial to pin down the present value of future pension payments that you and your spouse have earned. This job requires the skills of an actuary, though larger employers may do it for you. Be sure you know the formulas of all the plans: This is one reason why Woodhouse says you should never throw away the plan summaries an employer gives you.
 
What to do next will depend on your situation. After a brief marriage, Maton says, and if only one spouse has a pension, it usually makes sense for the spouse with the pension to keep it and give the other spouse some other asset in return. After a long marriage, staking a claim on the main wage-earner’s future pension payments may be the better idea for a spouse who has spent a lot of time out of the workforce.

This would be done through a Qualified Domestic Relations Order (QDRO). Employers often have prototype QDROs that can be used as a template for dividing up pensions and other benefits. But you and your attorney need to make sure it doesn’t leave anything out. “People have to remember,” says Wilson, “that John Smith’s company will send out a template that favors John.”
 
Lawyers aren’t therapists
 
Remember that anger only makes the lawyers rich. The toughest advice may be to keep your anger and other emotions in check in order to see your own interests clearly and not pick long and costly fights over small issues. Maton warns against using the legal and financial process to deal with your emotions. “It’s normal to be angry, it’s normal to be sad, it’s normal to be all those things,” she says. “But I almost always advise clients to have a therapist. It’s inappropriate to use your financial advisor or your lawyer as your therapist.”
 
Resources
 
Divorce and Money: How to Make the Best Financial Decisions During Divorce, 10th ed. by Violet Woodhouse with Dale Fetherling. Nolo Press, 2011.

Financial Planning Association
www.fpanet.org
800-322-4237
The FPA website has advice on divorce-related financial planning (at the home page. click “Life Crises,” then “Getting a Divorce”). It also has an online search engine (click “Find a Planner”) designed to locate planners by speciality, such as divorce, as well as location.

The Institute for Divorce Financial Analysts
800-875-1760
www.institutedfa.com
Trains financial professionals and awards them a Certified Divorce Financial Analyst™ (CDFA™) Planner designation. A search engine to find CDFAs is at www.institutedfa.com/cdfaSearch.php 

By Tom Gray

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