Navigating your finances before and after a divorce

Divorce can be one of the most emotionally, financially draining and life-altering experiences a person may ever face. Divorce has become more common than ever, particularly for older adults, as the divorce rate for people over age 50 has nearly doubled over the past 20 years.

If you or a family member is facing divorce, there are steps you can take to help manage the divorce process. The end of a marriage doesn't have to ruin your financial life. Here are the answers to common questions about one of life’s biggest transitions.

Q. What steps will help you financially prepare for divorce?

The first step is to gather and understand all your financial information. It's best to be prepared before you file for divorce. A good starting point is to get copies of tax returns, brokerage statements, bank statements, credit card account statements, loan applications, insurance documents and any budget planning documentation.

Being able to review and to also provide an attorney with three years of tax returns is good; five years is better. Tax returns include a lot of relevant information, such as interest and dividend income, losses from investments, business income information, depreciation on assets and real estate ownership income and losses. Tax returns may also reveal some new, unknown information. For example, it may show a tax deduction for a safe deposit box that a spouse didn’t know about.

In addition, loan applications, which contain information about claimed asset values and liabilities, and insurance-related documents, such as homeowner insurance, will show estimated property value and insurance riders may include detailed lists and claimed value of such things as jewelry, art, collectibles, etc. Credit card statements can provide valuable information about living expenses and lifestyle. People are often surprised to see what their actual living expenses are. Knowing and understanding living expenses, assets and liabilities are key factors in any divorce proceeding.

It’s also important to understand how the assets are being held. Are they held jointly, or by one spouse? If they are held in trust, you need to obtain copies of those trusts. If you are a beneficiary of a trust, identify the remainder beneficiaries. It's important to understand what property is held separately and what is marital property, especially if there is an existing prenuptial agreement.

Also, it is important to identify beneficiary designations on retirement and life insurance assets. For example, in many states a spouse being named as a beneficiary on a life insurance policy is negated by a divorce. However, not all jurisdictions follow that rule. You want to make sure that the beneficiaries of those policies are who you want them to be. The same is true for 401(k) plans, pensions, powers of attorney and health care proxies. Make sure to review and update all your beneficiary designations.

Q. Is there an efficient, amicable way to handle a divorce?

There generally are two ways that people may proceed with a divorce. It can be done by both sides negotiating a settlement or, alternatively, it can be done through litigation. The non-litigation route is generally cheaper and far less emotionally draining. This can best be done with the assistance of reasonable people who are represented by experienced and reasonably minded attorneys and/or experienced mediators or conciliators.

The litigation route, where a judge ultimately makes the decisions that directly impact one’s life and future, tends to be harsh and far more emotionally draining. In addition, litigation often brings unanticipated consequences. For example, in many states, the filing of a divorce action automatically and immediately freezes all assets and prevents anything from being transferred or sold. Once a party has been formally served with divorce papers, it requires an appearance before a judge to seek temporary orders for support, custody and visitation if children are involved. To access assets, it usually requires a court hearing and a judge's approval. Each court appearance increases the legal expenses and tends to impact an individual's emotional well-being. The added expenses eventually reduce what each party may receive in the end.

Q: How do you divide illiquid assets in a divorce settlement?

Couples need to engage qualified counsel who can assist in drafting agreements that cover as many contingencies as possible. It’s common to have assets in a divorce that can’t be immediately or easily divided, for example, private equity funds, direct deal investments or investments that were obtained solely in one person's name. A private equity fund is not going to change its rules and contractual designations simply because one person is getting divorced. However, good lawyers will put provisions in an agreement that acknowledge the existence of the asset held in the name of one spouse, indicate its value and state that “if, as, and when” that asset comes to fruition or becomes a liquid asset it will then be divided in whatever proportion the parties agree, for example 50/50.  Once again, you will need skilled counsel to draft the appropriate language into an agreement.

With real estate, unless there is an agreement or court order to the contrary, it is not uncommon that after a divorce between parties with minor children, one spouse (and the children) will remain in the marital home until the youngest child is fully emancipated or graduates from college before the marital home will be made available for sale. Once it is sold, the couple will split the proceeds as per an agreed upon percentage. However, over that time span, one party may have maintained the property or improved it, thereby increasing its resale value. Good attorneys will draft an agreement that allows for a return of her/his capital investment that was used to improve the property. You can never protect for every possible contingency, but good lawyers will cover the important ones and include things to address tax implications and the distribution of speculative or unallocated assets.

Q: Can I protect my assets if my child gets divorced?

Keep in mind that whatever information your child may have about your assets and possible inheritance may have already been provided to his or her spouse. That information could be used as a bargaining tool in your child’s divorce. Whether or not such an asset could be reached is really a separate question and dependent upon how your estate plan is structured. Accordingly, as a parent of a child about to be divorced you should meet with estate planning counsel to review your estate plan and trust provisions and confirm that you have the proper wording and safeguards in place to protect your child's inheritance in the event of a divorce. For example, a spendthrift provision clause in a trust for a child becomes very important in cases where the child is getting divorced. If you can make necessary changes to your estate plan, it’s a smart step to make changes that protect your assets as needed.

Q: Do you need to make changes to trusts and wills after a divorce?

Yes, you need to do full housekeeping of your trust and estate plan documents to make sure things are accurate in light of the divorce. Show your estate planning attorney the divorce terms. If there's something that's in your divorce agreement that needs to be built into your will it should be done immediately. Also make sure that your beneficiaries are who you want them to be going forward. Typically, we review plans every five to seven years, but a divorce accelerates that timing.

If you have a joint trust and the settlement agreement provides for assets to be split 50/50, then take your share and determine the best next steps. Specifically, seek advice from an estate planning attorney and wealth management professional.