Not every event is something that we can include in our financial planning; one such event is divorce. Unfortunately, the current divorce rate for first-time marriages, according to the National Marriage Project, is between 40 percent and 50 percent and estimates for second marriage divorces range from 67 percent to as high as 80 percent. The divorce rate for first-time marriages has steadily declined since it peaked in the 1980s, but the number of divorces in adults over 50 and those approaching retirement is on the rise. Going through a divorce can be overwhelming; however it is important to consider all your options as you go.
All divorces include significant financial decisions; this is especially true for older adults. The impact of those decisions can have personal and financial consequences that extend far beyond the immediate legal outcome. The financial decisions you make during a divorce can even affect your future relationships and your livelihood, so it's important to consider all the ramifications of your decisions.
How you go through a divorce and who advises you when making financial decisions is pivotal. In the traditional divorce process, both parties obtain legal representation and the attorneys provide most of the recommendations regarding how financial assets should be split. Fortunately, we now have a number of alternatives that make it possible to settle most divorce cases out of court.
Alternative processes, including collaborative divorce and mediation, frequently bring in third parties like financial specialists to offer counsel. Studies show that, no matter which process is used, enlisting the help of financial specialists and other consultants, like mental health professionals can result in a more holistic solution and a better long-term outcome for all parties.
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Some areas to consider when going through a divorce include:
The way you split jointly held property and future expenses can drastically affect your future finances. Retaining ownership of a home that is large or expensive to maintain can rapidly eat through your assets. It's
important to align assets that have ongoing costs, as in the case of a home that requires maintenance, with income producing assets or known employment earnings.
Retirement accounts and pension plans can provide tax shelters. The tax adjusted value of these accounts depends on the income level of each participant. An open discussion with all involved can maximize tax savings for everyone and create opportunities for a more equitable division of other assets. Care must be taken to ensure that all accounts are properly titled and transferred to avoid future tax surprises.
Dividing an individually or jointly owned business can be difficult. Employing someone who specializes in evaluating the current and future value of the businesses is essential.
Alimony amounts and duration are typically tied to the length of the marriage and the earning capabilities. The tax implications of this income should be considered in order to assure the value is equitable for both parties. Depending on the duration and amount of the alimony, you may want to consider purchasing insurance in order to avoid a disruption in payments in the event of death or disability.
The divorce settlement should make provisions for the living, healthcare and educational expenses of any children, and if a spouse is going to need medical insurance or training to resume working. If these provisions are structured well, there can be significant benefits and tax savings.
Often, dividing financial assets is best accomplished by considering how the assets will be held and taxed by each individual. Working through the details is best done when both sides can participate in joint discussions rather than having an arbitrary decision thrust on them by a judge.
Many attorneys do not have the training required to understand the current or future implications of the financial decisions in a divorce. A collaborative or meditative process can be more conducive to working through all aspects of a divorce. Using specialists in finance, emotional recovery, business valuation, and children's issues can have a better long-term outcome once the legal part of the divorce is complete.
If you are considering a divorce, take the time to review your options before you begin the process. Your long-term financial and emotional health, as well as your future relationships, is riding on your decisions. If you would like more information about these alternatives, you can search for "Collaborative Divorce" or "Divorce Mediation" online.
Tom Roberts, CFP® is a financial planner and owner of A New Approach Financial Planning in Lakewood Ranch and Sarasota. He can be reached at (941) 927-9590 or by email at Tom@ANewApproachFP.com.